##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q



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|  |  |                                                                                           
|- |  | ------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13
	OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934 
| 
|  |  | For the quarterly period ended
	September 30, 2001                                        
| 
|o |  | 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: 000-25331

CRITICAL PATH, INC.

|                         |  |                               
|------------------------ |  | ------------------------------
|A California Corporation |  | I.R.S. Employer No. 91-1788300

532 Folsom Street

San Francisco, California 94105


415-808-8800


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.     
þ 
Yes          
o  No

As of October 31, 2001, the company had
outstanding 75,496,491 shares of common stock, $0.001 par value
per share.



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TABLE OF CONTENTS



|                                                     |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                              
|                                                     | Item 1. Condensed Consolidated Financial Statements (Unaudited)                              
|CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS      
|CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS      
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                     | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                     | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|REPORT OF INDEPENDENT ACCOUNTANTS                   
|PART II                                             
|                                                     | Item 1. Legal Proceedings                                                                    
|                                                     | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                     | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                           
|INDEX TO EXHIBITS                                   
|EXHIBIT 10.1                                        
|EXHIBIT 10.2                                        
|EXHIBIT 10.3                                        
|EXHIBIT 10.4                                        
|EXHIBIT 10.5                                        
|EXHIBIT 15.1                                        



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##### Table of Contents



CRITICAL PATH, INC.

INDEX

|         |  |                                                                                                                                                |  |      |    | 
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                                                                |  | Page
|         |  |                                                                                                                                                |  |     
|PART I  
|Item  1. |  | Condensed Consolidated Financial Statements
	(Unaudited) Condensed Consolidated Balance Sheets as of
	December 31, 2000 and September 30, 2001 |  |      | 3  | 
|         |  | Condensed Consolidated Statement of Operations
	for the three and nine months ended September 30, 2000
	and 2001                               |  |      | 4  | 
|         |  | Condensed Consolidated Statement of Cash Flows
	for the nine months ended September 30, 2000 and 2001                                          |  |      | 5  | 
|         |  | Notes to Condensed Consolidated Financial
	Statements                                                                                          |  |      | 6  | 
|Item  2. |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations                                                         |  |      | 13 | 
|         |  | Supplemental Pro Forma Financial Data (Unaudited)                                                                                              |  |      | 33 | 
|Item  3. |  | Quantitative and Qualitative Disclosures About
	Market Risk                                                                                    |  |      | 34 | 
|         |  | Report of Independent Accountants                                                                                                              |  |      | 35 | 
|PART II 
|Item  1. |  | Legal Proceedings                                                                                                                              |  |      | 36 | 
|Item  4. |  | Submission of Matters to a Vote of Security
	Holders                                                                                           |  |      | 37 | 
|Item  6. |  | Exhibits and Reports on Form 8-K                                                                                                               |  |      | 37 | 

The following Condensed Consolidated Financial
Statements and Notes thereto of Critical Path, Inc. and
discussions contain forward-looking statements within the
meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, including but not
limited to statements regarding our future strategic plans,
plans related to the sale of certain product lines, our plans to
exit certain products and services, our plans to reduce costs
through a reduction of personnel and a consolidation of office
space, our anticipated charges and cost savings as a result of
those plans and our belief in our ability to successfully emerge
from the restructuring and refocusing of our operations. The
words anticipate, expect,
intend, plan, believe,
seek, and estimate and similar
expressions are intended to identify forward-looking statements.
These forward-looking statements involve a number of risks and
uncertainties that could cause actual results to differ
materially. Factors that might cause future results to differ
materially from those projected in the forward-looking
statements include, but are not limited to, turnover of senior
management, board of directors members and other key personnel,
difficulties of forecasting future results due to our limited
operating history, evolving business strategy and the emerging
nature of the market for our products and services, pending
litigation and SEC investigation, difficulties in finalizing our
strategic plan to exit certain non-core products and services,
difficulties of integrating acquired businesses, failure to
expand our sales and marketing activities, potential
difficulties associated with strategic relationships,
investments and uncollected bills, risks associated with an
inability to maintain continued compliance with the Nasdaq
National Market listing requirements, risks associated with our
international operations, unplanned system interruptions and
capacity constraints, software defects, and those discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Additional
Factors That May Affect Future Operating Results and
elsewhere in this report. Readers are cautioned not to place
undue reliance on these forward-looking statements. The
forward-looking statements speak only as of the date hereof. We
expressly disclaim any obligation to publicly release the
results of any revisions to these forward-looking statements to
reflect events or circumstances after the date of this
filing.

2



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##### Table of Contents






PART I




Item 1.     Condensed Consolidated Financial Statements
(Unaudited)

CRITICAL PATH, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except per share
amounts)


|                                               |                                                            |                                                                 |                                            |               |           |         |         |            |           |         | 
|---------------------------------------------- | ---------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------ | ------------- | --------- | ------- | ------- | ---------- | --------- | ------- | 
|                                               |                                                            | December 31,                                                    |                                            | September 30,
|                                               |                                                            | 2000                                                            |                                            | 2001         
|                                               |                                                            |                                                                 |                                            |              
|                                               |                                                            |                                                                
|                                               |                                                            | (Unaudited)                                                    
|ASSETS                                        
|Current assets                                 |                                                            |                                                                 |                                            |               |           |         |         |           
|                                               | Cash and cash equivalents                                  |                                                                 | $                                          | 216,542       |           |         | $       | 54,604     |          
|                                               | Short-term investments                                     |                                                                 |                                            |              |           |         |         | 10,752     |          
|                                               | Restricted cash                                            |                                                                 |                                            | 215           |           |         |         | 1,104      |          
|                                               | Accounts receivable, net                                   |                                                                 |                                            | 38,938        |           |         |         | 31,598     |          
|                                               | Other current assets                                       |                                                                 |                                            | 10,252        |           |         |         | 6,478      |          
|                                               |                                                            |                                                                 |                                            |               |           |         |         |           
|                                               |                                                            |                                                                 | Total current assets                       |               |           | 265,947 |         |            |           | 104,536 | 
|Long-term investments                          |                                                            |                                                                 | 10,610                                     |               |           |         | 7,535   |           
|Property and equipment, net                    |                                                            |                                                                 | 85,304                                     |               |           |         | 61,318  |           
|Intangible assets, net                         |                                                            |                                                                 | 77,339                                     |               |           |         | 36,843  |           
|Other assets                                   |                                                            |                                                                 | 11,655                                     |               |           |         | 5,945   |           
|                                               |                                                            |                                                                 |                                            |               |           |         |         |           
|                                               |                                                            |                                                                 | Total assets                               |               | $         | 450,855 |         |            | $         | 216,177 | 
|                                               |                                                            |                                                                 |                                            |               |           |         |         |           
|LIABILITIES AND SHAREHOLDERS
	EQUITY         
|Current liabilities                            |                                                            |                                                                 |                                            |               |           |         |         |           
|                                               | Accounts payable                                           |                                                                 | $                                          | 43,710        |           |         | $       | 35,659     |          
|                                               | Accrued expenses                                           |                                                                 |                                            | 10,377        |           |         |         | 7,205      |          
|                                               | Deferred revenue                                           |                                                                 |                                            | 15,720        |           |         |         | 15,913     |          
|                                               | Capital lease and other obligations, current               |                                                                 |                                            | 9,363         |           |         |         | 6,130      |          
|                                               |                                                            |                                                                 |                                            |               |           |         |         |           
|                                               |                                                            |                                                                 | Total current liabilities                  |               |           | 79,170  |         |            |           | 64,907  | 
|Convertible subordinated notes payable         |                                                            |                                                                 | 300,000                                    |               |           |         | 102,990 |           
|Capital lease and other obligations, long-term |                                                            |                                                                 | 4,687                                      |               |           |         | 1,866   |           
|                                               |                                                            |                                                                 |                                            |               |           |         |         |           
|                                               |                                                            |                                                                 | Total liabilities                          |               |           | 383,857 |         |            |           | 169,763 | 
|                                               |                                                            |                                                                 |                                            |               |           |         |         |           
|Commitments and contingencies                  |                                                            |                                                                 |                                            |               |           |         |         |           
|Minority interest in consolidated subsidiary   |                                                            |                                                                 | 649                                        |               |           |         |        |           
|                                               |                                                            |                                                                 |                                            |               |           |         |         |           
|Shareholders Equity                           |                                                            |                                                                 |                                            |               |           |         |         |           
|                                               | Preferred stock and paid-in-capital, $0.001 par
	value     |                                                                 |                                            |               |           |         |         |            |          
|                                               |                                                            | Shares authorized: 5,000                                        |                                            |               |           |         |         |            |           |        
|                                               |                                                            | Shares issued and outstanding: none                             |                                            |               |          |         |         |            |          |        
|                                               | Common stock and paid-in-capital, $0.001 par value         |                                                                 |                                            |               |           |         |         |            |          
|                                               |                                                            | Shares authorized: 150,000 and 500,000,
	respectively           |                                            |               |           |         |         |            |           |        
|                                               |                                                            | Shares issued and outstanding: 74,135 and 75,490,
	respectively |                                            |               | 2,130,329 |         |         |            | 2,135,817 |        
|                                               | Notes receivable from shareholders                         |                                                                 |                                            | (1,205        | )         |         |         | (1,209     | )        
|                                               | Unearned compensation                                      |                                                                 |                                            | (80,760       | )         |         |         | (40,890    | )        
|                                               | Accumulated deficit, including other
	comprehensive income |                                                                 |                                            | (1,982,015    | )         |         |         | (2,047,304 | )        
|                                               |                                                            |                                                                 |                                            |               |           |         |         |           
|                                               |                                                            |                                                                 | Total shareholders equity                 |               |           | 66,349  |         |            |           | 46,414  | 
|                                               |                                                            |                                                                 |                                            |               |           |         |         |           
|                                               |                                                            |                                                                 | Total liabilities and shareholders equity |               | $         | 450,855 |         |            | $         | 216,177 | 
|                                               |                                                            |                                                                 |                                            |               |           |         |         |           

The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.

3



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##### Table of Contents



CRITICAL PATH, INC.






CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS


(In thousands, except per share
amounts)


|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |        |         | 
|----------------------------------------------------------- | ------------------------------------------------- | -------------------------- | -------- | ----------------- | ------- | ------------- | ------- | ------------- | ------ | - | -------- | ------- | ------- | - | -------- | ------ | ------- | 
|                                                            |                                                   |                            |          |                  
|                                                            |                                                   | Three Months Ended         |          | Nine Months Ended
|                                                            |                                                   |                            |          |                  
|                                                            |                                                   | September 30,              |          | September 30,     |         | September 30, |         | September 30,
|                                                            |                                                   | 2000                       |          | 2001              |         | 2000          |         | 2001         
|                                                            |                                                   |                            |          |                   |         |               |         |              
|                                                            |                                                   |                           
|                                                            |                                                   | (Unaudited)               
|Net revenues                                                |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|                                                            | Software license                                  |                            | $        | 12,365            |         |               | $       | 7,724         |        |   | $        | 37,332  |         |   | $        | 22,187 |        
|                                                            | Hosted messaging                                  |                            |          | 16,759            |         |               |         | 10,000        |        |   |          | 40,074  |         |   |          | 35,580 |        
|                                                            | Professional service                              |                            |          | 3,609             |         |               |         | 4,206         |        |   |          | 9,132   |         |   |          | 10,523 |        
|                                                            | Maintenance and support                           |                            |          | 2,609             |         |               |         | 4,857         |        |   |          | 6,852   |         |   |          | 12,725 |        
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|                                                            |                                                   | Total net revenues         |          |                   | 35,342  |               |         |               | 26,787 |   |          |         | 93,390  |   |          |        | 81,015  | 
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Cost of net revenues                                        |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|                                                            | Software license                                  |                            |          | 634               |         |               |         | 517           |        |   |          | 2,378   |         |   |          | 934    |        
|                                                            | Hosted messaging                                  |                            |          | 15,552            |         |               |         | 13,982        |        |   |          | 40,970  |         |   |          | 49,360 |        
|                                                            | Professional service                              |                            |          | 1,317             |         |               |         | 2,565         |        |   |          | 3,761   |         |   |          | 8,125  |        
|                                                            | Maintenance and support                           |                            |          | 2,207             |         |               |         | 2,837         |        |   |          | 5,423   |         |   |          | 7,837  |        
|                                                            | Amortization of purchased technology              |                            |          | 4,434             |         |               |         | 4,970         |        |   |          | 10,969  |         |   |          | 16,314 |        
|                                                            | Acquisition-related retention bonuses             |                            |          | 260               |         |               |         |              |        |   |          | 1,040   |         |   |          |       |        
|                                                            | Stock-based expense  Hosted messaging            |                            |          | 381               |         |               |         | 339           |        |   |          | 1,257   |         |   |          | 1,165  |        
|                                                            | Stock-based expense  Professional
	service       |                            |          |                  |         |               |         | 161           |        |   |          |        |         |   |          | 1,182  |        
|                                                            | Stock-based expense  Maintenance and
	support    |                            |          |                  |         |               |         | 131           |        |   |          |        |         |   |          | 1,056  |        
|                                                            | Impairment of long-lived assets                   |                            |          |                  |         |               |         |              |        |   |          |        |         |   |          | 4,207  |        
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|                                                            |                                                   | Total cost of net revenues |          |                   | 24,785  |               |         |               | 25,502 |   |          |         | 65,798  |   |          |        | 90,180  | 
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Gross profit (loss)                                         |                                                   |                            | 10,557   |                   |         |               | 1,285   |               |        |   | 27,592   |         |         |   | (9,165   | )     
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Operating expenses                                          |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|                                                            | Sales and marketing                               |                            |          | 16,128            |         |               |         | 11,018        |        |   |          | 47,075  |         |   |          | 45,424 |        
|                                                            | Research and development                          |                            |          | 7,853             |         |               |         | 7,322         |        |   |          | 23,389  |         |   |          | 25,589 |        
|                                                            | General and administrative                        |                            |          | 6,568             |         |               |         | 9,447         |        |   |          | 20,666  |         |   |          | 34,485 |        
|                                                            | Amortization of intangible assets                 |                            |          | 94,160            |         |               |         | 2,485         |        |   |          | 230,845 |         |   |          | 10,730 |        
|                                                            | Acquisition-related retention bonuses             |                            |          | 1,028             |         |               |         | 92            |        |   |          | 7,400   |         |   |          | 1,055  |        
|                                                            | Stock-based expense  Sales and
	marketing        |                            |          | 8,719             |         |               |         | 5,841         |        |   |          | 22,416  |         |   |          | 19,122 |        
|                                                            | Stock-based expense  Research and
	development   |                            |          | 323               |         |               |         | 531           |        |   |          | 3,125   |         |   |          | 2,857  |        
|                                                            | Stock-based expense  General and
	administrative |                            |          | 1,346             |         |               |         | 4,914         |        |   |          | 3,492   |         |   |          | 19,981 |        
|                                                            | Restructuring expense, net                        |                            |          | 10,195            |         |               |         | 3,779         |        |   |          | 10,195  |         |   |          | 12,260 |        
|                                                            | Impairment of long-lived assets                   |                            |          |                  |         |               |         |              |        |   |          |        |         |   |          | 9,991  |        
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|                                                            |                                                   | Total operating expenses   |          |                   | 146,320 |               |         |               | 45,429 |   |          |         | 368,603 |   |          |        | 181,494 | 
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Loss from operations                                        |                                                   |                            | (135,763 | )                 |         |               | (44,144 | )             |        |   | (341,011 | )       |         |   | (190,659 | )     
|Interest and other income, net                              |                                                   |                            | 4,905    |                   |         |               | 178     |               |        |   | 10,860   |         |         |   | 4,796    |       
|Interest expense                                            |                                                   |                            | (5,214   | )                 |         |               | (3,829  | )             |        |   | (10,748  | )       |         |   | (14,211  | )     
|Minority interest in net income of consolidated
	subsidiary |                                                   |                            | (201     | )                 |         |               |        |               |        |   | (526     | )       |         |   |         |       
|Equity in net loss of joint venture                         |                                                   |                            | (640     | )                 |         |               | (346    | )             |        |   | (640     | )       |         |   | (1,519   | )     
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Loss before extraordinary item and income taxes             |                                                   |                            | (136,913 | )                 |         |               | (48,141 | )             |        |   | (342,065 | )       |         |   | (201,593 | )     
|Provision for income taxes                                  |                                                   |                            | (2,534   | )                 |         |               | (2,180  | )             |        |   | (4,333   | )       |         |   | (3,673   | )     
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Loss before extraordinary item                              |                                                   |                            | (139,447 | )                 |         |               | (50,321 | )             |        |   | (346,398 | )       |         |   | (205,266 | )     
|Gain on retirement of convertible subordinated
	notes, net  |                                                   |                            |         |                   |         |               | 137,222 |               |        |   |         |         |         |   | 141,040  |       
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Net income (loss)                                           |                                                   | $                          | (139,447 | )                 |         | $             | 86,901  |               |        | $ | (346,398 | )       |         | $ | (64,226  | )     
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Net income (loss) per common
	share  Basic and diluted     |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Loss before extraordinary item                              |                                                   | $                          | (2.26    | )                 |         | $             | (0.68   | )             |        | $ | (6.09    | )       |         | $ | (2.79    | )     
|Gain on retirement of convertible subordinated
	notes       |                                                   |                            |         |                   |         |               | 1.84    |               |        |   |         |         |         |   | 1.92     |       
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Net income (loss)                                           |                                                   | $                          | (2.26    | )                 |         | $             | 1.17    |               |        | $ | (6.09    | )       |         | $ | (0.87    | )     
|                                                            |                                                   |                            |          |                   |         |               |         |               |        |   |          |         |         |   |          |       
|Weighted average common shares outstanding                  |                                                   |                            | 61,614   |                   |         |               | 74,492  |               |        |   | 56,925   |         |         |   | 73,472   |       

The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.

4



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##### Table of Contents



CRITICAL PATH, INC.






CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS


(In thousands)


|                                                       |                                                             |                                                      |         |               |         |   |          |          |         |  
|------------------------------------------------------ | ----------------------------------------------------------- | ---------------------------------------------------- | ------- | ------------- | ------- | - | -------- | -------- | ------- | -
|                                                       |                                                             |                                                     
|                                                       |                                                             | Nine Months Ended                                   
|                                                       |                                                             |                                                     
|                                                       |                                                             | September 30,                                        |         | September 30,
|                                                       |                                                             | 2000                                                 |         | 2001         
|                                                       |                                                             |                                                      |         |              
|                                                       |                                                             |                                                     
|                                                       |                                                             | (Unaudited)                                         
|Operations                                             |                                                             |                                                      |         |               |         |   |          |         
|                                                       | Net loss                                                    |                                                      | $       | (346,398      | )       |   | $        | (64,226  | )      
|                                                       | Provision for doubtful accounts                             |                                                      |         | 1,169         |         |   |          | 4,647    |        
|                                                       | Depreciation and amortization                               |                                                      |         | 24,915        |         |   |          | 35,013   |        
|                                                       | Amortization of intangible assets                           |                                                      |         | 245,314       |         |   |          | 27,043   |        
|                                                       | Amortization of stock-based costs and expenses              |                                                      |         | 33,737        |         |   |          | 45,363   |        
|                                                       | Impairment of long-lived assets                             |                                                      |         |              |         |   |          | 14,198   |        
|                                                       | Gain on retirement of convertible debt                      |                                                      |         |              |         |   |          | (141,040 | )      
|                                                       | Provision for restructured operations                       |                                                      |         |              |         |   |          | 4,037    |        
|                                                       | Equity in net loss of unconsolidated affiliate              |                                                      |         | 640           |         |   |          | 1,519    |        
|                                                       | Minority interest in net income of consolidated
	subsidiary |                                                      |         | 526           |         |   |          |         |        
|                                                       | Accounts receivable                                         |                                                      |         | (10,901       | )       |   |          | 3,271    |        
|                                                       | Other assets                                                |                                                      |         | (3,738        | )       |   |          | 2,808    |        
|                                                       | Accounts payable                                            |                                                      |         | (11,364       | )       |   |          | (3,570   | )      
|                                                       | Accrued expenses                                            |                                                      |         | 856           |         |   |          | (2,820   | )      
|                                                       | Deferred revenue                                            |                                                      |         | (799          | )       |   |          | 306      |        
|                                                       |                                                             |                                                      |         |               |         |   |          |         
|                                                       |                                                             | Net cash used in operating activities                |         |               | (66,043 | ) |          |          | (73,451 | )
|                                                       |                                                             |                                                      |         |               |         |   |          |         
|Investing                                              |                                                             |                                                      |         |               |         |   |          |         
|                                                       | Notes receivable from officers                              |                                                      |         | (371          | )       |   |          | (1,415   | )      
|                                                       | Property and equipment purchases                            |                                                      |         | (39,939       | )       |   |          | (10,613  | )      
|                                                       | Investments in unconsolidated entities, net                 |                                                      |         | (27,895       | )       |   |          | (4,212   | )      
|                                                       | Payments for acquisitions, net of cash acquired             |                                                      |         | (15,269       | )       |   |          | (5,686   | )      
|                                                       | Short-term investments                                      |                                                      |         |              |         |   |          | (10,752  | )      
|                                                       | Promissory note receivable                                  |                                                      |         | 10,000        |         |   |          |         |        
|                                                       | Restricted cash                                             |                                                      |         |              |         |   |          | (889     | )      
|                                                       |                                                             |                                                      |         |               |         |   |          |         
|                                                       |                                                             | Net cash used in investing activities                |         |               | (73,474 | ) |          |          | (33,567 | )
|                                                       |                                                             |                                                      |         |               |         |   |          |         
|Financing                                              |                                                             |                                                      |         |               |         |   |          |         
|                                                       | Proceeds from issuance of Common Stock, net                 |                                                      |         | 29,414        |         |   |          | 1,606    |        
|                                                       | Proceeds from convertible debt offering, net                |                                                      |         | 289,181       |         |   |          |         |        
|                                                       | Retirement of convertible debt                              |                                                      |         |              |         |   |          | (49,116  | )      
|                                                       | Payment of note payable                                     |                                                      |         | (6,000        | )       |   |          |         |        
|                                                       | Principal payments on lease and other obligations           |                                                      |         | (4,710        | )       |   |          | (7,462   | )      
|                                                       | Purchase of common stock                                    |                                                      |         | (113          | )       |   |          | (54      | )      
|                                                       |                                                             |                                                      |         |               |         |   |          |         
|                                                       |                                                             | Net cash provided by (used in) financing
	activities |         |               | 307,772 |   |          |          | (55,026 | )
|                                                       |                                                             |                                                      |         |               |         |   |          |         
|Net change in cash and cash equivalents                |                                                             |                                                      | 168,255 |               |         |   | (162,044 | )       
|Effect of exchange rates on cash and cash
	equivalents |                                                             |                                                      | (1,729  | )             |         |   | 106      |         
|Cash and cash equivalents at beginning of period       |                                                             |                                                      | 75,932  |               |         |   | 216,542  |         
|                                                       |                                                             |                                                      |         |               |         |   |          |         
|Cash and cash equivalents at end of period             |                                                             | $                                                    | 242,458 |               |         | $ | 54,604   |         
|                                                       |                                                             |                                                      |         |               |         |   |          |         

The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.

5



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##### Table of Contents



CRITICAL PATH, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


Note 1  Basis of Presentation
and Summary of Significant Accounting Policies

The Company

Critical Path, Inc. was incorporated in
California on February 19, 1997. In connection with the
annual meeting of shareholders held in June 2000, the
shareholders approved the re-incorporation of Critical Path,
Inc. in Delaware, as well as an increase in the authorized
shares of Common Stock from 150 million to
500 million. The Company amended its articles of
incorporation to increase the authorized shares to
505 million; however the Company has not yet
re-incorporated in Delaware. Critical Path, Inc. along with its
subsidiaries (collectively referred to herein as the
Company) provides messaging and directory
communications solutions for corporate enterprises and service
providers worldwide.

The unaudited Condensed Consolidated Financial
Statements (Financial Statements) of Critical Path,
Inc. and subsidiaries furnished herein have been reviewed by
independent accountants, whose report is included herein. These
financial statements reflect all adjustments that are, in the
opinion of management, necessary to present fairly the financial
position and results of operations for each interim period
presented. All adjustments are normal recurring adjustments. The
Financial Statements should be read in conjunction with the
condensed consolidated financial statements and notes thereto,
together with managements discussion and analysis of
financial condition and results of operations, presented in the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, as amended. The results of
operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for the
entire year.

With respect to the unaudited condensed
consolidated financial information of the Company as of
September 30, 2001 and for the three- and nine-month
periods ended September 30, 2000 and 2001 included herein,
PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for
a review of such information. However, their separate report
dated November 7, 2001, appearing herein, states that they
did not audit and they do not express an opinion on the
unaudited condensed consolidated financial information.
PricewaterhouseCoopers LLP is not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for
their report on the unaudited condensed consolidated financial
information because that report is not a report or a part of
this Form 10-Q prepared or certified by
PricewaterhouseCoopers LLP within the meaning of Sections 7
and 11 of the Act.

Basis of
Presentation

The consolidated financial statements include the
accounts of the Company and its wholly and majority owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Investments

Short-term and long-term investments are
accounted for in accordance with Statement of Financial
Accounting Standards No. 115 Accounting for Certain
Investments in Debt and Equity Securities. This statement
requires that securities be classified as held to
maturity, available-for-sale or
trading, and the securities in each classification
be accounted for at either amortized cost or fair market value,
depending upon their classification. The Company currently holds
short-term investments of approximately $10.8 million in
low risk government securities and corporate bonds and
classifies these investments as available-for-sale.
Available-for-sale securities are carried at fair market value,
with the unrealized gains and losses, net of tax, reported as
other comprehensive income, a separate component of
stockholders equity. At the time of sale, any gains or
losses will be recognized as a component of operating results.

6



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Segment and Geographic
Information

The Company does not currently manage its
business in a manner that requires it to report financial
results on a segment basis. The Company currently operates in
one segment, messaging and directory communications solutions,
and management uses one measure of profitability. Revenue
information on a product basis has been disclosed in our
statement of operations. Included in software license revenue is
InScribe Messaging revenue of approximately $2.5 million
and $9.4 million for the three- and nine month periods
ended September 30, 2001, respectively, and approximately
$5.2 million and $22.4 million for the three- and nine
month periods ended September 30, 2000, respectively.

Reclassifications

Certain amounts previously reported have been
reclassified to conform to the current period presentation.

Recent Accounting
Pronouncements

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This Statement supersedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This Statement applies to
all long-lived assets (including discontinued operations) and
consequently amends APB Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. This
Statement develops one accounting model for long-lived assets
that are to be disposed of by sale. This Statement requires that
long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell.
Additionally, this Statement expands the scope of discontinued
operations to include all components of an entity with
operations that can be distinguished from the rest of the entity
and will be eliminated from the ongoing operations of the entity
in a disposal transaction. This Statement is effective for
financial statements issued for fiscal years beginning after
December 15, 2001. The Company does not expect the adoption
of this Statement to have a significant impact on its financial
statements.

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141, Business
Combinations. This Statement addresses financial accounting and
reporting for business combinations and supersedes Accounting
Principles Board (APB) Opinion No. 16, Business
Combinations, and SFAS No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of this Statement are to be
accounted for using one method, the purchase method. The
provisions of this Statement apply to all business combinations
initiated after June 30, 2001 and all business combinations
accounted for under the purchase method for which the date of
acquisition is July 1, 2001, or later. We have engaged in
significant acquisition activity in the past, including business
combinations. The provisions of this Statement would require all
future business combinations to be accounted for using the
purchase method.

In June 2001, the FASB also issued SFAS
No. 142, Goodwill and Other Intangible Assets. This
Statement addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other
assets (but not those acquired in a business combination) at
acquisition and goodwill and other intangible assets subsequent
to their acquisition. This Statement supersedes APB Opinion
No. 17, Intangible Assets. Under the provisions of this
Statement, if an intangible asset is determined to have an
indefinite useful life, it shall not be amortized until its
useful life is determined to be no longer indefinite. An
intangible asset that is not subject to amortization shall be
tested for impairment annually, or more frequently if events or
changes in circumstances indicate that the asset might be
impaired. Goodwill shall not be amortized. Goodwill shall be
tested for impairment on an annual basis and between annual
tests in certain circumstances at a level of reporting referred
to as a reporting unit. This Statement is required to be applied
starting with fiscal years beginning after December 15,
2001. Goodwill and intangible assets acquired after
June 30, 2001 will be

7



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

subject immediately to the nonamortization and
amortization provisions of this Statement. We anticipate that
implementation of this Statement will not have a material impact
on our financial results.

Note 2 
Restructuring

In April 2001, the Company announced a three part
strategic restructuring plan that involved reorganizing Critical
Paths product and service offerings around a group of core
communication solutions. The three elements of the plan include:
(i) focusing on core communication solutions;
(ii) workforce reduction; and (iii) facilities and
operations consolidation. Additionally, the Company has
implemented an aggressive expense management plan to further
reduce operating costs while maintaining strong customer service
for its core solutions. During the third quarter the Company
substantially completed its restructuring plan, including the
divestiture of many of its non-core products and services, a
significant reduction in headcount and facilities and the
implementation of other cost cutting measures, causing a
significant reduction in overall operating expenses. As a result
of these strategic initiatives, the Company anticipates that it
will realize future annual cost savings of greater than
$70.0 million. The non-core products and services comprised
approximately 18% and 26% of total revenues in the three- and
nine-month periods ended September 30, 2001 and
approximately 22% and 25% of total revenues in the three- and
nine-month periods ended September 30, 2000. It is expected
that these products and services will be an insignificant part
of the Companys revenue stream by the fourth quarter of
2001.

Refocusing on Core
Communications Solutions

Core communication solutions are our messaging
and directory infrastructure platform, including mail, calendar,
address book, file storage, secure delivery, directory and
meta-directory, and access services supporting wireline and
wireless users. Restructuring charges associated with this
refocusing of our products and services consisted primarily of
contract termination fees, gains and losses related to asset
sales and dispositions, and lease termination fees. During the
quarter, the Company sold or discontinued nearly all of its
thirteen non-core products and services. The Company also
completed the disposition of six of seven non-core products
being sold, inclusive of the sales of the InJoin Trans, Batch
and PATH/3270, the InJoin Broker product family, and the InLine
Project Collaboration. Additionally, the Company has
discontinued four of six non-core products and services that it
has decided to exit and the remaining two are expected to be
discontinued no later than the first quarter of 2002. As a
result of these transactions a net gain of $2.7 million was
recorded in the third quarter.

Reduction of Workforce,
Facility and Other Expenses

The Company further reduced its headcount from
1,011 at March 31, 2001 and 784 at June 30, 2001 to
564 employees at September 30, 2001, and continued to
consolidate its facilities from 77 at March 31, 2001 and 44
at June 30, 2001 to the current level of 38, with
approximately 15 additional facilities expected to close no
later than the first quarter of 2002. Charges related to the
headcount reduction consisted primarily of the payment of
severance and fringe benefits, and aggregated approximately
$5.3 million during the third quarter. Included in the
third quarter was approximately $1.5 million related to the
forgiveness of a note receivable to one of the Companys
former executives. Lease terminations and facility consolidation
related charges consisted primarily of lease termination, future
lease payments and related fees, and aggregated approximately
$1.2 million during the third quarter. The Company
anticipates that the remaining restructuring charges will be
recorded in the fourth quarter and will amount to less than
$1.5 million.

8



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Summary of Year-To-Date
Restructuring Costs

|                                                         |  |        |      |         |  |          |     |                    |  |   |      |   |  |   |     | 
|-------------------------------------------------------- |  | ------ | ---- | ------- |  | -------- | --- | ------------------ |  | - | ---- | - |  | - | --- | 
|                                                         |  | Total  |      | Noncash |  | Cash     |     | Liabilities at    
|                                                         |  | Charge |      | Charges |  | Payments |     | September 30, 2001
|                                                         |  |        |      |         |  |          |     |                   
|Workforce reduction                                      |  | $      | 10.3 |         |  | $        | 1.3 |                    |  | $ | 7.5  |   |  | $ | 1.4 | 
|Facility and operations consolidation and other
	charges |  |        | 3.3  |         |  |          | 1.0 |                    |  |   | 1.1  |   |  |   | 1.3 | 
|Non-core product and service sales and
	divestitures     |  |        | (1.3 | )       |  |          | 0.9 |                    |  |   | (3.4 | ) |  |   | 1.2 | 
|                                                         |  |        |      |         |  |          |     |                    |  |   |      |   |  |   |     | 
|Total                                                    |  | $      | 12.3 |         |  | $        | 3.2 |                    |  | $ | 5.2  |   |  | $ | 3.9 | 

Note 3  Convertible
Subordinated Notes

On March 30, 2000, the Company issued
$300.0 million of five-year, 5.75% Convertible Subordinated
Notes due April 1, 2005 (the Notes). In June
2001 the Company began a financial restructuring of its balance
sheet, which included the repurchase of a portion of its
outstanding Notes on an opportunistic basis. During the three-
and nine-months ended September 30, 2001, the Company
retired $192.0 million and $197.0 million in face
value of Notes, respectively, which resulted in after-tax
extraordinary gains of approximately $137.2 million and
$141.0 million, respectively. As of September 30, 2001
$103.0 million of face value of its Notes remained
outstanding. Also refer to Note 9  Subsequent
Events.

Note 4  Commitments and
Contingencies

Securities Class Actions in Northern
District of California.Beginning on
February 2, 2001, a number of securities class action
complaints were filed against the Company, certain of our
current and former officers and directors in the United States
District Court for the Northern District of California. The
complaints have been filed as purported class actions by
individuals who allege that they purchased the Companys
common stock during a purported class period; the alleged class
periods vary among the complaints. The complaints have been
consolidated into a single action. The complaints generally
allege that, during the period from September 26, 2000 to
February 1, 2001, the Company and certain of its former
officers made false or misleading statements of material fact
about the Companys financial statements, including its
revenues, revenue recognition policies, business operations and
prospects for the year 2000 and beyond. The complaints seek an
unspecified amount in damages on behalf of persons who purchased
Critical Path stock during certain periods, including those who
acquired the Companys stock in connection with the
acquisition of Peerlogic. In addition, on September 24,
2001, certain former shareholders of Peerlogic filed a putative
class action in the Superior Court of the State of California
alleging that Critical Path breached representations and
warranties made in connection with the acquisition of Peerlogic.
The complaint seeks an unspecified amount in damages. We have
removed the action to the United States District Court for the
Northern District of California. On November 8, 2001,
Critical Path announced that it had reached an agreement in
principle to settle these cases and executed binding memoranda
of understanding. Also refer to Note 9 
Subsequent Events.

Derivative Actions in Northern District of
California.Beginning on
February 5, 2001, Critical Path has been named as a nominal
defendant in a number of derivative actions, purportedly brought
on the Companys behalf, filed in the Superior Court of the
State of California and in the United States District Court for
the Northern District of California. The derivative complaints
allege that certain of Critical Paths current and former
officers and directors breached their fiduciary duties to the
Company, engaged in abuses of their control of the Company, were
unjustly enriched by their sales of the Companys common
stock, engaged in insider trading in violation of California law
or published false financial information in violation of
California law. The plaintiffs seek unspecified damages on the
Companys behalf from each of the defendants. Because of
the nature of derivative litigation, any recovery in the action
would inure to the Companys benefit. Contemporaneously
with settlement of the securities class action described above,
an agreement in principle

9



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

has been reached to settle the derivative action
and executed binding memoranda of understanding. Also refer to
Note 9  Subsequent Events.

Securities and Exchange Commission
Investigation.In February 2001, the
Securities and Exchange Commission (the SEC) issued
a formal order of investigation of the Company and certain of
the Companys current and former officers and directors
associated with the Company with respect to non-specified
accounting matters, financial reports, other public disclosures
and trading activity in the Companys securities. While the
Company does not know the current status of the investigation or
any possible actions that may be taken against the Company as a
result, any SEC action against Critical Path could harm the
Companys business.

Securities Class Action in Southern
District of New York.Beginning on
July 18, 2001, a number of securities class action
complaints were filed against the Company, and certain of our
current and former officers and directors and underwriters
connected with our initial public offering of common stock in
the United States District Court for the Southern District of
New York. The complaints have been filed as purported class
actions by individuals who allege that they purchased common
stock at the initial public offering of common stock between
March 26, 1999 and December 6, 2000. The complaints
allege generally that the Prospectus under which such securities
were sold contained false and misleading statements with respect
to discounts and commissions received by the underwriters. The
complaints have been consolidated into a single action. The
complaints seek an unspecified amount in damages on behalf of
persons who purchased Critical Path stock during the specified
period

The uncertainty associated with various
unresolved lawsuits and the SEC investigation could seriously
harm the Companys business and financial condition. In
particular, the lawsuits or the investigation could harm its
relationships with existing customers and its ability to obtain
new customers. The continued defense of the lawsuits and conduct
of the investigation could also result in the diversion of
managements time and attention away from business
operations, which could harm the Companys business.
Negative developments with respect to the lawsuits or the
investigation could cause the Companys stock price to
decline significantly. In addition, although the Company is
unable to determine the amount, if any, that it may be required
to pay in connection with the resolution of these lawsuits or
the investigation by settlement or otherwise, the size of any
such payment could seriously harm the Companys financial
condition.

Note 5  Impairment of
Long-Lived Assets

In connection with the Companys
restructuring plan (Note 2  Restructuring), an
impairment assessment of certain of its long-lived assets was
performed during the second quarter. The assessment was
performed as a result of the determination by the Company to
exit certain products and services that were determined to be
non-core to the Companys business strategy. The Company
has reviewed the intangible assets related to these non-core
products and services and, as a result of its assessment, in the
second quarter of 2001 recorded a $14.2 million impairment
charge to reduce these intangible assets to their estimated fair
values or eliminate them, as appropriate.

Note 6  Related Party
Transactions

Vectis Group,
LLC

In March 2001, the Company entered into certain
agreements with Vectis Group, LLC (Vectis Group) to
engage Vectis Group to act as an advisor to the Company with
respect to various strategic alternatives the Company was
exploring and to assist with other management related services.
As part of the agreement, Vectis Group agreed to provide
consulting services to the Company in exchange for a monthly
retainer fee, potential transaction - based fees
associated with certain strategic asset sales and investments in
Critical Path and immediately exercisable warrants to purchase
500,000 shares of the Companys Common

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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock with an exercise price of $2.00 per share,
issuable upon execution of the agreement. Using the
Black-Scholes option-pricing model and assuming a term of three
years, the term of the agreement, and expected volatility of
215%, the initial and final fair value of the warrant on the
effective date of the agreement approximated $732,000, which was
recognized upon the execution of the agreement in March 2001, as
the relationship is terminable at any time. During the term of
the agreement, we paid Vectis Group an aggregate of
approximately $1.1 million in monthly retainer fees and
expenses and approximately $3.1 million in transactional
fees (including approximately $2.75 million in connection
with the recent financing transaction). William
McGlashan, Jr., a principal in Vectis Group, is a member of
the Board of Directors of the Company, was appointed interim
President and Chief Operating Officer in April, 2001 and has
recently been appointed Vice Chairman and interim Chief
Executive Officer. Effective September 30, 2001, the
Company terminated its agreement with Vectis Group for
consulting and other transactional services. In connection with
the termination of the agreement, certain other employees of
Vectis Group have become employees of Critical Path. Although
the agreement terminated, certain obligations under the
agreement survived, including the transaction fee paid in
connection with the Companys recent financing transaction
and related indemnification obligations. Also refer to Note
9  Subsequent Events.

Loans to Executive
Officers

In connection with each of their respective
employment agreements, the Company made loans and held notes
receivable from David C. Hayden, Executive Chairman, and
Pierre Van Beneden, President, totaling $1.5 million and
$350,000, respectively. Haydens full recourse note accrues
interest at the rate of 6.75% per annum and shall be repaid by
the achievement of performance-based milestones described in
Mr. Haydens employment agreement and performance loan
agreement. Mr. Van Benedens loan shall be interest
free for the first year and shall be forgiven in monthly
installments over the first year of Van Benedens
employment. In the event of Mr. Van Benedens
departure prior to one year from employment, the note shall be
repayable and interest due in accordance with the terms of his
employment agreement. Mr. Van Benedens employment
agreement and loan was not effective until October 8, 2001.

Note 7  Other Comprehensive
Loss

The components of comprehensive loss are as
follows:

|                                         |  |                    |          |                   |  |      |        |      |  |   |          |   |  |   |         |  
|---------------------------------------- |  | ------------------ | -------- | ----------------- |  | ---- | ------ | ---- |  | - | -------- | - |  | - | ------- | -
|                                         |  |                    |          |                  
|                                         |  | Three Months Ended |          | Nine Months Ended
|                                         |  | September 30,      |          | September 30,    
|                                         |  |                    |          |                  
|                                         |  | 2000               |          | 2001              |  | 2000 |        | 2001
|                                         |  |                    |          |                   |  |      |        |     
|Net loss                                 |  | $                  | (139,447 | )                 |  | $    | 86,901 |      |  | $ | (346,398 | ) |  | $ | (64,226 | )
|Unrealized investment gains (losses)     |  |                    | (3,117   | )                 |  |      | (558   | )    |  |   | (9,233   | ) |  |   | (947    | )
|Foreign currency translation adjustments |  |                    | (1,177   | )                 |  |      | 2,301  |      |  |   | (13,087  | ) |  |   | (116    | )
|                                         |  |                    |          |                   |  |      |        |      |  |   |          |   |  |   |         |  
|Total comprehensive income (loss)        |  | $                  | (143,741 | )                 |  | $    | 88,644 |      |  | $ | (356,939 | ) |  | $ | (65,289 | )
|                                         |  |                    |          |                   |  |      |        |      |  |   |          |   |  |   |         |  

Accumulated other comprehensive loss consists of
unrealized gains (losses) on available-for-sale securities, net
of tax, and cumulative translation adjustments.

11



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 8  Net Loss Per
Share

Net loss per share is calculated as follows:

|                                               |                                                                              |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |          |  
|---------------------------------------------- | ---------------------------------------------------------------------------- | ------------------ | - | ----------------- | - | ---- | - | ------- | - |  | - | -------- | - |  | - | -------- | -
|                                               |                                                                              |                    |   |                  
|                                               |                                                                              | Three Months Ended |   | Nine Months Ended
|                                               |                                                                              | September 30,      |   | September 30,    
|                                               |                                                                              |                    |   |                  
|                                               |                                                                              | 2000               |   | 2001              |   | 2000 |   | 2001   
|                                               |                                                                              |                    |   |                   |   |      |   |        
|Net income (loss)                              |                                                                              |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |         
|                                               | Loss before extraordinary item                                               |                    | $ | (139,447          | ) |      | $ | (50,321 | ) |  | $ | (346,398 | ) |  | $ | (205,266 | )
|                                               | Gain on retirement of convertible subordinated
	notes                        |                    |   |                  |   |      |   | 137,222 |   |  |   |         |   |  |   | 141,040  |  
|                                               |                                                                              |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |         
|                                               | Net income (loss)                                                            |                    | $ | (139,447          | ) |      | $ | 86,901  |   |  | $ | (346,398 | ) |  | $ | (64,226  | )
|                                               |                                                                              |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |         
|Weighted average shares outstanding            |                                                                              |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |         
|                                               | Weighted average shares outstanding                                          |                    |   | 64,405            |   |      |   | 75,509  |   |  |   | 60,061   |   |  |   | 74,913   |  
|                                               | Weighted average shares subject to repurchase
	agreements                    |                    |   | (1,214            | ) |      |   | (102    | ) |  |   | (1,637   | ) |  |   | (251     | )
|                                               | Weighted average shares held in escrow related to
	acquisitions              |                    |   | (1,577            | ) |      |   | (915    | ) |  |   | (1,499   | ) |  |   | (1,190   | )
|                                               |                                                                              |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |         
|                                               | Shares used in computation of basic and diluted
	net income (loss) per share |                    |   | 61,614            |   |      |   | 74,492  |   |  |   | 56,925   |   |  |   | 73,472   |  
|                                               |                                                                              |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |         
|Basic and diluted net income (loss) per
	share |                                                                              |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |         
|                                               | Loss before extraordinary item                                               |                    | $ | (2.26             | ) |      | $ | (0.68   | ) |  | $ | (6.09    | ) |  | $ | (2.79    | )
|                                               | Gain on retirement of convertible subordinated
	notes                        |                    | $ |                  |   |      | $ | 1.84    |   |  | $ |         |   |  | $ | 1.92     |  
|                                               |                                                                              |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |         
|                                               | Net income (loss)                                                            |                    | $ | (2.26             | ) |      | $ | 1.17    |   |  | $ | (6.09    | ) |  | $ | (0.87    | )
|                                               |                                                                              |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |         

For the nine-month periods ended
September 30, 2000 and 2001 approximately 19.4 million
and 31.7 million potential common shares, respectively,
were excluded from the determination of diluted net loss per
share, as the effect of such shares on a weighted average basis
is anti-dilutive.

Note 9  Subsequent
Events

Equity Financing and Debt Retirement.On November 8, 2001, the Company
closed a financing transaction with net cash proceeds of
approximately $27 million and the retirement of
$65 million of face value of 5  3/4% Convertible
Subordinated Notes. In connection with the financing
transaction, the Company will issue 4 million shares of
convertible preferred stock (convertible into 52.4 million
shares of common stock) and 2.5 million in warrants to
purchase common stock. The financing transaction was led by
General Atlantic Partners, LLC and affiliates, and also included
Cheung Kong Limited and affiliates, Hutchison Whampoa Limited
and affiliates and Vectis Group LLC. A portion of General
Atlantic Partners participation in the transaction
(representing 6.2% of ownership of the Company, on a pro forma
basis after giving effect to the transaction and the conversion
into shares of common stock), shall be held in a separate escrow
pending either shareholder approval by majority vote or the
approval of the Nasdaq Stock Market. The release of financing
proceeds from escrow is contingent upon the execution of final
settlement agreements with respect to the class action and
shareholder derivative litigation.

Settlement of Litigation.On November 8, 2001, the Company
announced that it executed binding memoranda of understanding
with respect to the settlement of the securities class action
and derivative shareholder litigation filed in the U.S. District
Court for the Northern District of California. Settlement is
subject to the execution of a definitive settlement agreement of
the parties, notice to class members and shareholders and review
and approval by the court.

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Nasdaq Compliance.On October 30, 2001, the Company
received a letter from the Nasdaq Listing Qualifications Board
of the Nasdaq Stock Market indicating the Companys
compliance with the minimum equity requirements for continued
listing on the Nasdaq National Market. In addition, the Company
received confirmation of the application of the moratorium in
place until January 1, 2002 with respect to compliance with
the minimum bid requirements for continued listing on the Nasdaq
National Market.

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Item 2.     Managements Discussion and Analysis of Financial Condition
and Results of Operations

The following Condensed Consolidated Financial
Statements and Notes thereto of Critical Path, Inc. and
discussions contain forward-looking statements within the
meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, including but not
limited to statements regarding our future strategic plans and
financing strategies, plans related to our products and services
and the market for such products and services, plans related to
the sale of certain product lines, our plans to exit certain
products and services, our plans to continue to reduce costs
through a reduction of personnel and a consolidation of office
space, our anticipated charges and cost savings as a result of
those plans and our belief in our ability to successfully emerge
from the restructuring and refocusing of our operations. The
words anticipate, expect,
intend, plan, believe,
seek, and estimate and similar
expressions are intended to identify forward-looking statements.
These forward-looking statements involve a number of risks and
uncertainties that could cause actual results to differ
materially. Factors that might cause future results to differ
materially from those projected in the forward-looking
statements include, but are not limited to, turnover of senior
management, board of directors members and other key personnel,
difficulties of forecasting future results due to our limited
operating history, evolving business strategy and the emerging
nature of the market for our products and services, pending
litigation and SEC investigation, difficulties in finalizing our
strategic plan to exit certain non-core products and services,
difficulties of integrating acquired businesses, failure to
expand our sales and marketing activities, potential
difficulties associated with strategic relationships,
investments and uncollected bills, risks associated with an
inability to maintain continued compliance with the Nasdaq
National Market listing requirements, risks associated with our
international operations, unplanned system interruptions and
capacity constraints, software defects, and those discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Additional
Factors That May Affect Future Operating Results and
elsewhere in this report. Readers are cautioned not to place
undue reliance on these forward-looking statements. The
forward-looking statements speak only as of the date hereof. We
expressly disclaim any obligation to publicly release the
results of any revisions to these forward-looking statements to
reflect events or circumstances after the date of this
filing.

Overview

Critical Path, Inc. is a global leader in
messaging and directory communications solutions. We provide
solutions to manage the flow of mission-critical information
through an integrated portfolio of messaging, directory, and
security solutions. Our technology provides the messaging and
directory infrastructure to support customers new and
existing eBusiness initiatives. Our primary sources of revenue
come from providing a wide range of messaging and directory
products and services. The Company was founded in 1997 and is
headquartered in San Francisco, California with offices
worldwide.

Results of Operations

In view of the rapidly evolving nature of the our
business, prior acquisitions, organizational restructuring, and
limited operating history, we believe that period-to-period
comparisons of revenues and operating results, including gross
profit margin and operating expenses as a percentage of total
net revenues, are not meaningful and should not be relied upon
as indications of future performance. At September 30,
2001, we had 564 employees, in comparison with
1,041 employees at December 31, 2000 and
1,028 employees at September 30, 2000. Given those and
other changes to our organizational structure, we do not believe
that our historical trends for revenue, expenses, or personnel
are indicative of future results.

Net Revenues.We
derive most of our revenues through the sale of our messaging
and directory communication solutions. These solutions include
both licensed software products and hosted messaging services.
In addition, we receive revenues from professional services and
maintenance and support services. Software license revenue is
derived from perpetual and term licenses for our messaging,
directory and enterprise application integration technologies.
Hosted messaging services relate to fees for our hosted
messaging and collaboration services. These are primarily based
upon monthly contractual per unit rates for the services
involved, which are recognized on a ratable monthly basis over
the term of the contract. Professional services revenue is
derived from fees primarily related to training, installation
and configuration

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services and revenue is recognized as services
are performed. Maintenance and support revenue is derived from
fees related to post-contract customer support agreements
associated with software product licenses and customer support
agreements associated with hosted messaging customers, and
revenue is recognized ratably over the term of the agreement.


Software License.We
recognized $7.7 million and $22.2 million in software
license revenues during the three-and nine-month periods ended
September 30, 2001, respectively, as compared to
$12.4 million and $37.3 million in software license
revenues during the same periods in 2000, respectively. This
significant decrease from revenues in the same period of 2000
was attributed to several factors that affected our operations
during the first three quarters of 2001. Delays in information
technology spending were experienced across many industries due
to unfavorable macroeconomic conditions and these delays were
exacerbated by circumstances at the Company. Many potential
customers who were evaluating our products have delayed making
decisions until they could gain a level of comfort in us as we
emerge from our management transition and restructuring
initiatives. Additionally, our sales organization was distracted
by the termination and resignation of much of its leadership in
the first quarter and its focus on rebuilding also has caused a
reduction in effectiveness. During this rebuilding process,
which is ongoing we did experience increases in software license
sales from the first quarter, to the second quarter, however
license sales decreased from the second quarter to the third
quarter of 2001 and revenues are lower than the same periods of
the prior year. The decrease in the third quarter was primarily
due to our restructuring effort, but was at least to some extent
further exacerbated as a result of the terrorist attacks of
September 11, 2001. These tragic events significantly
impacted the world economic markets and acted to delay certain
of our licensed software sales with enterprise customers who
operated in the affected area or whose operations were disrupted
by these events. Additionally, in connection with our
restructuring initiative, we identified certain non-core
software license products, of which substantially all have
either been exited or sold to third parties. Although we have
recognized revenue during 2001 related to these non-core
products, these initiatives have significantly reduced the
revenue for these products offsetting increases in the revenues
for our core solutions. We expect to see this trend in non-core
revenue continue. Additionally, we anticipate non-core product
revenues will not account for a significant portion of our
revenues by the end of the year.

Hosted Messaging.We
recognized $10.0 million and $35.6 million in hosted
messaging revenues during the three- and nine-month periods
ended September 30, 2001, respectively, as compared to
$16.8 million and $40.1 million in hosted messaging
revenues in the same periods in 2000, respectively. This
decrease in the third quarter of 2001 as compared with the third
quarter of 2000, resulted primarily from our restructuring
initiative, as we identified certain non-core hosted messaging
services, of which substantially all have either been exited or
sold to third parties. Although we have recognized revenue
during 2001 related to these non-core services, the
restructuring initiative has significantly reduced the revenue
derived from these non-core services and provide the primary
reason for the decrease in revenue in the third quarter of 2001.
We anticipate that non-core revenues will not account for a
significant portion of our revenues by the end of the year.

Professional Services.We recognized $4.2 million and
$10.5 million in professional service revenues during the
three- and nine-month periods ended September 30, 2001,
respectively, as compared to $3.6 million and
$9.1 million in professional service revenues in the same
periods in 2000, respectively. Professional service revenue
increased in the final quarter of 2000 and the first half of
2001 as a result of the completion of the acquisition of
PeerLogic, Inc. in September 2000. However these increases were
offset in the second and third quarters of 2001 by the effects
of our restructuring initiative and the exit of certain non-core
products and services. Although we have recognized revenue
during 2001, as a result of these non-core products and
services, these restructuring initiatives have significantly
reduced the professional services revenue surrounding these
non-core products.

Maintenance and Support.We recognized $4.9 million and
$12.7 million in maintenance and support revenues during
the three- and nine-month periods ended September 30, 2001,
respectively, as compared to $2.6 million and
$6.9 million in maintenance and support revenues in the
same periods in 2000, respectively. Maintenance and support
revenue increased as a result of the completion of several
acquisitions during 2000 and additional sales of software
license products during 2000 and 2001. However these increases
were offset in the second and third quarters of 2001 by the
effects of our restructuring initiative and the exit of certain
non-

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core products and services. Although we have
recognized revenue during 2001 as a result of these non-core
products and services, these restructuring initiatives have
reduced the maintenance and support revenue related to these
non-core products.


Critical Paths international operations
accounted for approximately 45% and 40% of net revenues in the
three-and nine-month periods ended September 30, 2001,
respectively, as compared to approximately 39% and 40% of net
revenues in the same periods of 2000, respectively. There was a
decrease in the first quarter of 2001 in international revenues
related primarily to a reduction in enterprise information
technology spending, and the associated impact on the sales of
our license products in our international markets. During the
second quarter of 2001, international license product sales
increased, resulting in an increase in international revenues,
while during the third quarter of 2001, international license
product sales decreased, as a result of our restructuring
initiative and the exit of certain non-core products and
services.

Cost of Net
Revenues

Software License.Cost of net software license revenues
consists primarily of product media duplication, manuals and
packaging materials, personnel and facility costs, and
third-party royalties. The overall decrease in the cost of net
software license revenue for the three- and nine-month periods
ended September 30, 2001, respectively, were the result of
the mix of software license revenue and the related royalties
paid to third parties. During the third quarter of 2001 there
was an increase in third party royalty expense.

Hosted Messaging.Cost of net hosted messaging revenues
consists primarily of costs incurred in the delivery and support
of messaging services, including depreciation of capital
equipment used in network infrastructure, amortization of
purchased technology, Internet connection charges, accretion of
acquisition-related retention bonuses, personnel costs incurred
in operations, and other direct and allocated indirect costs.
The decrease in the third quarter was the result of the sale and
divestiture of several non-core services and the termination of
employees through our restructuring initiative. Additionally,
the implementation of certain other cost cutting measures
further reduced cost of the net hosted messaging revenues during
the third quarter of 2001.

Professional Service.Cost of net professional service
revenues consists primarily of personnel costs including custom
engineering, installation and training services for both hosted
and licensed solutions, and other direct and allocated indirect
costs. As a result of the acquisitions completed in 2000,
additional costs were incurred during the first three quarters
of 2001 on professional service resources in comparison with the
same period of 2000.

Maintenance and Support.Cost of net maintenance and support
revenues consists primarily of personnel costs related to the
customer support functions for both hosted and licensed
solutions, and other direct and allocated indirect costs. As a
result of the acquisitions completed in 2000, additional costs
were incurred during the first three quarters of 2001 on
customer support resources in comparison with the same period of
2000.

Cost of net service revenues during the second
half of 2000 and first half of 2001 were primarily impacted by
the increased compensation and other personnel costs resulting
from the additional headcount added through our acquisitions
completed during 2000, and through our continued efforts to
enhance our portfolio of messaging and directory communications
solutions. During the second quarter of 2001, we initiated a
strategic restructuring plan, which significantly reduced our
workforce in addition to impacting several other aspects of our
business. During the third quarter we substantially completed
our restructuring plan, significantly reducing our cost of net
service revenue through the divestiture of many of our non-core
products and services and the successful reduction in our
headcount. Operations, customer support, and professional
services staff decreased to 197 employees at September 30,
2001 from 338 employees at September 30, 2000 and
340 employees at December 31, 2000.

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Operating
Expenses

Sales and Marketing.Sales and marketing expenses consist
primarily of compensation for sales and marketing personnel,
advertising, public relations, other promotional costs, and, to
a lesser extent, related overhead. Increases in marketing and
promotional expenses, incentive compensation payments to sales
personnel, and increases in compensation associated with
additional headcount added through the acquisitions completed
during the first quarter and duration of 2000, resulted in the
increase in sales and marketing expenses from the first half of
2000 through the first half of 2001. However, during the first
quarter of 2001, the termination and resignation of several
employees in the sales organization, the termination of certain
strategic marketing relationships related to non-core services
and certain other cost cutting measures in connection with our
restructuring plan resulted in a significant reduction in sales
and marketing expense in the second and third quarters of 2001,
as compared to the same quarters of 2000. Sales and marketing
staff decreased to 131 employees at September 30, 2001
from 298 employees at September 30, 2000 and
305 employees at December 31, 2000.

Research and Development.Research and development expenses
consist primarily of compensation for technical staff, payments
to outside contractors, depreciation of capital equipment
associated with research and development activities, and, to a
lesser extent, related overhead. Research and development
expenses increased during 2000 and the first quarter of 2001
primarily as a result of increased compensation and other
personnel costs from the additional headcount added through the
acquisitions completed during 2000. These increases caused an
increase in research and development expense from the first half
of 2000 to the first half of 2001. During the second and third
quarters of 2001, we terminated several employees as well as
certain contracts with outside consultants associated with
research and development in connection with our restructuring
initiative and implemented certain other cost cutting measures,
which resulted in a reduction in research and development
expense in the second and third quarters of 2001 as compared
with the same quarters of 2000. Research and development staff
decreased to 142 employees at September 30, 2001 from 239
employees at September 30, 2000 and 252 employees at
December 31, 2000.

General and Administrative.General and administrative expenses
consist primarily of compensation for personnel, fees for
outside professional services, occupancy costs and, to a lesser
extent, related overhead. General and administrative expense
increased during 2000 and the first quarter of 2001 primarily as
a result of increased compensation and other personnel costs
from the additional headcount added through the acquisitions
completed during 2000. We have incurred higher fees for outside
professional services in 2001, in particular significantly
higher legal fees related to the SEC investigation and
shareholder litigation and significantly higher accounting fees
related to the extended audit performed for fiscal year 2000.
These increases in general and administrative expenses have been
offset by the termination of several employees in connection
with our restructuring initiative and the implementation of
certain other cost cutting measures, resulting in a decrease in
general and administrative expense from the second quarter to
the third quarter of 2001. However, these increases, net of
reductions, resulted in an overall increase in general and
administrative expense in the third quarter of 2001 as compared
to the third quarter of 2000. General and administrative staff
decreased to 94 employees at September 30, 2001 from 153
employees at September 30, 2000 and 144 employees at
December 31, 2000.

Amortization
of Intangible Assets

In connection with acquisitions completed in 1999
and 2000, which were all accounted for using the purchase method
of accounting, we recorded goodwill and other intangible assets,
primarily for assembled workforce, customer base, and existing
technology. During the fourth quarter of 2000, we recognized a
$1.3 billion charge related to the impairment of certain
goodwill and other intangible assets. As a result of this
impairment charge, amortization expense decreased significantly
from the first half of 2000 to the first half of 2001.
Additionally, in connection with the Companys
restructuring plan announced in April 2001, an impairment
assessment of certain of our long-lived assets was performed. As
a result of this assessment, the Company has recorded an
additional $14.2 million impairment charge to reduce these
intangible assets to their revised estimated fair values or
eliminate them, as appropriate, and further reduce amortization
expense. Based on the types of identifiable intangibles acquired
certain amounts of amortization expense were allocated

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to cost of net revenues and the remaining
amortization expense was allocated to operating expenses. There
was an increase in amortization expense related to amounts
allocated to cost of net revenues; this increase was the direct
result of an acquisition completed in the third quarter of 2000,
as certain of the intangible assets allocated to acquired
existing technology have not been impaired.


Acquisition-Related Retention Bonuses

In connection with the acquisitions completed in
1999 and 2000, we established certain retention bonus programs
that in the aggregate amounted to approximately
$20.7 million in incentives for certain former employees of
the acquired companies to encourage their continued employment
with Critical Path. The significant decrease in
acquisition-related retention bonus expense from fiscal 2000 to
fiscal 2001 resulted from the completion, during fiscal year
2000, of all but one of these bonus programs, which is expected
to conclude in April 2002.

Restructuring

In April 2001, Critical Path announced a three
part strategic restructuring plan that involved reorganizing
Critical Paths product and service offerings around a
group of core communication solutions. The three elements of the
plan include: (i) focusing on core communication solutions;
(ii) workforce reduction; and (iii) facilities and
operations consolidation. Additionally, we have implemented an
aggressive expense management plan to further reduce operating
costs while maintaining strong customer service for our core
solutions. During the third quarter Critical Path substantially
completed its restructuring plan, including the divestiture of
many of its non-core products and services, a significant
reduction in headcount and the implementation of other cost
cutting measures, causing a significant reduction in overall
operating expenses. As a result of these strategic initiatives,
we anticipate that we will realize future annual cost savings of
approximately $70.0 million. The non-core products and
services comprised approximately 18% and 26% of total revenues
in the three-and nine-month periods ended September 30,
2001 and approximately 22% and 25% of total revenues in the
three- and nine-month periods ended September 30, 2000. We
expect that these products and services will be an insignificant
part of the Companys revenue stream by the fourth quarter
of 2001.

Refocusing on Core Communications Solutions.Core communication solutions consist
of our messaging and directory infrastructure platform,
including mail, calendar, address book, file storage, secure
delivery, directory and meta-directory, and access services
supporting wireline and wireless users. Restructuring charges
associated with this refocusing of our products and services
consisted primarily of contract termination fees, gains and
losses related to asset sales and dispositions, and lease
termination fees. During the quarter, we sold or discontinued
nearly all of its thirteen non-core products and services. We
also completed the disposition of six of seven non-core products
being sold, inclusive of the sales of the InJoin Trans, Batch
and PATH/3270 products, the InJoin Broker product family, and
the InLine Project Collaboration. Additionally, we have
discontinued four of six non-core products and services that we
have decided to exit and the remaining two are expected to be
discontinued no later than the first quarter of 2002. As a
result of these transactions a net gain of $2.7 million was
recorded in the third quarter.

Reduction of Workforce, Facility and Other
Expenses.We further reduced our
headcount from 1,011 at March 31, 2001 and 784 at
June 30, 2001 to 564 employees at September 30,
2001, and continued to consolidate our facilities from 77 at
March 31, 2001 and 44 at June 30, 2001 to the current
level of 38, with approximately 15 additional facilities
expected to close no later than the first quarter of 2002.
Charges related to the headcount reduction consisted primarily
of the payment of severance and fringe benefits, and aggregated
approximately $5.3 million during the third quarter.
Included in the third quarter was approximately
$1.5 million related to the severance and forgiveness of a
note payable to one of our former executives. Lease terminations
and facility consolidation related charges consisted primarily
of lease termination and related fees, and aggregated
approximately $1.2 million during the third quarter. We
anticipate that the remaining restructuring charges will be
recorded in the fourth quarter and will amount to less than
$1.5 million.

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Summary of Year-To-Date Restructuring
Costs

|                                                         |  |        |      |         |  |          |     |                    |  |   |      |   |  |   |     | 
|-------------------------------------------------------- |  | ------ | ---- | ------- |  | -------- | --- | ------------------ |  | - | ---- | - |  | - | --- | 
|                                                         |  | Total  |      | Noncash |  | Cash     |     | Liabilities at    
|                                                         |  | Charge |      | Charges |  | Payments |     | September 30, 2001
|                                                         |  |        |      |         |  |          |     |                   
|Workforce reduction                                      |  | $      | 10.3 |         |  | $        | 1.3 |                    |  | $ | 7.5  |   |  | $ | 1.4 | 
|Facility and operations consolidation and other
	charges |  |        | 3.3  |         |  |          | 1.0 |                    |  |   | 1.1  |   |  |   | 1.3 | 
|Non-core product and service sales and
	divestitures     |  |        | (1.3 | )       |  |          | 0.9 |                    |  |   | (3.4 | ) |  |   | 1.2 | 
|                                                         |  |        |      |         |  |          |     |                    |  |   |      |   |  |   |     | 
|Total                                                    |  | $      | 12.3 |         |  | $        | 3.2 |                    |  | $ | 5.2  |   |  | $ | 3.9 | 

Stock-Based
Expenses

Warrants.During
1999 and 2000, we issued warrants to purchase shares of our
preferred and common stock pursuant to certain strategic
agreements with ICQ, Inc., Qwest Communications Corporation,
Worldsport Network Ltd., one of our lessors, and a major
telecommunications company. These issuances allowed the warrant
holders to purchase an aggregate of 7.1 million shares of
our common stock in exchange for services related increases,
sub-branded advertising and various other services. During the
three- and nine-months ended September 30, 2001, we
recognized stock-based expenses related to these warrants of
approximately $4.9 million and $14.6 million,
respectively, compared to the three- and nine-months ended
September 30, 2000, we recognized amounts of approximately
$7.8 million and $19.3 million, respectively. We
believe that these warrant agreements could have a significant
current and future impact on our operating results.

In March 2001, the Company entered into certain
agreements with Vectis Group, LLC (Vectis Group) to
engage Vectis Group to act as an advisor to the Company with
respect to various strategic alternatives the Company was
exploring and to assist with other management related services.
As part of the agreement, Vectis Group agreed to provide
consulting services to the Company in exchange for a monthly
retainer fee, potential transaction - based fees
associated with certain strategic asset sales and investments in
Critical Path and immediately exercisable warrants to purchase
500,000 shares of the Companys Common Stock with an
exercise price of $2.00 per share, issuable upon execution of
the agreement. Using the Black-Scholes option-pricing model and
assuming a term of three years, the term of the agreement, and
expected volatility of 215%, the initial and final fair value of
the warrant on the effective date of the agreement approximated
$732,000, which was recognized upon the execution of the
agreement in March 2001, as the relationship is terminable at
any time. During the term of the agreement, we paid Vectis Group
an aggregate of approximately of $1.1 million in monthly
retainer fees and expenses and $3.1 million in
transactional fees (including approximately $2.75 million
in connection with the recent financing transaction). William
McGlashan, Jr., a principal in Vectis Group, is a member of
the Board of Directors of the Company, was appointed interim
President and Chief Operating Officer in April, 2001 and has
recently been appointed Vice Chairman and interim Chief
Executive Officer. Effective September 30, 2001, the
Company terminated its agreement with Vectis Group for
consulting and other transactional services. In connection with
the termination of the agreement certain other employees of
Vectis Group have become employees of Critical Path. Although
the agreement terminated, certain obligations under the
agreement, including the transaction fee paid in connection with
the Companys recent financing transaction and related
indemnification obligations. Also refer to
Note 9  Subsequent Events.

Interest and
Other Income (Expense)

Interest and other income, net of expense,
consists primarily of interest earnings on cash and cash
equivalents as well as net realized gains (losses) on
foreign exchange transactions. On March 30, 2000, we issued
$300.0 million of five-year, 5.75% Convertible Subordinated
Notes due April 1, 2005. As a result of this increase in
cash available for investing, interest income increased
significantly during the last three quarters of 2000. Our cash
balance was significantly reduced between the third quarter of
2000 and the third quarter of 2001 as a result of cash used in
operations and the repurchase of a portion of our convertible
subordinated

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notes, causing a significant decrease in interest
income during 2001. Interest income amounted to
$1.1 million and $5.0 million for the three- and
nine-months ended September 30, 2001, respectively, and
$4.0 million and $9.9 million for the three- and
nine-months ended September 30, 2000, respectively. Also,
associated with foreign currency transactions related to our
international operations we recognized a $1.0 million net
loss and $500,000 net gain for the three- and nine-months ended
September 30, 2001, respectively, and $900,000 and
$1.0 million net gains for the three- and nine-months ended
September 30, 2000, respectively.


Interest
Expense

Interest expense consists primarily of the
interest and amortization of debt issuance costs related to the
convertible subordinated notes we issued in March 2000, and
interest and stock-based charges on certain capital leases. We
incurred approximately $3.1 million and $11.7 million
in interest on these notes, and approximately $200,000 and
$1.3 million related to amortization of debt issuance costs
for the three- and nine-month periods ended September 30,
2001, respectively. Additionally, we incurred approximately
$4.3 million and $8.6 million in interest on these
notes for the three- and nine-month periods ended
September 30, 2000, and approximately $540,000 and
$1.1 million related to amortization of debt issuance
costs, respectively. During the three- and nine-month periods
ended September 30, 2001, amortization of stock-based
charges was zero and $16,000, respectively, and interest charges
on capital lease obligations amounted to $500,000 and
$1.2 million, respectively. For the three-and nine-month
periods ended September 30, 2000, amortization of
stock-based charges was $16,000 and $48,000, respectively, and
interest charges on capital lease obligations amounted to
$327,000 and $974,000, respectively.

Equity in Net
Loss of Critical Path Pacific

In June 2000, we established a joint venture,
Critical Path Pacific, with Mitsui and Co., Ltd., NTT
Communications Corporation and NEC Corporation to deliver
advanced Internet messaging solutions to businesses in Asia. We
invested $7.5 million and hold a 40% ownership interest in
the joint venture. This investment is being accounted for using
the equity method. During the three- and nine-month periods
ended September 30, 2001, we recorded equity in net loss of
joint venture of $346,000 and $1,519,000 million,
respectively. During the three- and nine-month periods ended
September 30, 2000, the Company recorded equity in net loss
of joint venture of $640,000.

Provision for
Income Taxes

No current provision or benefit for U.S. federal
or state income taxes has been recorded as we have incurred net
operating losses for income tax purposes since our inception. No
deferred provision or benefit for federal or state income taxes
has been recorded as we are in a net deferred tax asset position
for which a full valuation allowance has been provided due to
uncertainty of realization. We recognized a provision for
foreign income taxes during the three- and nine-month periods
ended September 30, 2001 in the amounts of
$2.2 million and $3.7 million, respectively, as
certain of our European operations generated taxable income.
During the three-and nine-month periods ended September 30,
2000, we recognized a provision for foreign income taxes in the
amounts of $2.5 million and $4.3 million, respectively.

Convertible
Subordinated Notes

On March 30, 2000, Critical Path issued
$300.0 million of five-year, 5.75% Convertible Subordinated
Notes due April 1, 2005 (the Notes). In June
2001 we began a financial restructuring of our balance sheet,
which included the repurchase of a portion of its outstanding
Notes on an opportunistic basis. During the three-and
nine-months ended September 30, 2001, Critical Path retired
$192.0 million and $197.0 million of face value of its
Notes, respectively, which resulted in after-tax extraordinary
gains of approximately $137.2 million and
$141.0 million, respectively. As of September 30, 2001
$103.0 million of face value of its Notes remained
outstanding. On November 8, 2001, we closed a financing
transaction with net cash proceeds of approximately $27 million
and the retirement of $65 million of face value of the
Notes. In connection with the financing transaction, we will
also issue 4 million shares of convertible preferred stock
(convertible into 52.4 million shares of common stock) and
warrants to purchase 2.5 million shares of common stock. The

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release of financing proceeds from escrow is
contingent upon the execution of final settlement agreements
with respect to the shareholder litigation.


Liquidity and Capital Resources

During 2001 we have begun investing a portion of
our cash in high grade, low risk investments with an average
maturity of twelve months. As of September 30, 2001, our cash
and short-term investments totaled approximately
$65.4 million, comprised of $54.6 million in cash and
cash equivalents and $10.8 million in short-term
investments. Our working capital amounted to approximately
$39.6 million. During the nine-months ended
September 30, 2001, we used approximately
$162.0 million in cash. After incurring restructuring
charges and realizing the expected quarterly cost savings in
connection with our strategic restructuring, implementing
certain worldwide cost control policies and procedures, and the
potential increase in revenue we hope to realize when we move
beyond the issues experienced in the first quarter of 2001, we
believe that we have sufficient cash to operate through March
2002.

We used $73.4 million in cash to fund
operating activities during the nine-months ended
September 30, 2001 primarily due to our net loss adjusted
for non-cash charges, acquisition-related retention bonus
payments and payments related to our restructuring plan. Our
cash disbursements related primarily to compensation and other
costs for our employees and various other operating costs, which
are identified in the Results of Operations portion of this
section.

We used $33.6 million in cash to fund
investing activities during the nine-months ended
September 30, 2001 to enter into certain short-term
investments and to purchase property, equipment and other
capital expenditures, however the cash used for those capital
expenditures in 2001 has significantly reduced from capital
expenditure levels in 2000. The primary use of cash during 2001
was related to the purchase of short-term investments of
approximately $10.8 million, which is comprised primarily
of low risk corporate bonds and government securities.
Additionally we acquired the remaining outstanding equity
interest in CP Italia, a consolidated subsidiary, paid an
investment banking fee related to the ISOCOR acquisition and
purchased additional network infrastructure equipment for our
data centers.

We used $55.0 million in cash from financing
activities during the nine-months ended September 30, 2001
to retire principal on capital lease obligations and our
convertible subordinated notes. The primary use of cash during
2001 was $49.1 million to repurchase $197.0 million of
our convertible subordinated notes. During 2000 we received net
proceeds of $29.4 million from the sale of the
Companys common stock as well as from the exercise of
employee stock options and the purchase of stock under our
employee stock purchase plan. We received $289.2 million in net
cash proceeds from financing activities during 2000 from the
sale of $300.0 million in convertible subordinated notes.
These cash proceeds were partially offset by payments to retire
principal on capital lease obligations.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
OPERATING RESULTS

Due to our limited operating history, evolving
business strategy and the nature of the messaging and directory
infrastructure market, our future revenues are unpredictable,
and our quarterly operating results may fluctuate.

We cannot accurately forecast our revenues as a
result of our limited operating history, evolving business
strategy and the emerging nature of the Internet messaging
infrastructure market. Forecasting is further complicated by
rapid changes in our business due to the ten acquisitions we
completed in 1999 and 2000, our current strategic restructuring,
as well as significant fluctuations in license revenues as a
percentage of total revenues from an insignificant percentage in
1999, to 38% in 2000 and to 27% in the first nine months of
2001. Our revenues could fall short of expectations if we
experience delays or cancellations of even a small number of
orders. We often offer volume-based pricing, which may affect
operating margins. A number of factors are likely to cause
fluctuations in operating results, including, but not limited to:



| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | the use of messaging and directory infrastructure
	products and services in particular;
|
| |  | demand for outsourced messaging services;                                              

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| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | demand for licensing of messaging, directory, and
	other products;                                                       
|
| |  | our ability to attract and retain customers and
	maintain customer satisfaction;                                         
|
| |  | our ability to attract and retain qualified
	personnel with industry expertise, particularly sales personnel;            
|
| |  | the reaction of our customers and potential
	customers to integration of acquired businesses;                            
|
| |  | the ability to upgrade, develop and maintain our
	systems and infrastructure;                                            
|
| |  | the budgeting cycles of our customers and
	potential customers;                                                          
|
| |  | the amount and timing of operating costs and
	capital expenditures relating to expansion of business and
	infrastructure;
|
| |  | our ability to effectively respond to the rapid
	technology change of the messaging and directory infrastructure
	market;
|
| |  | technical difficulties or system outages; and                                                                            
|
| |  | the announcement or introduction of new or
	enhanced services by competitors.                                            

In addition to the factors set forth above,
operating results will be impacted by the extent to which we
incur non-cash charges associated with stock-based arrangements
with employees and non-employees. In particular, we have
incurred and expect to continue to incur substantial non-cash
charges associated with the grant of stock options to employees
and non-employees and the grant of warrants to customers,
investors and other parties with which we have business
relationships. These grants of options and warrants also may be
dilutive to existing shareholders.

Our operating results have been and could
continue to be impacted by decisions to eliminate product or
service offerings through termination, sale or other disposition
or to sustain certain products and services at a minimum level
where customer commitments prevent us from eliminating the
offering altogether. Decisions to eliminate or limit our
offering of a product or service will involve the expenditure of
capital, the realization of losses, a reduction in our
workforce, facility consolidation or the elimination of revenues
along with the associated costs, any of which could harm our
financial condition and operating results.

As a result of the foregoing, period-to-period
comparisons of operating results are not a good indication of
future performance. It is likely that operating results in some
quarters will be below market expectations. In this event, the
price of our common stock is likely to decline.

We depend on strategic relationships and other
sales channels and the loss of any strategic relationships could
harm our business and negatively affect our revenues.

We depend on strategic relationships to expand
distribution channels and to undertake joint product development
and marketing efforts. Our ability to increase revenues depends
upon marketing services through new and existing strategic
relationships. We depend on a broad acceptance of our software
and outsourced messaging services on the part of potential
resellers and partners and acceptance of our company as the
supplier for these outsourced messaging solutions. We also
depend on joint marketing and product development through
strategic relationships to achieve market acceptance and brand
recognition. Our agreements with strategic partners typically do
not restrict them from introducing competing services. These
agreements typically are for terms of one to three years, and
automatically renew for additional one-year periods unless
either party gives prior notice of its intention to terminate
the agreement. In addition, these agreements are terminable by
our partners without cause, and some agreements are terminable
by us, upon 30-120 days notice. Most of the
agreements also provide for the partial refund of fees paid or
other monetary penalties in the event that our services fail to
meet defined minimum performance standards. Distribution
partners may choose not to renew existing arrangements on
commercially acceptable terms, or at all. If we lose any
strategic relationships, fail to renew these agreements or
relationships or fail to develop new strategic relationships,
our business will suffer. The loss of any key strategic
relationships would have an adverse impact

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on our current and future revenues. In addition
to strategic relationships, we also depend on the ability of our
customers to sell and market our services to their end-users.


We have experienced turnover of senior
management and our current management team has been together for
a limited time, which could harm our business and
operations.

In the first half of 2001, we announced a series
of changes in our management and board of directors. In the
early part of the second quarter of 2001, we announced a series
of additional changes in our management and board of directors.
It is possible this high turnover at our senior management
levels may continue. A majority of the current senior executives
of the Company, joined us in the second and third quarters of
2001. Because of these recent changes and their recent
recruitment, our management team has not worked together for a
significant length of time and may not be able to work together
effectively to successfully implement our strategy. If our
management team is unable to accomplish our business objectives,
our ability to grow our business could be severely impaired. We
do not have long-term employment agreements with any of our
executive officers. The loss of the services of one or more of
our current senior executive officers could harm our business
and affect our ability to successfully implement our business
objectives.

We have a history of losses, expect continuing
losses and may never achieve profitability.

As of September 30, 2001, we had an
accumulated deficit, including other comprehensive income, of
approximately $2.0 billion. We have not achieved
profitability in any period and expect to continue to incur net
losses in accordance with generally accepted accounting
principles for the foreseeable future. We expect that our
operating expenses will decrease as a result of our strategic
restructuring and other cost-cutting efforts. However, we will
continue to spend resources on maintaining and strengthening our
business, and this may have a negative effect on our operating
results and our financial condition in the near term.

In past quarters, we have spent heavily on
technology and infrastructure development. We may continue to
spend substantial financial and other resources to develop and
introduce new end-to-end messaging and directory infrastructure
solutions, and improve our sales and marketing organizations,
strategic relationships and operating infrastructure. In
addition, in future periods we will continue to incur
significant non-cash charges related to the ten acquisitions we
completed in 1999 and 2000 and stock-based compensation. We
expect that our cost of revenues, sales and marketing expenses,
general and administrative expenses, operations and customer
support expenses and depreciation and amortization expenses
could continue to increase in absolute dollars and may increase
as a percent of revenues. If revenues do not correspondingly
increase, our operating results and financial condition could be
harmed. If we continue to incur net losses in future periods, we
may not be able to retain employees, or fund investments in
capital equipment, sales and marketing programs, and research
and development to successfully compete against our competitors.
We may never obtain sufficient revenues to achieve
profitability. If we do achieve profitability, we may not
sustain or increase profitability in the future. This may, in
turn, cause the price of our common stock to decline.

If we fail to improve sales and marketing
activities, we may be unable to improve our business.

Our ability to increase revenues will depend on
our ability to successfully recruit, train and retain sales and
marketing personnel. Competition for qualified personnel is
intense and we may not be able to hire and retain personnel with
relevant experience. The complexity and implementation of our
messaging and directory infrastructure products and services
require highly trained sales and marketing personnel to educate
prospective customers regarding the use and benefits of our
services. Current and prospective customers, in turn, must be
able to educate their end-users. Any delays or difficulties
encountered in our staffing efforts would impair our ability to
attract new customers and enhance our relationships with
existing customers. This in turn would adversely impact the
timing and extent of revenues. Because we have experienced
turnover in our sales force and the majority of our current
sales and marketing personnel have recently joined us and have
limited experience working together, our sales and marketing
organizations may not be able to compete successfully against
the sales and marketing organizations of our competitors. If we
do not successfully operate our sales and marketing activities,
our business could suffer and the price of our common stock
could decline.

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A limited number of customers account for a
high percentage of our revenues; if we lose a major customer or
if we are unable to attract new customers, our operating results
could be harmed.

We expect that sales of our services to a limited
number of customers will continue to account for a high
percentage of our revenue for the foreseeable future. Our future
success depends on our ability to retain our current customers,
and to attract new customers, in our target markets. The loss of
a major customer could harm our business. Our agreements with
our customers typically have terms of one to three years often
with automatic one year renewals and can be terminated without
cause upon 30-120 days notice. If our customers
terminate their agreements before the end of the contract term,
the loss of the customer could have an adverse impact on our
current and future revenues. Also, if we are unable to attract
and enter into agreements with new customers, our business will
not grow and we will not generate additional revenues.

If we are unable to successfully compete in
our product market, our operating results could be
harmed.

Because we have a variety of messaging and
directory infrastructure products and services, we encounter
different competitors at each level of our products and
services. Our competitors for corporate customers seeking
outsourced hosted messaging solutions are email service
providers, such as Commtouch, Easylink, USA.NET and application
service providers offering hosted exchange services. Our
competitors for service providers seeking insourced or
outsourced product-based solutions are iPlanet and OpenWave. For
secure delivery services, our competitors include Tumbleweed for
product-based solutions and SlamDunk for service-based
solutions. In the enterprise/ eBusiness directory category, we
compete primarily with iPlanet, Microsoft and Novell, and our
competitors in the meta-directory market are iPlanet, Microsoft,
Novell and Siemens.

We believe that competitive factors affecting the
market for messaging and directory infrastructure solutions
include:



| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | breadth of platform features and functionality;                                                                                                                                                                        
|
| |  | ease of integration into customers existing
	systems;                                                                                                                                                                 
|
| |  | ease of expansion and upgrade;                                                                                                                                                                                         
|
| |  | flexibility to enable customers to manage certain
	aspects of their systems internally and leverage outsourced
	services in other cases when resources, costs and time to market
	reasons favor an outsourced offering;
|
| |  | cost of ownership and operation;                                                                                                                                                                                       
|
| |  | scalability, reliability and performance; and                                                                                                                                                                          
|
| |  | ability to enhance customers brand
	identities by allowing them to maintain brand control.                                                                                                                            

We believe competition will increase as current
competitors increase the sophistication of their offerings and
as new participants enter the market. Many of our current and
potential competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do and
may enter into strategic or commercial relationships with
larger, more established and better-financed companies. Any
delay in our development and delivery of new services or
enhancement of existing services would allow our competitors
additional time to improve their service or product offerings,
and provide time for new competitors to develop messaging and
directory infrastructure products and services and solicit
prospective customers within our target markets. Increased
competition could result in pricing pressures, reduced operating
margins and loss of market share, any of which could cause our
business to suffer.

We may need to raise additional capital and to
initiate other operational strategies that may dilute existing
shareholders.

We believe that existing capital resources will
enable us to maintain current and planned operations through
March 31, 2001. However, additional capital may be required
to continue operations and achieve profitability. In addition,
we may be required to raise additional funds due to unforeseen
circumstances. If our

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capital requirements vary materially from those
currently planned, we may require additional financing sooner
than anticipated. Such financing may not be available in
sufficient amounts or on terms acceptable to us and may be
dilutive to existing shareholders. Additionally, we face a
number of challenges in operating our business, including our
highly leveraged capital structure and significant contingent
liabilities associated with litigation. In the event that
resolution of these or other operational matters involve
issuance of stock, our existing shareholders may experience
significant dilution.


Pending litigation could seriously harm our
business.

We have had filed in recent years, a number of
lawsuits against us, including securities class action and
shareholder derivative litigation filed in February 2001,
certain of our current and former officers and directors and
some of our subsidiaries. While these lawsuits vary in the
materiality of potential liability associated with them, the
uncertainty associated with substantial unresolved lawsuits
could seriously harm our business, financial condition and
reputation, whether material individually or in the aggregate.
In particular, this uncertainty could harm our relationships
with existing customers and our ability to obtain new customers.

The continued defense of the lawsuits also could
result in continued diversion of our managements time and
attention away from business operations, which could harm our
business. Negative developments with respect to the lawsuits
could cause the price of our common stock to decline
significantly. In addition, although we are unable to determine
the amount, if any, that we may be required to pay in connection
with the resolution of these lawsuits by settlement or
otherwise, the size of any such payments, individually or in the
aggregate, could seriously harm our financial condition. Many of
the complaints associated with these lawsuits do not specify the
amount of damages that plaintiffs seek. As a result, we are
unable to estimate the possible range of damages that might be
incurred as a result of the lawsuits. We have not set aside any
financial reserves relating to potential damages associated with
any of these lawsuits.

Failure to complete settlement of pending
securities class action and shareholder derivative action could
materially harm our business.

Although the Company has executed binding
memoranda of understanding in connection with the securities
class action and shareholder derivative action pending in the
U.S. District Court for the Northern District of California, we
cannot provide assurance that a final settlement shall occur in
accordance with such memoranda of understanding, or at all. The
binding memoranda of understanding with respect to the
litigation are subject to the negotiation and execution of
definitive settlement agreements between the parties and other
factors, such as court review and approval, before the subject
actions are dismissed. In addition, even if definitive
settlement agreements are entered into between the parties, such
agreements are subject to notice to the putative class and of
the shareholders of the Company, as well as review and approval
by the court. There can be no assurance that the court will
approve such agreements once they are executed. A failure to
complete and finalize the settlement agreement between the
parties could have a number of materially detrimental effects on
the Companys financial condition and business.

Should such definitive settlement agreements fail
to be executed and the litigation continue, there can be no
assurance that fees and expenses, and any ultimate settlement
amount associated with such litigation, shall be within the
coverage limits of our insurance and/or our ability to pay such
amounts. Although the terms of the memoranda of understanding
are within the coverage limits of the Companys directors
and officers insurance, should the current agreement in
principle fail to be formalized in definitive settlement
agreements there can be no assurance that the Company will be
able to conclude such litigation on terms that coincide with the
coverage limits of our insurance and/or ability to pay upon any
final determination.

In addition the proceeds from the Companys
recent financing transaction are subject to an escrow agreement
conditioning release of such funds on the execution of
definitive settlement agreements with respect to the securities
class action. Should such final settlement agreements fail to
occur, such failure could cause the financing transaction to be
unwound. If the Company were then otherwise unable to secure
alternative financing, the business and operations of the
Company would be materially adversely affected. A failure to
complete the previously announced financing transaction could
also cast doubt as to the prospects of the

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Company in the eyes of our customers, potential
customers and investors, and cause the Companys stock
price to decline.


The pending SEC investigation could harm our
business.

In February 2001, the Securities and Exchange
Commission, or SEC, issued a formal order of investigation of us
and certain current and former officers associated with us. The
investigation relates to non-specified accounting matters,
financial reports, other public disclosures and trading activity
in our stock. While we do not know the current status of the
investigation or any possible actions that may be taken against
us as a result, any negative developments with respect to the
investigation or any SEC action against us could harm our
business and cause the price of our common stock to continue
decline significantly.

We may not be able to maintain our listing on
The Nasdaq National Market and if we fail to do so, the price
and liquidity of our common stock may decline.

The Nasdaq Stock Market has quantitative
maintenance criteria for the continued listing of common stock
on The Nasdaq National Market. The current requirements
affecting us include (i) having net tangible assets of at
least $4 million and (ii) maintaining a minimum bid
price per share of $1. As of October 30, 2001 the Nasdaq
Listings Qualifications Board has indicated our compliance with
the minimum equity requirements. However, from July 12,
2001 through October 31, 2001, the closing bid price per
share for our common stock was below $1. Although our bid
price has been above $1 per share since November 1, 2001,
if the bid price of our common stock price slips below $1 per
share, our common stock may not remain listed on The Nasdaq
National Market. Although the Nasdaq Stock Market instituted a
moratorium on delisting proceedings through January 2,
2002, there can be no assurance that we will remain in
compliance of the minimum bid price requirements for continued
listing by that time. If we fail to maintain continued listing
on the Nasdaq National Market, our business and its financial
condition could be harmed.

The Nasdaq National Markets Audit Committee
Rules require audit committees to be comprised of at least three
independent directors. We currently comply with this
requirement, however, in the event that we are not able to
comply with this or any of the other requirements in the future
we may be delisted from The Nasdaq National Market. If we are
delisted, it could have a material adverse effect on the market
price of, and the liquidity of the trading market for, our
common stock.

In addition, the SEC approved certain amendments
to The Nasdaq Stock Market Marketplace Rules which are effective
June 20, 2001, including but not limited to changing the
current net tangible assets listing standard to an equity
listing standard. The new equity standard requires net equity of
at least $10 million. We may begin to qualify under this
standard immediately, but compliance with the new equity listing
standard is not required until November 1, 2002. If we do
not comply with this standard by November 1, 2002 we may be
delisted from The Nasdaq National Market. Such action may
negatively affect our standing with The Nasdaq National Market,
which in turn would harm our business and its financial
condition.

Our stock price has declined during recent
quarters and continued volatility in the stock market may cause
fluctuations and/or further decline in our stock
price.

The trading price of our common stock has been
and may continue to experience volatility and wide fluctuations.
For example, during the second quarter of 2001, the closing sale
prices of our common stock on The Nasdaq National Market ranged
from $0.26 on September 7, 2001 to $0.68 on
September 26, 2001, and the closing sale price of our
common stock on September 28, 2001 was $0.58. Our stock
price may decline or fluctuate in response to any number of
factors and events, such as technological innovations, strategic
and sales relationships, new product and service offerings by us
or our competitors, changes in financial estimates and
recommendations of securities analysts, the operating and stock
price performance of other companies that investors may deem
comparable, news reports relating to trends in our markets and
overall market conditions. In addition, the stock market in
general, particularly with respect to technology stocks, has
experienced extreme volatility and a significant cumulative
decline in recent months. This volatility and decline has
affected many companies, including our company, irrespective to
the specific operating perform-

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ance of such companies. These broad market
influences and fluctuations may adversely affect the price of
our stock, and our ability to remain listed on The Nasdaq
National Market, regardless of our operating performance or
other factors.


Limitations of our director and officer
liability insurance may harm our business.

Our liability insurance for actions taken by
officers and directors during the period from March 1999 to
March 2001, the period during which events related to securities
class action lawsuits against us and certain of our current and
former executive officers are alleged to have occurred, provides
only limited liability protection. If these policies do not
adequately cover our expenses related to those lawsuits, our
business and financial condition could be seriously harmed. Our
current director and officer liability insurance, in place
through March 2002, contains similar provisions.

Under California law, in connection with our
charter documents and indemnification agreements we entered into
with our executive officers and directors, we must indemnify our
current and former officers and directors to the fullest extent
permitted by law. The indemnification covers any expenses and
liabilities reasonably incurred in connection with the
investigation, defense, settlement or appeal of legal
proceedings.

We may experience difficulty in attracting and
retaining key personnel, which may negatively affect our ability
to develop new services or retain and attract
customers.

The loss of the services of key personnel could
harm our business results. Our success also depends on our
ability to recruit, retain and motivate highly skilled sales and
marketing, operational, technical and managerial personnel.
Competition for these people is intense and we may not be able
to successfully recruit, train or retain qualified personnel. If
we fail to do so, we may be unable to develop new services or
continue to provide a high level of customer service, which
could result in the loss of customers and revenues.

We do not have long-term employment agreements
with any of our key personnel. In addition, we do not maintain
key person life insurance on our employees and have no plans to
do so. The loss of the services of one or more of our current
key personnel could harm our business and affect our ability to
successfully implement our business objectives.

Our failure to manage growth and expenses
could cause our business to suffer.

In the past, the expansion of our operations has
placed a significant strain on managerial, operational and
financial resources. To manage any future growth, we may need to
improve or replace our existing operational, customer service
and financial systems, procedures and controls. Any failure to
properly manage these systems and procedural transitions could
impair our ability to attract and service customers, and could
cause us to incur higher operating costs and delays in the
execution of our business plan. We will also need to hire
additional personnel including sales personnel. Our management
may not be able to hire, train, retain, motivate and manage
required personnel. In addition, our management may not be able
to successfully identify, manage and exploit existing and
potential market opportunities. If we cannot manage growth and
expenses associated with strategic growth effectively, our
business and operating results could suffer.

We have a strategic plan to exit certain
non-core products and services; if we are not successful in
implementing our plan, our business could be negatively
impacted.

In the first quarter of 2001, we developed a
strategic plan that involved reorganizing our product and
service offerings around a group of core products deemed most
imperative to our ability to serve the messaging and directory
infrastructure market. In the second and third quarter of 2001,
implementation of the plan commenced and, accordingly, products
and services determined to be non-core to our strategy were
strategically exited. Our strategic plan also includes an
initiative to reduce operating costs through a reduction of
approximately 450 personnel and a consolidation of approximately
two-thirds of our office space in keeping with our increased
focus on core messaging products and services. During the third
quarter, we had a reduction in force of approximately an
additional 220 personnel and were able to consolidate an
additional 6 of

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our facilities. We are continuing to implement
and finalize these actions and we expect to incur some
additional one-time charges in the fourth quarter. The non-core
products and services comprised approximately 37% of total
revenues in the first quarter of 2001, approximately 24% of
revenues in the second quarter of 2001, approximately 18% in the
third quarter, and 26% of total revenues during fiscal year
2000. It is expected that these products and services will not
be a part of our revenue stream by the fourth quarter of 2001.


We will face technical, operational and
strategic challenges that may prevent us from successfully
continuing the integration of any businesses we have
acquired.

Acquisitions involve risks related to the
integration and management of acquired technology, operations
and personnel. The integration of businesses that we have
acquired into our business has been and will continue to be a
complex, time consuming and expensive process, which may disrupt
our business if not completed in a timely and efficient manner.
We must operate as a combined organization utilizing common
information and communication systems, operating procedures,
financial controls and human resources practices to be
successful. In particular, we are currently evaluating,
upgrading or replacing our financial information systems and
establishing uniformity among the systems of the acquired
businesses. We may encounter substantial difficulties, costs and
delays involved in integrating the operations of our
subsidiaries, including:



| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | potential incompatibility of business cultures;                          
|
| |  | perceived adverse changes in business focus; and                         
|
| |  | potential failure in effectively managing our
	rapid growth in personnel.

Consequently, we may not be successful in
integrating acquired businesses or technologies and may not
achieve anticipated revenues and cost benefits. We also cannot
guarantee that these acquisitions will result in sufficient
revenues or earnings to justify our investment in, or expenses
related to, these acquisitions or that any synergies will
develop. If we are not successful in integrating acquired
businesses or if expected earnings or synergies do not
materialize, we could be forced to attempt to resell or cease
operations of acquired businesses. In either event, we would
likely incur significant expenses as well as non-cash charges to
write-off acquired assets, which could seriously harm our
financial condition and operating results.

Further, due in part to the significant
underperformance of some of our acquisitions relative to
expectations, we have reviewed the products and services we sell
to customers, the locations in which we operate and the manner
in which we go to market with our core product and service
offerings. As a result of this review, in 2001, we decided to
eliminate certain acquired product or service offerings through
termination, sale or other disposition or to sustain certain
products and services at a minimum level where customer
commitments prevent us from eliminating the offering altogether.
Any decision, including our recent decisions, to eliminate or
limit our offering of an acquired product or service could
involve the expenditure of capital, the realization of losses, a
reduction in workforce, facility consolidation, and/ or the
elimination of revenues along with the associated costs, any of
which could harm our financial condition and operating results.

We may need to license third-party
technologies and we face risks in doing so.

We intend to continue to license certain
technology from third parties, including web server and
encryption technology. The market is evolving and we may need to
license additional technologies to remain competitive. We may
not be able to license these technologies on commercially
reasonable terms or at all.

In addition, we may fail to successfully
integrate any licensed technology into our services. These
third-party in-licenses may expose us to increased risks,
including risks related to the integration of new technology,
the diversion of resources from the development of proprietary
technology, and an inability to generate revenues from new
technology sufficient to offset associated acquisition and
maintenance costs. An inability to obtain any of these licenses
could delay product and service development until equivalent
technology can be

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identified, licensed and integrated. Any delays
in services could cause our business and operating results to
suffer.


If our system security is breached, our
business and reputation could suffer.

A fundamental requirement for online
communications is the secure transmission of confidential
information over public networks. Third parties may attempt to
breach our security or that of our customers. If these attempts
are successful, customers confidential information,
including customers profiles, passwords, financial account
information, credit card numbers or other personal information
could be breached. We may be liable to our customers for any
breach in security and a breach could harm our reputation. We
rely on encryption technology licensed from third parties.
Although we have implemented network security measures, our
servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead
to interruptions, delays or loss of data. We may be required to
expend significant capital and other resources to license
encryption technology and additional technologies to protect
against security breaches or to alleviate problems caused by any
breach. Failure to prevent security breaches may harm our
business and operating results.

Unknown software defects could disrupt our
services and harm our business and reputation.

Our software products are inherently complex.
Additionally, our service offerings depend on complex software,
both internally developed and licensed from third parties.
Complex software often contains defects, particularly when first
introduced or when new versions are released. We may not
discover software defects in our products or that affect new or
current services or enhancements until after they are deployed.
Although we have not experienced any material software defects
to date, it is possible that, despite testing, defects may occur
in the software. These defects could cause service
interruptions, which could damage our reputation or increase
service costs, cause us to lose revenue, delay market acceptance
or divert development resources, any of which could cause our
business to suffer.

We may have liability for Internet content and
we may not have adequate liability insurance.

As a provider of messaging and directory
services, we face potential liability for defamation,
negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the materials
transmitted via our services. We do not and cannot screen all of
the content generated by our users, and we could be exposed to
liability with respect to this content. Furthermore, some
foreign governments, such as Germany, have enforced laws and
regulations related to content distributed over the Internet
that are more strict than those currently in place in the United
States.

Although we carry general liability and umbrella
liability insurance, our insurance may not cover claims of these
types or may not be adequate to indemnify us for all liability
that may be imposed. There is a risk that a single claim or
multiple claims, if successfully asserted against us, could
exceed the total of our coverage limits. There also is a risk
that a single claim or multiple claims asserted against us may
not qualify for coverage under our insurance policies as a
result of coverage exclusions that are contained within these
policies. Should either of these risks occur, capital
contributed by our shareholders may need to be used to settle
claims. Any imposition of liability, particularly liability that
is not covered by insurance or is in excess of insurance
coverage could harm our reputation and business and operating
results, or could result in the imposition of criminal penalties.

Unplanned system interruptions and capacity
constraints could reduce our ability to provide messaging
services and could harm our business reputation.

Our customers have, in the past, experienced some
interruptions in our messaging service. We believe that these
interruptions will continue to occur from time to time. These
interruptions are due to hardware failures, unsolicited bulk
email, or spam, attacks and operating system
failures. Our business will suffer if we experience frequent or
long system interruptions that result in the unavailability or
reduced performance of systems or networks or reduce our ability
to provide email services. We expect to experience occasional

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temporary capacity constraints due to sharply
increased traffic, which may cause unanticipated system
disruptions, slower response times, impaired quality and
degradation in levels of customer service. If this were to
continue to happen, our business and reputation could suffer
dramatically.


We have entered into messaging agreements with
some customers that require minimum performance standards,
including standards regarding the availability and response time
of messaging services. If we fail to meet these standards, our
customers could terminate their relationships with us and we
could be subject to contractual monetary penalties.

We rely on trademark, copyright and trade
secret laws and contractual restrictions to protect our
proprietary rights, and if these rights are not sufficiently
protected, it could harm our ability to compete and generate
revenue.

We also rely on a combination of trademark,
copyright and trade secret laws, and contractual restrictions,
such as confidentiality agreements and licenses, to establish
and protect our proprietary rights. Our ability to compete and
grow our business could suffer if these rights are not
adequately protected. We seek to protect our source code for our
software, documentation and other written materials under trade
secret and copyright laws. We license our software pursuant to
agreements which impose certain restrictions on the
licensees ability to utilize the software. We also seek to
avoid disclosure of our intellectual property by requiring
employees and consultants with access to our proprietary
information to execute confidentiality agreements. Our
proprietary rights may not be adequately protected because:



| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | laws and contractual restrictions may not prevent
	misappropriation of our technologies or deter others from
	developing similar technologies; and                           
|
| |  | policing unauthorized use of our products and
	trademarks is difficult, expensive and time-consuming, and we
	may be unable to determine the extent of this unauthorized use.

Also, the laws of other countries in which we
market our products may offer little or no protection of our
proprietary technologies. Reverse engineering, unauthorized
copying or other misappropriation of our proprietary
technologies could enable third parties to benefit from our
technologies without paying us for it, which would harm our
competitive position and market share.

We may not be able to respond to the rapid
technological change of the messaging and directory
infrastructure industry.

The messaging directory infrastructure industry
is characterized by rapid technological change, changes in user
and customer requirements and preferences, and the emergence of
new industry standards and practices that could render our
existing services, proprietary technology and systems obsolete.
We must continually improve the performance, features and
reliability of our services, particularly in response to
competitive offerings. Our success depends, in part, on our
ability to enhance our existing email and messaging services and
to develop new services, functionality and technology that
address the increasingly sophisticated and varied needs of
prospective customers. If we dont properly identify the
feature preferences of prospective customers, or if we fail to
deliver email features which meet the standards of these
customers, our ability to market our service successfully and to
increase revenues could be impaired. The development of
proprietary technology and necessary service enhancements entail
significant technical and business risks and require substantial
expenditures and lead-time. We may not be able to keep pace with
the latest technological developments. We may also be unable to
use new technologies effectively or adapt services to customer
requirements or emerging industry standards.

We may not be able to protect intellectual
property and proprietary rights.

We regard our copyrights, service marks,
trademarks, trade secrets and similar intellectual property as
critical to our success, and we rely on trademark and copyright
law, trade secret protection and confidentiality and/or license
agreements with employees, customers and partners to protect
proprietary rights. Despite these precautions, unauthorized
third parties may infringe or copy portions of our services or
reverse engineer or

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obtain and use information that we regard as
proprietary. End user license provisions protecting against
unauthorized use, copying, transfer and disclosure of the
licensed program may be unenforceable under the laws of certain
jurisdictions and foreign countries.


The status of United States patent protection in
the software industry is not well defined and will evolve as the
U.S. Patent and Trademark Office grants additional patents.
We have several patents pending in the United States and may
seek additional patents in the future. We do not know if the
patent application or any future patent application will be
issued with the scope of the claims sought, if at all, or
whether any patents received will be challenged or invalidated.
In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the
United States. Our means of protecting proprietary rights in the
United States or abroad may not be adequate and competitors may
independently develop similar technology. Additionally, although
we have not received notice of any other alleged patent
infringement, we cannot be certain that our products do not
infringe issued patents that may relate to our products. In
addition, because patent applications in the United States are
not publicly disclosed until the patent is issued, applications
may have been filed which relate to our software products.

If we do not successfully address the risks
inherent in the expansion of our international operations, our
business could suffer.

We derived 40% of our revenue from international
sales in the first nine months of 2001 and 40% of our revenue
from international sales in 2000. We intend to continue to
operate in international markets and to spend significant
financial and managerial resources to do so. If revenues from
international operations do not exceed the expense of
establishing and maintaining these operations, our business,
financial condition and operating results will suffer. We have
limited experience in international operations and may not be
able to compete effectively in international markets. We face
certain risks inherent in conducting business internationally,
including:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | difficulties and costs of staffing and managing
	international operations;                                    
|
| |  | fluctuations in currency exchange rates and
	imposition of currency exchange controls;                        
|
| |  | differing technology standards;                                                                               
|
| |  | difficulties in collecting accounts receivable
	and longer collection periods;                                
|
| |  | unexpected changes in regulatory requirements,
	including U.S. export restrictions on encryption technologies;
|
| |  | political and economic instability;                                                                           
|
| |  | potential adverse tax consequences; and                                                                       
|
| |  | reduced protection for intellectual property
	rights in some countries.                                       

Any of these factors could harm our international
operations and, consequently, our business and consolidated
operating results. Specifically, failure to successfully manage
international growth could result in higher operating costs than
anticipated or could delay or preclude altogether our ability to
generate revenues in key international markets.

Our reserves may be insufficient to cover
bills we are unable to collect.

We assume a certain level of credit risk with our
customers in order to do business. Conditions affecting any of
our customers could cause them to become unable or unwilling to
pay us in a timely manner, or at all, for products or services
we have already provided them. For example, if the current
economic conditions continue to decline or if new or
unanticipated government regulations are enacted which affect
our customers, they may be unable to pay their bills. In the
past, we have experienced significant collection delays from
certain customers, and we cannot predict whether we will
continue to experience similar or more severe delays in the
future. In particular, a portion of our customers are suffering
from the general weakness in the economy and among technology
companies in particular. Although we have established reserves
that we believe are

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sufficient to cover losses due to delays in or
inability to pay, there can be no assurance that such reserves
will be sufficient to cover such losses. If losses due to delays
or inability to pay are greater than our reserves, it could harm
our business, operating results and financial condition.


We rely on a continuous power supply to
conduct our operations, and Californias current energy
crisis could disrupt our operations and increase our
expenses.

California is in the midst of a serious energy
crisis that may disrupt our operations and increase our
expenses. In the event of an acute power shortage, that is, when
power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the
future continue to implement, rolling blackouts throughout the
state. If blackouts interrupt our power supply or the power
supply of any of our customers, we, or our customers, may be
temporarily unable to operate. Any interruption in our ability
to continue operations could delay the development or interfere
with the sales of our products. Future interruptions could
damage our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business and
results of operations. Any interruption in the ability of our
customers to continue operations could also harm our business.
We do not carry sufficient business interruption insurance to
compensate us for losses that may occur, and any losses or
damages we incur could harm our business.

Furthermore, the deregulation of the energy
industry instituted in 1996 by the California government and
shortages in wholesale electricity supplies have caused power
prices to increase. If wholesale prices continue to increase,
our operating expenses will likely increase, as our headquarters
and many employees are based in California.

Our articles of incorporation and bylaws
contain provisions that could delay or prevent a change in
control.

Our articles of incorporation and bylaws contain
provisions that could delay or prevent a change in control of
our company. These provisions could limit the price that
investors might be willing to pay in the future for shares of
our common stock. Some of these provisions:



| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize the issuance of preferred stock that
	can be created and issued by our board of directors without
	prior shareholder approval, commonly referred to as blank
	check preferred stock, with rights senior to those of our
	common stock;
|
| |  | prohibit shareholder action by written consent;
	and                                                                                                                                                                                              
|
| |  | establish advance notice requirements for
	submitting nominations for election to our board of directors
	and for proposing matters that can be acted upon by shareholders
	at a meeting.                                                         

In March 2001, we adopted a shareholder rights
plan or poison pill. This plan could cause the
acquisition of our company by a party not approved by our board
of directors to be prohibitively expensive.

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SUPPLEMENTAL PRO FORMA FINANCIAL
DATA

The following supplemental pro forma financial
information presents Critical Paths condensed consolidated
results of operations during the three-and nine-month periods of
2001 and 2000, excluding the impact of certain special charges
consisting of (i) amortization of intangible assets
associated with purchase business combinations,
(ii) accruals for employee retention bonuses associated
with purchase business combinations, (iii) stock-based
compensation associated with outstanding options and warrants,
(iv) one-time charges related to our restructuring
initiative, (v) impairment of long-lived assets, and
(vi) gain on the retirement of convertible subordinated
debt. This supplemental presentation is for informational
purposes only, and is not intended to replace the consolidated
operating results prepared and presented in accordance with
generally accepted accounting principles.

CRITICAL PATH, INC.

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS

Excluding Special Charges


(Unaudited)


(In thousands, except per share
amounts)


|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |        |         | 
|----------------------------------------------------------- | -------------------------- | -------------------------- | ------- | ----------------- | ------ | ------------- | ------- | ------------- | ------ | - | ------- | ------ | ------ | - | -------- | ------ | ------- | 
|                                                            |                            |                            |         |                  
|                                                            |                            | Three Months Ended         |         | Nine Months Ended
|                                                            |                            |                            |         |                  
|                                                            |                            | September 30,              |         | September 30,     |        | September 30, |         | September 30,
|                                                            |                            | 2000                       |         | 2001              |        | 2000          |         | 2001         
|                                                            |                            |                            |         |                   |        |               |         |              
|                                                            |                            |                           
|                                                            |                            | (Unaudited)               
|Net revenues                                                |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|                                                            | Software license           |                            | $       | 12,365            |        |               | $       | 7,724         |        |   | $       | 37,332 |        |   | $        | 22,187 |        
|                                                            | Hosted messaging           |                            |         | 16,759            |        |               |         | 10,000        |        |   |         | 40,074 |        |   |          | 35,580 |        
|                                                            | Professional service       |                            |         | 3,609             |        |               |         | 4,206         |        |   |         | 9,132  |        |   |          | 10,523 |        
|                                                            | Maintenance and support    |                            |         | 2,609             |        |               |         | 4,857         |        |   |         | 6,852  |        |   |          | 12,725 |        
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|                                                            |                            | Total net revenues         |         |                   | 35,342 |               |         |               | 26,787 |   |         |        | 93,390 |   |          |        | 81,015  | 
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|Cost of net revenues                                        |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|                                                            | Software license           |                            |         | 634               |        |               |         | 517           |        |   |         | 2,378  |        |   |          | 934    |        
|                                                            | Hosted messaging           |                            |         | 15,552            |        |               |         | 13,982        |        |   |         | 40,970 |        |   |          | 49,360 |        
|                                                            | Professional service       |                            |         | 1,317             |        |               |         | 2,565         |        |   |         | 3,761  |        |   |          | 8,125  |        
|                                                            | Maintenance and support    |                            |         | 2,207             |        |               |         | 2,837         |        |   |         | 5,423  |        |   |          | 7,837  |        
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|                                                            |                            | Total cost of net revenues |         |                   | 19,710 |               |         |               | 19,901 |   |         |        | 52,532 |   |          |        | 66,256  | 
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|Gross profit (loss)                                         |                            |                            | 15,632  |                   |        |               | 6,886   |               |        |   | 40,858  |        |        |   | 14,759   |       
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|Operating expenses                                          |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|                                                            | Sales and marketing        |                            |         | 16,128            |        |               |         | 11,018        |        |   |         | 47,075 |        |   |          | 45,424 |        
|                                                            | Research and development   |                            |         | 7,853             |        |               |         | 7,322         |        |   |         | 23,389 |        |   |          | 25,589 |        
|                                                            | General and administrative |                            |         | 6,568             |        |               |         | 9,447         |        |   |         | 20,666 |        |   |          | 34,485 |        
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|                                                            |                            | Total operating expenses   |         |                   | 30,549 |               |         |               | 27,787 |   |         |        | 91,130 |   |          |        | 105,498 | 
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|Loss from operations                                        |                            |                            | (14,917 | )                 |        |               | (20,901 | )             |        |   | (50,272 | )      |        |   | (90,739  | )     
|Interest and other income (expense), net                    |                            |                            | 4,905   |                   |        |               | 178     |               |        |   | 10,860  |        |        |   | 4,796    |       
|Interest expense                                            |                            |                            | (5,214  | )                 |        |               | (3,829  | )             |        |   | (10,748 | )      |        |   | (14,211  | )     
|Minority interest in net income of consolidated
	subsidiary |                            |                            | (201    | )                 |        |               |        |               |        |   | (526    | )      |        |   |         |       
|Equity in net loss of joint venture                         |                            |                            | (640    | )                 |        |               | (346    | )             |        |   | (640    | )      |        |   | (1,519   | )     
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|Loss before income taxes                                    |                            |                            | (16,067 | )                 |        |               | (24,898 | )             |        |   | (51,326 | )      |        |   | (101,673 | )     
|Provision for income taxes                                  |                            |                            | (2,534  | )                 |        |               | (2,180  | )             |        |   | (4,333  | )      |        |   | (3,673   | )     
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|Net loss                                                    |                            | $                          | (18,601 | )                 |        | $             | (27,078 | )             |        | $ | (55,659 | )      |        | $ | (105,346 | )     
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|Net loss per share  basic and diluted                      |                            | $                          | (0.30   | )                 |        | $             | (0.36   | )             |        | $ | (0.98   | )      |        | $ | (1.41    | )     
|                                                            |                            |                            |         |                   |        |               |         |               |        |   |         |        |        |   |          |       
|Weighted average shares  basic and
	diluted                |                            |                            | 61,614  |                   |        |               | 74,492  |               |        |   | 56,925  |        |        |   | 74,492   |       

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK




Item 3.     Quantitative and Qualitative Disclosures About Market
Risk

As of September 30, 2001, our investment
portfolio consisted of available-for-sale securities, excluding
those classified as cash equivalents, of $18.3 million.
These securities consist of $7.5 million of strategic
equity investments in corporate partners, certain of which are
publicly traded and marketable and certain of which are
privately held and $10.8 million of high grade low risk
government securities and corporate bonds. These securities are
subject to equity price risk. Critical Paths long-term
obligations consist of our $102.0 million five-year, 5.75%
Convertible Subordinated Notes due April 2005, and certain fixed
rate capital leases. We do not attempt to reduce or eliminate
our market exposure on these securities.

A significant portion of our worldwide operations
has a functional currency other than the United States dollar.
Accordingly, we are exposed to foreign currency exchange rate
risk inherent in our sales commitments, anticipated sales, and
assets and liabilities of these operations. Fluctuations in
exchange rates may harm our results of operations and could also
result in exchange losses. The impact of future exchange rates
fluctuations cannot be predicted adequately. To date, we have
not sought to hedge the risks associated with fluctuations in
exchange rates.

Information relating to quantitative and
qualitative disclosure about market risk is set forth in
Managements Discussion and Analysis of Financial
Condition and Results of Operations.

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders

of Critical Path,
Inc.


We have reviewed the accompanying condensed
consolidated balance sheet of Critical Path, Inc. and its
subsidiaries as of September 30, 2001, and the related
condensed consolidated statement of operations for each of the
three and nine-month periods ended September 30, 2000 and
September 30, 2001 and the condensed consolidated statement
of cash flows for each of the nine month periods ended
September 30, 2000 and September 30, 2001. These
financial statements are the responsibility of the
Companys management.

We conducted our review in accordance with
standards established by the American Institute of Certified
Public Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any
material modifications that should be made to the accompanying
condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted
in the United States of America.

We previously audited in accordance with auditing
standards generally accepted in the United States of America,
the consolidated balance sheet as of December 31, 2000, and
the related consolidated statements of operations, of
shareholders equity, and of cash flows for the year then
ended (not presented herein), and in our report dated
April 4, 2001 we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth
in the accompanying condensed balance sheet as of
December 31, 2000, is fairly stated in all material
respects in relation to the consolidated balance sheet from
which it has been derived.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, CA

November 7, 2001


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PART II

OTHER INFORMATION




Item 1.     Legal Proceedings

We are a party to lawsuits in the normal course
of our business. Litigation in general, and securities and
intellectual property litigation in particular, can be expensive
and disruptive to normal business operations. Moreover, the
results of complex legal proceedings are difficult to predict.
Other than as described below, we are not a party to any other
material legal proceedings.

Securities
Class Actions in Northern District of
California

Beginning on February 2, 2001, a number of
securities class action complaints were filed against us,
certain of our current and former officers and directors and our
independent accountants in the United States District Court for
the Northern District of California. The complaints have been
filed as purported class actions by individuals who allege that
they purchased our common stock during a purported class period;
the alleged class periods vary among the complaints. The
complaints have been consolidated into a single action. The
complaints generally allege that, in the period from
September 26, 1999 to February 1, 2001, we and certain
of our current and former officers made false or misleading
statements of material fact about our financial statements,
including our revenues, revenue recognition policies, business
operations and prospects for the year 2000 and beyond. The
complaints seek an unspecified amount in damages on behalf of
persons who purchased Critical Path stock during certain
periods, including those who acquired our stock in connection
with the acquisition of Peerlogic. In addition, on
September 24, 2001, certain former shareholders of
Peerlogic filed a putative class action in the Superior Court of
the State of California alleging that Critical Path breached
representations and warranties made in connection with the
acquisition of Peerlogic. The complaint seeks an unspecified
amount in damages. We have removed the action to the United
States District Court for the Northern District of California.

On November 8, 2001, Critical Path announced
that it had reached an agreement in principle to settle these
cases and executed binding memoranda of understanding.
Settlement is subject to the execution of a definitive
settlement agreement by the parties, notice to class members and
shareholders review and approval of the court.

Derivative
Actions in Northern District of California

Beginning on February 5, 2001, we have been
named as a nominal defendant in a number of derivative actions,
purportedly brought on our behalf, filed in the Superior Court
of the State of California and in the United States District
Court for the Northern District of California. The derivative
complaints allege that certain of Critical Paths current
and former officers and directors breached their fiduciary
duties to us, engaged in abuses of their control of us, were
unjustly enriched by their sales of our common stock, engaged in
insider trading in violation of California law or published
false financial information in violation of California law. The
plaintiffs seek unspecified damages on our behalf from each of
the defendants. Because of the nature of derivative litigation,
any recovery in the action would inure to our benefit.
Contemporaneously with settlement of the securities class action
described above, we announced we reached an agreement in
principle has been reached to settle the derivative actions and
executed binding memoranda of understanding. Settlement is
subject to the execution of a definitive settlement agreement by
the parties, notice to class members and shareholders and review
and approval of the court.

Securities
Class Action in Southern District of New York

Beginning on July 18, 2001, a number of
securities class action complaints were filed against the
Company, and certain of our current and former officers and
directors and underwriters connected with our initial public
offering of common stock in the United States District Court for
the Southern District of New York. The complaints have been
filed as purported class actions by individuals who allege that
they purchased common stock at the initial public offering of
common stock between March 26, 1999 and December 6,
2000. The complaints allege generally that the Prospectus under
which such securities were sold contained false and misleading
statements with respect to discounts and commissions received by
the underwriters. The

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complaints have been consolidated into a single
action. The complaints seek an unspecified amount in damages on
behalf of persons who purchased Critical Path stock during the
specified period.


SEC
Investigation

In February 2001, the Securities and Exchange
Commission issued a formal order of investigation of Critical
Path and certain unidentified individuals associated with
Critical Path with respect to non-specified accounting matters,
financial reports, other public disclosures and trading activity
in our securities. While we do not know the current status of
the investigation or any possible actions that may be taken
against us as a result, any SEC action against us could harm our
business.

The uncertainty associated with these and other
unresolved lawsuits and the SEC investigation could seriously
harm the Companys business and financial condition. In
particular, the lawsuits or the investigation could harm its
relationships with existing customers and its ability to obtain
new customers. The continued defense of the lawsuits and conduct
of the investigation could also result in the diversion of
managements time and attention away from business
operations, which could harm the Companys business.
Negative developments with respect to the lawsuits or the
investigation could cause the Companys stock price to
decline significantly. In addition, although the Company is
unable to determine the amount, if any, that it may be required
to pay in connection with the resolution of these lawsuits or
the investigation by settlement or otherwise, the size of any
such payment could seriously harm the Companys financial
condition.




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

None




Item 6.     Exhibits and Reports on Form 8-K

(a)     Exhibits

| |      |  |  |                                                                                                                                                                                                                                                                            
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1* |  |  | Amended and Restated Articles of Incorporation.                                                                                                                                                                                                                            
| | 3.2* |  |  | Amendment to the Articles of Incorporation.                                                                                                                                                                                                                                
| | 3.3* |  |  | Amended and Restated Bylaws.                                                                                                                                                                                                                                               
| | 4.1* |  |  | Form of Common Stock Certificate.                                                                                                                                                                                                                                          
| | 4.2* |  |  | Preferred Stock Rights Agreement, dated as of
	March 29, 2001 between Critical Path, Inc. and
	Computershare, including the Certificate of Determination, the
	form of Rights Certificate and the Summary of Rights attached
	thereto as Exhibits A, B and C, respectively.
| | 4.3  |  |  | Warrant to Purchase Common Stock of Critical
	Path, Inc. issued to Vectis Group, LLC.                                                                                                                                                                                      
| | 10.1 |  |  | Termination Agreement with Vectis Group LLC dated
	as of September 30, 2001                                                                                                                                                                                                
| | 10.2 |  |  | Agreement between Critical Path, Inc. and
	Lawrence Reinhold dated as of May 15, 2001                                                                                                                                                                                      
| | 10.3 |  |  | Agreement between Critical Path, Inc. and David
	Hayden dated as of August 1, 2001                                                                                                                                                                                         
| | 10.4 |  |  | Agreement between Critical Path, Inc. and William
	McGlashan, Jr. dated as of August 1, 2001                                                                                                                                                                               
| | 10.5 |  |  | Agreement between Critical Path, Inc. and Pierre
	Van Beneden dated as of October 8, 2001                                                                                                                                                                                  
| | 15.1 |  |  | Letter of PricewaterhouseCoopers LLP on Unaudited
	Interim Financial Information.                                                                                                                                                                                          



---



|  |                                                                               
|- | ------------------------------------------------------------------------------
|* | See Exhibit Index attached hereto, which is
	incorporated herein by reference.

(b)  Reports on Form 8-K

On August 9, 2001, we filed a report on
Form 8-K under Items 5 and 7 announcing the
appointment of Larry Weber and Jeffrey T. Webber to vacancies on
the Board of Directors left by the resignations of Kevin Harvey
and George Zachary.

On August 21, 2001, we filed a report on
Form 8-K under Items 5 and 7, announcing the
appointment of Laureen DeBuono as Interim Chief Financial
Officer, replacing Lawrence Reinhold as Chief Financial Officer,
who resigned effective August 31, 2001.

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SIGNATURE

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, thereunto duly
authorized.

Date: November 14, 2001

| |                    
| | -------------------
| | CRITICAL PATH, INC.



| |     |                    
| | --- | -------------------
| | BY: | /s/ LAUREEN DEBUONO

| |                                       
| | --------------------------------------
| |                                       
| | LAUREEN DEBUONO                       
| | Interim Chief Financial Officer       
| | (Duly Authorized Officer and Principal
| | Financial and Accounting Officer)     

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INDEX TO EXHIBITS

|        |        |                     |  |                                                                                                                                                                                                                                                                            
|------- | ------ | ------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                    
|Number  |        | Exhibit Description
|        |        |                    
|        | 3.1(1) |                     |  | Amended and Restated Articles of Incorporation.                                                                                                                                                                                                                            
|        | 3.2(2) |                     |  | Amendment to the Articles of Incorporation.                                                                                                                                                                                                                                
|        | 3.3(1) |                     |  | Amended and Restated Bylaws.                                                                                                                                                                                                                                               
|        | 4.1(3) |                     |  | Form of Common Stock Certificate.                                                                                                                                                                                                                                          
|        | 4.2(4) |                     |  | Preferred Stock Rights Agreement, dated as of
	March 29, 2001 between Critical Path, Inc. and
	Computershare, including the Certificate of Determination, the
	form of Rights Certificate and the Summary of Rights attached
	thereto as Exhibits A, B and C, respectively.
|        | 4.3    |                     |  | Warrant to Purchase Common Stock of Critical
	Path, Inc. issued to Vectis Group, LLC.                                                                                                                                                                                      
|        | 10.1   |                     |  | Termination Agreement with Vectis Group LLC dated
	as of September 30, 2001                                                                                                                                                                                                
|        | 10.2   |                     |  | Agreement between Critical Path, Inc. and
	Lawrence Reinhold dated as of May 15, 2001                                                                                                                                                                                      
|        | 10.3   |                     |  | Agreement between Critical Path, Inc. and David
	Hayden dated as of August 13, 2001                                                                                                                                                                                        
|        | 10.4   |                     |  | Agreement between Critical Path, Inc. and William
	McGlashan, Jr. dated as of August 1, 2001                                                                                                                                                                               
|        | 10.5   |                     |  | Agreement between Critical Path, Inc. and Pierre
	Van Beneden dated as of October 8, 2001                                                                                                                                                                                  
|        | 15.1   |                     |  | Letter of PricewaterhouseCoopers LLP on Unaudited
	Interim Financial Information.                                                                                                                                                                                          



---



|    |                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from
	Exhibits 3(i)(b) and 3(ii)(b) of Critical Path, Inc.s
	Registration Statement on Form S-1 (File
	Number 333-71499) filed with the Securities and Exchange
	Commission on January 29, 1999.    
|   
|(2) | Incorporated by reference from Exhibit 3.2
	of Critical Path, Inc.s Form 10-K for the year ended
	December 31, 2000.                                                                                                          
|   
|(3) | Incorporated by reference from Exhibit 4.1
	of Critical Path, Inc.s Registration Statement on
	Form S-1, Amendment Number  1 (File
	Number 333-71499) filed with the Securities and Exchange
	Commission on February 24, 1999.
|   
|(4) | Incorporated by reference from Exhibit 4.5
	of Critical Path, Inc.s Form 8-A filed on May 7,
	2001.                                                                                                                           

39