##### 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 March 31,
    2002                                               
| 
|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

350 The Embarcadero

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 April 30, 2002, the company had
outstanding 77,646,645 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 BALANCE SHEETS               
|                            |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                            |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                            |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                            | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS        
|                            | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                            | SUPPLEMENTAL ALTERNATIVE MEASUREMENT FINANCIAL DATA                                          
|                            | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART 2 -- OTHER INFORMATION
|                            | Item 1. Legal Proceedings                                                                    
|                            | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                  
|INDEX TO EXHIBITS          
|Exhibit 4.1                
|Exhibit 4.2                
|Exhibit 4.3                
|Exhibit 4.4                
|Exhibit 4.5                
|Exhibit 10.1               
|Exhibit 10.2               
|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                                                     |  |      | 2  | 
|        |  | Condensed Consolidated Statements of Operations                                           |  |      | 3  | 
|        |  | Condensed Consolidated Statements of Cash Flows                                           |  |      | 4  | 
|        |  | Notes to Condensed Consolidated Financial
    Statements                                  |  |      | 5  | 
|Item 2. |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 11 | 
|        |  | Supplemental Alternative Measurement Financial
    Data (Unaudited)                       |  |      | 29 | 
|Item 3. |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 30 | 
|PART II
|Item 1. |  | Legal Proceedings                                                                         |  |      | 32 | 
|Item 6. |  | Exhibits and Reports on Form 8-K                                                          |  |      | 33 | 

1



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##### Table of Contents






PART I




Item 1.     Condensed
Consolidated Financial Statements (Unaudited)

CRITICAL PATH, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


(In thousands, except per
share amounts)


|                                                                                     |                                                               |                                                                    |                                                                                        |            |           |         |        |            |           |         | 
|------------------------------------------------------------------------------------ | ------------------------------------------------------------- | ------------------------------------------------------------------ | -------------------------------------------------------------------------------------- | ---------- | --------- | ------- | ------ | ---------- | --------- | ------- | 
|                                                                                     |                                                               | December 31,                                                       |                                                                                        | March 31, 
|                                                                                     |                                                               | 2001                                                               |                                                                                        | 2002      
|                                                                                     |                                                               |                                                                    |                                                                                        |           
|                                                                                     |                                                               |                                                                   
|                                                                                     |                                                               | (Unaudited)                                                       
|ASSETS                                                                              
|Current assets                                                                       |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|                                                                                     | Cash and cash equivalents                                     |                                                                    | $                                                                                      | 59,463     |           |         | $      | 52,257     |          
|                                                                                     | Short-term investments                                        |                                                                    |                                                                                        | 9,702      |           |         |        | 11,272     |          
|                                                                                     | Accounts receivable, net                                      |                                                                    |                                                                                        | 26,692     |           |         |        | 27,114     |          
|                                                                                     | Other current assets                                          |                                                                    |                                                                                        | 5,367      |           |         |        | 8,588      |          
|                                                                                     |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|                                                                                     |                                                               |                                                                    | Total current assets                                                                   |            |           | 101,224 |        |            |           | 99,231  | 
|Investments                                                                          |                                                               |                                                                    | 7,215                                                                                  |            |           |         | 6,247  |           
|Property and equipment, net                                                          |                                                               |                                                                    | 36,285                                                                                 |            |           |         | 29,584 |           
|Intangible assets, net                                                               |                                                               |                                                                    | 48,641                                                                                 |            |           |         | 37,879 |           
|Restricted cash                                                                      |                                                               |                                                                    | 2,674                                                                                  |            |           |         | 2,670  |           
|Other assets                                                                         |                                                               |                                                                    | 3,913                                                                                  |            |           |         | 3,671  |           
|                                                                                     |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|                                                                                     |                                                               |                                                                    | Total assets                                                                           |            | $         | 199,952 |        |            | $         | 179,282 | 
|                                                                                     |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
    STOCK AND
    SHAREHOLDERS EQUITY
|Current liabilities                                                                  |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|                                                                                     | Accounts payable                                              |                                                                    | $                                                                                      | 25,955     |           |         | $      | 31,318     |          
|                                                                                     | Accrued expenses                                              |                                                                    |                                                                                        | 6,232      |           |         |        | 6,251      |          
|                                                                                     | Deferred revenue                                              |                                                                    |                                                                                        | 10,297     |           |         |        | 8,809      |          
|                                                                                     | Capital lease and other obligations, current                  |                                                                    |                                                                                        | 3,431      |           |         |        | 661        |          
|                                                                                     |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|                                                                                     |                                                               |                                                                    | Total current liabilities                                                              |            |           | 45,915  |        |            |           | 47,039  | 
|Convertible subordinated notes payable                                               |                                                               |                                                                    | 38,360                                                                                 |            |           |         | 38,360 |           
|Capital lease and other obligations, long-term                                       |                                                               |                                                                    | 1,149                                                                                  |            |           |         | 865    |           
|                                                                                     |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|                                                                                     |                                                               |                                                                    | Total liabilities                                                                      |            |           | 85,424  |        |            |           | 86,264  | 
|                                                                                     |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|Commitments and contingencies                                                        |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|Mandatorily redeemable preferred stock                                               |                                                               |                                                                    | 5,373                                                                                  |            |           |         | 8,442  |           
|Shareholders equity                                                                 |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|                                                                                     | Common Stock and paid-in-capital, $0.001 par value            |                                                                    |                                                                                        |            |           |         |        |            |          
|                                                                                     |                                                               | Shares authorized: 500,000                                         |                                                                                        |            |           |         |        |            |           |        
|                                                                                     |                                                               | Shares issued and outstanding: 76,581 and 77,507,
    respectively |                                                                                        |            | 2,176,370 |         |        |            | 2,173,496 |        
|                                                                                     | Common stock warrants                                         |                                                                    |                                                                                        | 5,250      |           |         |        | 5,250      |          
|                                                                                     | Notes receivable from shareholders                            |                                                                    |                                                                                        | (1,222     | )         |         |        |           |          
|                                                                                     | Unearned compensation                                         |                                                                    |                                                                                        | (7,050     | )         |         |        | (3,130     | )        
|                                                                                     | Accumulated deficit, including other
    comprehensive income |                                                                    |                                                                                        | (2,064,193 | )         |         |        | (2,091,040 | )        
|                                                                                     |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|                                                                                     |                                                               |                                                                    | Total shareholders equity                                                             |            |           | 109,155 |        |            |           | 84,576  | 
|                                                                                     |                                                               |                                                                    |                                                                                        |            |           |         |        |           
|                                                                                     |                                                               |                                                                    | Total liabilities, mandatorily redeemable
    preferred stock and shareholders equity |            | $         | 199,952 |        |            | $         | 179,282 | 
|                                                                                     |                                                               |                                                                    |                                                                                        |            |           |         |        |           

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

2



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##### Table of Contents



CRITICAL PATH, INC.






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except per share
amounts)


|                                                                  |                                                      |                            |         |           |        |   |         |        |        | 
|----------------------------------------------------------------- | ---------------------------------------------------- | -------------------------- | ------- | --------- | ------ | - | ------- | ------ | ------ | 
|                                                                  |                                                      |                           
|                                                                  |                                                      | Three Months Ended        
|                                                                  |                                                      |                           
|                                                                  |                                                      | March 31,                  |         | March 31,
|                                                                  |                                                      | 2001                       |         | 2002     
|                                                                  |                                                      |                            |         |          
|                                                                  |                                                      |                           
|                                                                  |                                                      | (Unaudited)               
|Net revenues                                                      |                                                      |                            |         |           |        |   |         |       
|                                                                  | Software license                                     |                            | $       | 5,550     |        |   | $       | 10,911 |       
|                                                                  | Hosted messaging                                     |                            |         | 14,440    |        |   |         | 6,964  |       
|                                                                  | Professional services                                |                            |         | 3,416     |        |   |         | 1,937  |       
|                                                                  | Maintenance and support                              |                            |         | 3,737     |        |   |         | 3,877  |       
|                                                                  |                                                      |                            |         |           |        |   |         |       
|                                                                  |                                                      | Total net revenues         |         |           | 27,143 |   |         |        | 23,689 | 
|                                                                  |                                                      |                            |         |           |        |   |         |       
|Cost of net revenues                                              |                                                      |                            |         |           |        |   |         |       
|                                                                  | Software license                                     |                            |         | 291       |        |   |         | 287    |       
|                                                                  | Hosted messaging                                     |                            |         | 17,938    |        |   |         | 7,817  |       
|                                                                  | Professional services                                |                            |         | 2,966     |        |   |         | 2,443  |       
|                                                                  | Maintenance and support                              |                            |         | 2,586     |        |   |         | 2,103  |       
|                                                                  | Amortization of purchased technology                 |                            |         | 5,672     |        |   |         | 4,630  |       
|                                                                  | Stock-based expense  Hosted messaging               |                            |         | 1,303     |        |   |         | 185    |       
|                                                                  | Stock-based expense  Professional
    services      |                            |         |          |        |   |         | 81     |       
|                                                                  | Stock-based expense  Maintenance and
    support    |                            |         |          |        |   |         | 151    |       
|                                                                  |                                                      |                            |         |           |        |   |         |       
|                                                                  |                                                      | Total cost of net revenues |         |           | 30,756 |   |         |        | 17,697 | 
|                                                                  |                                                      |                            |         |           |        |   |         |       
|Gross profit (loss)                                               |                                                      |                            | (3,613  | )         |        |   | 5,992   |       
|                                                                  |                                                      |                            |         |           |        |   |         |       
|Operating expenses                                                |                                                      |                            |         |           |        |   |         |       
|                                                                  | Sales and marketing                                  |                            |         | 18,712    |        |   |         | 10,943 |       
|                                                                  | Research and development                             |                            |         | 9,934     |        |   |         | 5,002  |       
|                                                                  | General and administrative                           |                            |         | 13,293    |        |   |         | 6,678  |       
|                                                                  | Amortization of intangible assets                    |                            |         | 8,966     |        |   |         | 6,131  |       
|                                                                  | Acquisition-related retention bonuses                |                            |         | 170       |        |   |         | 10     |       
|                                                                  | Stock-based expense  Sales and
    marketing        |                            |         | 1,767     |        |   |         | 2,536  |       
|                                                                  | Stock-based expense  Research and
    development   |                            |         | 1,097     |        |   |         | 422    |       
|                                                                  | Stock-based expense  General and
    administrative |                            |         | 8,733     |        |   |         | 297    |       
|                                                                  |                                                      |                            |         |           |        |   |         |       
|                                                                  |                                                      | Total operating expenses   |         |           | 62,672 |   |         |        | 32,019 | 
|                                                                  |                                                      |                            |         |           |        |   |         |       
|Loss from operations                                              |                                                      |                            | (66,285 | )         |        |   | (26,027 | )     
|Interest and other income (expense), net                          |                                                      |                            | 2,425   |           |        |   | 629     |       
|Interest expense                                                  |                                                      |                            | (5,067  | )         |        |   | (783    | )     
|Equity in net loss of joint venture                               |                                                      |                            | (776    | )         |        |   | (403    | )     
|                                                                  |                                                      |                            |         |           |        |   |         |       
|Loss before income taxes                                          |                                                      |                            | (69,703 | )         |        |   | (26,584 | )     
|Benefit from (provision for) income taxes                         |                                                      |                            | (343    | )         |        |   | 573     |       
|                                                                  |                                                      |                            |         |           |        |   |         |       
|Net loss                                                          |                                                      |                            | (70,046 | )         |        |   | (26,011 | )     
|Accretion on redeemable convertible preferred
    shares          |                                                      |                            |        |           |        |   | (3,206  | )     
|                                                                  |                                                      |                            |         |           |        |   |         |       
|Net loss attributable to common shares                            |                                                      | $                          | (70,046 | )         |        | $ | (29,217 | )     
|                                                                  |                                                      |                            |         |           |        |   |         |       
|Net loss per share  basic and diluted                            |                                                      | $                          | (0.97   | )         |        | $ | (0.34   | )     
|                                                                  |                                                      |                            |         |           |        |   |         |       
|Net loss per share attributable to
    common  basic and diluted |                                                      | $                          | (0.97   | )         |        | $ | (0.38   | )     
|                                                                  |                                                      |                            |         |           |        |   |         |       
|Weighted average shares  basic and
    diluted                   |                                                      |                            | 72,137  |           |        |   | 76,514  |       

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 STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                          |                                                            |                                       |         |           |         |   |        |         |        |  
|--------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------- | ------- | --------- | ------- | - | ------ | ------- | ------ | -
|                                                          |                                                            |                                      
|                                                          |                                                            | Three Months Ended                   
|                                                          |                                                            |                                      
|                                                          |                                                            | March 31,                             |         | March 31,
|                                                          |                                                            | 2001                                  |         | 2002     
|                                                          |                                                            |                                       |         |          
|                                                          |                                                            |                                      
|                                                          |                                                            | (Unaudited)                          
|Operating                                                 |                                                            |                                       |         |           |         |   |        |        
|                                                          | Net loss                                                   |                                       | $       | (70,046   | )       |   | $      | (26,011 | )     
|                                                          | Provision for doubtful accounts                            |                                       |         | 1,642     |         |   |        | 85      |       
|                                                          | Depreciation and amortization                              |                                       |         | 12,169    |         |   |        | 8,009   |       
|                                                          | Amortization of intangible assets                          |                                       |         | 14,638    |         |   |        | 10,761  |       
|                                                          | Amortization of stock-based costs and expenses             |                                       |         | 12,912    |         |   |        | 3,672   |       
|                                                          | Equity in net loss of joint venture                        |                                       |         | 776       |         |   |        | 403     |       
|                                                          | Change in fair value of preferred stock instrument         |                                       |         |          |         |   |        | (200    | )     
|                                                          | Accounts receivable                                        |                                       |         | 8,310     |         |   |        | (507    | )     
|                                                          | Other assets                                               |                                       |         | (1,198    | )       |   |        | (3,212  | )     
|                                                          | Accounts payable                                           |                                       |         | (5,132    | )       |   |        | 5,363   |       
|                                                          | Accrued expenses                                           |                                       |         | (1,625    | )       |   |        | 19      |       
|                                                          | Deferred revenue                                           |                                       |         | 1,332     |         |   |        | (1,489  | )     
|                                                          |                                                            |                                       |         |           |         |   |        |        
|                                                          |                                                            | Net cash used in operating activities |         |           | (26,222 | ) |        |         | (3,107 | )
|                                                          |                                                            |                                       |         |           |         |   |        |        
|Investing                                                 |                                                            |                                       |         |           |         |   |        |        
|                                                          | Notes receivable from officers                             |                                       |         |          |         |   |        | 161     |       
|                                                          | Property and equipment purchases                           |                                       |         | (6,156    | )       |   |        | (1,307  | )     
|                                                          | Payments for acquisitions, net of cash acquired            |                                       |         | (9,898    | )       |   |        |        |       
|                                                          | Purchase of short-term investments                         |                                       |         |          |         |   |        | (1,569  | )     
|                                                          | Restricted cash                                            |                                       |         | 57        |         |   |        | 4       |       
|                                                          |                                                            |                                       |         |           |         |   |        |        
|                                                          |                                                            | Net cash used in investing activities |         |           | (15,997 | ) |        |         | (2,711 | )
|                                                          |                                                            |                                       |         |           |         |   |        |        
|Financing                                                 |                                                            |                                       |         |           |         |   |        |        
|                                                          | Proceeds from issuance of Preferred Stock, net             |                                       |         |          |         |   |        | (75     | )     
|                                                          | Proceeds from issuance of Common Stock, net                |                                       |         | 575       |         |   |        | 677     |       
|                                                          | Proceeds from payments of shareholder notes
    receivable |                                       |         |          |         |   |        | 1,221   |       
|                                                          | Principal payments on lease obligations                    |                                       |         | (2,355    | )       |   |        | (3,054  | )     
|                                                          | Purchase of Common Stock                                   |                                       |         | (51       | )       |   |        |        |       
|                                                          |                                                            |                                       |         |           |         |   |        |        
|                                                          |                                                            | Net cash used in financing activities |         |           | (1,831  | ) |        |         | (1,231 | )
|                                                          |                                                            |                                       |         |           |         |   |        |        
|Net change in cash and cash equivalents                   |                                                            |                                       | (44,050 | )         |         |   | (7,049 | )      
|Effect of exchange rates on cash and cash
    equivalents |                                                            |                                       | (858    | )         |         |   | (157   | )      
|Cash and cash equivalents at beginning of period          |                                                            |                                       | 216,542 |           |         |   | 59,463 |        
|                                                          |                                                            |                                       |         |           |         |   |        |        
|Cash and cash equivalents at end of period                |                                                            | $                                     | 171,634 |           |         | $ | 52,257 |        
|                                                          |                                                            |                                       |         |           |         |   |        |        

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

4



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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. Critical Path, along with
its subsidiaries (collectively referred to herein as the
Company), provides messaging and collaboration
solutions, from wireless, secure and unified messaging to basic
email and personal information management, as well as identity
management solutions that simplify user profile management and
strengthen information security. The Companys customers
are corporate enterprises, carriers and service providers,
postal authorities and government agencies. The unaudited
condensed consolidated financial statements (Financial
Statements) of Critical Path, Inc. and Subsidiaries
furnished herein 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
audited 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 2001 Annual Report on Form 10-K. The results
of operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for the
entire year.



| |                      
| | ---------------------
| | Basis of Presentation

The condensed consolidated financial statements
include the accounts of the Company, and its wholly-owned and
majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
The equity method is used to account for investments in
unconsolidated entities if the Company has the ability to
exercise significant influence over financial and operating
matters, but does not have the ability to control such entities.
The cost method is used to account for equity investments in
unconsolidated entities where the Company does not have the
ability to exercise significant influence over financial and
operating matters.



| |                                       
| | --------------------------------------
| | 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: Internet messaging and communication products and
services and management uses one measure of profitability.
Revenue information on a product basis has been disclosed in our
statement of operations.



| |                  
| | -----------------
| | Reclassifications

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



| |                                     
| | ------------------------------------
| | Recent accounting
    pronouncements

In April 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 145, Rescission
of FASB Statements No. 4, 44 and 64, Amendment of SFAS
No. 13, and Technical Corrections. SFAS No. 145 is
effective for financial statements issued on or after
May 15, 2002 and rescinds both SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and the amendment
to SFAS No. 4, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. Through this
rescission, SFAS No. 145 eliminates the requirement that
gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of
the related income tax effect.

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. This Statement addressed
financial accounting and reporting for intangible assets
acquired individually or with a group of

5



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. Goodwill and
intangible assets acquired after June 30, 2001 will be
subject immediately to the nonamortization and amortization
provisions of this Statement. The Company adopted the new rules
on accounting for goodwill and other intangible assets in the
first quarter of fiscal 2002. Adoption resulted in approximately
$5.5 million related to acquired workforce and goodwill
that will no longer be amortized, however we will annually test
them for impairment, if not on a more frequent basis.

The gross carrying value related to these assets
totaled $12.3 million and $10.9 million as of
March 31, 2001 and March 31, 2002, respectively, and
accumulated amortization totaled $1.3 million and
$5.4 million. The aggregate amortization expense related to
these assets during the first quarter of 2001 and 2002 totaled
$1.3 million and zero. The estimated total amortization
expense related to all intangible assets is $43.1 million
for the year ended 2002, at which time all amortizable
intangible assets will be fully amortized.

The following table presents net loss
attributable to common shares and net loss per share
attributable to common basic and diluted, as if the acquired
workforce and goodwill had not been amortized during the periods
presented (in thousands, except per share amounts):

|                                                              |  |                    |         |           |  |   |         |  
|------------------------------------------------------------- |  | ------------------ | ------- | --------- |  | - | ------- | -
|                                                              |  |                   
|                                                              |  | Three Months Ended
|                                                              |  |                   
|                                                              |  | March 31,          |         | March 31,
|                                                              |  | 2001               |         | 2002     
|                                                              |  |                    |         |          
|Reported net loss attributable to common shares               |  | $                  | (70,046 | )         |  | $ | (29,217 | )
|Amortization of acquired workforce and goodwill               |  |                    | 1,284   |           |  |   |        |  
|                                                              |  |                    |         |           |  |   |         |  
|Net loss attributable to common shares, as
    adjusted       |  | $                  | (68,762 | )         |  | $ | (29,217 | )
|                                                              |  |                    |         |           |  |   |         |  
|                                                             
|Reported net loss per share attributable to common            |  | $                  | (0.97   | )         |  | $ | (0.38   | )
|Amortization of acquired workforce and goodwill
    per share |  |                    | 0.02    |           |  |   |        |  
|                                                              |  |                    |         |           |  |   |         |  
|Net loss per share attributable to common, as
    adjusted    |  | $                  | (0.95   | )         |  |   | (0.38   | )
|                                                              |  |                    |         |           |  |   |         |  

Note 2  Commitments and
Contingencies

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 the Company and certain of our
current and former officers and directors in the United States
District Court for the Northern District of California. The
complaints were filed as purported class actions by individuals
who allege that they purchased the Companys common stock
during a purported class period and sought an unspecified amount
in damages; the alleged class periods vary among the complaints.
The complaints were consolidated into a single action which
alleged 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

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

beyond. In addition, on September 24, 2001,
certain former shareholders of PeerLogic, Inc. 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 sought an unspecified amount in damages. We
subsequently removed the PeerLogic 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. In
February 2002, the Court gave preliminary approval to the
settlement of the class action litigation. The Court also set
the hearing date for final approval of the settlement agreement
for May 23, 2002.

On April 30, 2002, MBCP PeerLogic LLC and
other named plaintiffs filed suit in the U.S. District
Court for the Southern District of New York against Critical
Path and certain of its former officers. The plaintiff
shareholders opted out of the shareholder litigation settlement
currently pending in the U.S. District Court for the Northern
District of California. The complaint, which has not been served
on the Company, alleges breach of contract, unjust enrichment,
common law fraud and violations of federal securities laws and
seeks compensatory and punitive damages in an unnamed amount but
in excess of $200 million.

Derivative Actions in Northern District of
California.Beginning on
February 5, 2001, Critical Path was 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
alleged 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 sought 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 has been reached to settle the
derivative action.

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. The
Company fully cooperated with the SEC in its investigation. The
SECs investigation was concluded against the Company in
January 2002 with no imposition of fines or penalties against
the Company. The Company consented, without admitting or denying
liability, to an administrative order that the Company violated
certain non-fraud provisions of the federal securities laws and
to a cease and desist order. The investigation has thus far
resulted with charges being filed against two former executive
officers of the Company. The investigation of former executive
officers and directors of the Company is continuing and while
the Company is fully cooperating with such investigation we do
not know the status of the investigation with respect to many of
such former officers.

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 purported class action complaints were filed 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.

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Lease Dispute.In
July 2000, PeerLogic, an acquired subsidiary of Critical Path,
signed a lease for office space at 292 Ivy Street in
San Francisco, CA. The landlord and PeerLogic had begun
construction work to build out the space, when Critical Path
acquired PeerLogic in December 2000. After reviewing its
obligations under the lease, Critical Path noted that local
zoning laws likely prohibited a business like Critical Path or
PeerLogic from occupying the leased premises, and promptly
sought a zoning determination from the San Francisco Zoning
Administrator to resolve the matter. The preliminary zoning
determination stated that Critical Paths proposed use of
the leased premises was not permitted. The landlord appealed
this determination and prevailed before the San Francisco
Board of Appeals. Critical Path appealed that determination but
upon rehearing the Board of Appeals confirmed its decision. As
anticipated, thereafter the landlord filed suit for back rent
and breach of contract against Critical Path on April 30,
2002. The complaint seeks $7 million in compensatory
damages and an unspecified amount of punitive damages. The
Company intends to vigorously defend its rights but there can be
no assurance as to the outcome of this litigation.

The uncertainty associated with these and other
unresolved or threatened lawsuits could seriously harm the
Companys business and financial condition. In particular,
the lawsuits or the continued effects of the SEC investigation
could harm our relationships with existing customers and our
ability to obtain new customers. The continued defense of the
lawsuits could also result in the diversion of managements
time and attention away from business operations, which could
harm the Companys business. Although some of the named
lawsuits are in the final stages of settlement, there can be no
assurance that the applicable courts will accept the final
settlement as executed, or at all. Negative developments with
respect to the settlements or the lawsuits 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 payments could
seriously harm the Companys financial condition.

Note 3  Related Party
Transactions



| |                            
| | ---------------------------
| | Loans to Executive Officers

During 2001 and in connection with his employment
agreement, the Company made a loan and held a note receivable
from David Hayden, Executive Chairman, in the amount of
$1.5 million. The full recourse note accrues interest at
the rate of 6.75% per annum and could be repaid by the
achievement of performance-based milestones described in
Mr. Haydens employment agreement and performance loan
agreement. The loan was also subject to forgiveness upon certain
change of control events. In February 2002, the Board approved
an amendment of Mr. Haydens employment agreement
which eliminated the original performance-based milestones in
favor of a single performance-based milestone tied to a change
of control event. In addition, the Board increased the amount
available under the loan agreement by an additional $450,000,
which Mr. Hayden borrowed in March 2002. The loan amount is
secured by a first priority security interest in all of
Mr. Haydens shares and options in the Company, with
all other terms of the loan and other agreements unchanged.

In December 2001, the Board approved a fully
secured loan to William McGlashan, Jr., the Companys Chief
Executive Officer, of up to $4.0 million in connection with
the purchase of a principal residence in the San Francisco Bay
Area. In May 2002, the Compensation Committee of the Board and
Mr. McGlashan agreed to amend the agreement in order to
reduce the amount of the loan commitment to $1.5 million.
In connection with the reduction of the loan commitment,
Mr. McGlashan was granted additional options to purchase
shares of the Companys Common Stock. As of May 14,
2002, no portion of the loan commitment had been funded.

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 4  Strategic Restructuring and
Employee Severance

During 2001, the Company announced a strategic
restructuring plan that involved reorganizing Critical
Paths product and service offerings around a group of core
communications solutions, a reduction in the Companys
workforce, and the consolidation of facilities and operations.
Total restructuring charges amounted to $18.3 million, all
of which was recognized during 2001. As of December 31,
2001 a $2.2 million accrual remained as a component of
accounts payable. During the first quarter of 2002,
approximately $400,000 was charged against this accrual,
primarily cash paid related to facilities and operations
consolidation restructuring activities, leaving a remaining
restructuring accrual of $1.8 million as of March 31,
2002, which is expected to be paid over the next 12 months.

Note 5  Other Comprehensive
Loss

The components of other comprehensive loss are as
follows:

|                                         |  |                    |         |      |  |   |         |  
|---------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | -
|                                         |  |                   
|                                         |  | Three Months Ended
|                                         |  | March 31,         
|                                         |  |                   
|                                         |  | 2001               |         | 2002
|                                         |  |                    |         |     
|Net loss                                 |  | $                  | (70,046 | )    |  | $ | (26,011 | )
|Unrealized investment gains (losses)     |  |                    | 302     |      |  |   | (497    | )
|Foreign currency translation adjustments |  |                    | (839    | )    |  |   | (339    | )
|                                         |  |                    |         |      |  |   |         |  
|Other comprehensive loss                 |  | $                  | (70,583 | )    |  | $ | (26,847 | )
|                                         |  |                    |         |      |  |   |         |  

Accumulated other comprehensive loss consists of
unrealized gains (losses) on available-for-sale securities, net
of tax, and cumulative translation adjustments, as presented on
the accompanying consolidated balance sheet.

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6  Net Loss Per Share



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Net loss per share is calculated as follows: 
          (In thousands, except per share
    amounts)

|                                                                                             |  |                    |         |           |  |   |         |  
|-------------------------------------------------------------------------------------------- |  | ------------------ | ------- | --------- |  | - | ------- | -
|                                                                                             |  |                   
|                                                                                             |  | Three Months Ended
|                                                                                             |  |                   
|                                                                                             |  | March 31,          |         | March 31,
|                                                                                             |  | 2001               |         | 2002     
|                                                                                             |  |                    |         |          
|Net loss                                                                                     |  |                    |         |           |  |   |         |  
|Net loss                                                                                     |  | $                  | (70,046 | )         |  | $ | (26,011 | )
|Accretion on redeemable convertible preferred
    shares                                     |  |                    |        |           |  |   | (3,206  | )
|                                                                                             |  |                    |         |           |  |   |         |  
|Net loss attributable to common shares                                                       |  | $                  | (70,046 | )         |  | $ | (29,217 | )
|Weighted average shares outstanding                                                          |  |                    |         |           |  |   |         |  
|Weighted average shares outstanding                                                          |  |                    | 74,268  |           |  |   | 76,916  |  
|Weighted average common shares issued subject to
    repurchase agreements                   |  |                    | (526    | )         |  |   | (58     | )
|Shares held in escrow related to acquisitions                                                |  |                    | (1,605  | )         |  |   | (344    | )
|                                                                                             |  |                    |         |           |  |   |         |  
|Shares used in computation of basic and diluted
    net loss per share                       |  |                    | 72,137  |           |  |   | 76,514  |  
|Basic and diluted net loss per share                                                         |  |                    |         |           |  |   |         |  
|Net loss                                                                                     |  | $                  | (0.97   | )         |  | $ | (0.34   | )
|Accretion on redeemable convertible preferred
    shares Weighted average shares outstanding |  |                    |        |           |  |   | (0.04   | )
|                                                                                             |  |                    |         |           |  |   |         |  
|Net loss attributable to common shares                                                       |  | $                  | (0.97   | )         |  | $ | (0.38   | )
|                                                                                             |  |                    |         |           |  |   |         |  

For the three months ended March 31, 2002,
approximately 91,603,266 million potential common shares
were excluded from the determination of diluted net loss per
share, as the effect of such shares on a weighted average basis
was anti-dilutive.

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CRITICAL PATH, INC.






MANAGEMENTS DISCUSSION AND ANALYSIS
OF


FINANCIAL CONDITION AND RESULTS OF
OPERATIONS







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

This report on Form 10-Q contains
forward-looking statements within the meaning of the safe
harbor provisions of the Private Securities Litigation
Reform Act of 1995, as amended and in effect from time to time.
The words anticipates, expects,
intends, plans, believes,
seek, and estimate and similar
expressions are intended to identify forward-looking statements.
These are statements that relate to future periods and include
statements regarding our future strategic, operational and
financial plans, anticipated or projected revenues, expenses and
operational growth, markets and potential customers for our
products and services, plans related to sales strategies and
global sales efforts, the anticipated benefits of our
relationships with strategic partners, growth of our
competition, our ability to compete, investments in product
development, the adequacy of our current facilities and our
ability to obtain additional space, our litigation strategy, use
of future earnings, the feature, benefits and performance of our
current and future products and services, plans to reduce
operating costs through continued expense reduction, anticipated
effects of restructuring and retirement of debt, and our belief
as to our ability to successfully emerge from the restructuring
and refocusing of our operations. These forward-looking
statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected.
Factors that might cause future results to differ materially
from those projected in the forward-looking statements include,
but are not limited to, difficulties of forecasting future
results due to our limited operating history, failure to meet
sales and revenue forecasts, evolving business strategy and the
emerging nature of the market for our products and services,
finalization of pending litigation and the settlement of the
continuing SEC investigation against former executives and
directors, turnover within and integration of senior management,
board of directors members and other key personnel, difficulties
in our strategic plans to exit certain products and services
offerings, failure to expand our sales and marketing activities,
potential difficulties associated with strategic relationships,
investments and uncollected bills, general economic conditions
in markets in which the Company does business, risks associated
with our international operations, foreign currency
fluctuations, unplanned system interruptions and capacity
constraints, software defects, and 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.

All references to Critical Path,
we, our, or the Company mean
Critical Path, Inc. and its subsidiaries, except where it is
clear from the context that such terms means only the parent
company and excludes subsidiaries.

This Quarterly Report on Form 10-Q
includes numerous trademarks and registered trademarks of
Critical Path. Products or service names of other companies
mentioned in this Quarterly Report on Form 10-Q may be
trademarks or registered trademarks of their respective
owners.

Overview

Critical Path, Inc., a global leader in Internet
communications, delivers software and services that are designed
to maximize the value of Internet communications. We provide
messaging and collaboration solutions from wireless, secure and
unified messaging to basic email and personal information
management, as well as identity management solutions that
simplify user profile management and strengthen information

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security. Our standards-based Critical Path
Communications Platform, built to perform reliably at the scale
of public networks, delivers the industrys lowest total
cost of ownership for messaging solutions and lays a solid
foundation for next-generation communications services.


Our primary sources of revenue come from
providing a wide range of messaging and directory products and
services. Critical Paths customers are corporate
enterprises, carriers and service providers, postal authorities
and government agencies. Critical Path 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 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 March 31, 2002, we
had 583 employees, in comparison with 562 employees at
December 31, 2001 and 1,011 employees at March 31,
2001. We do not believe that our historical growth rates 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 communications 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 revenues are derived from perpetual and term
licenses for our messaging, directory, collaborative and
enterprise application integration technologies. Hosted
messaging revenues relates to fees for our hosted messaging and
collaboration services. These fees are primarily based upon
monthly contractual per unit rates for the services involved,
and are recognized as revenue on a ratable monthly basis over
the term of the contract. Professional services revenues are
derived from fees primarily related to training, installation
and configuration 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. Maintenance and
support revenues are recognized ratably over the term of the
agreement.

Software License.We
recognized $10.9 million in software license revenues
during the first quarter of 2002, compared to $5.6 million
in the same quarter in 2001. The significant increase in
software license revenues over the prior year was due primarily
to the uncertainty surrounding Critical Path during the first
quarter of 2001, which caused a number of current and potential
customers to delay making purchase decisions. This uncertainty
was created by the Companys restatement of certain
previously released financial results for the third quarter of
2000, significant turnover within the senior management group
and the termination and resignation of much of the leadership
within our sales organization. Even with the higher license
revenues levels during the first quarter of 2002, our business
activities continue to be impacted by the difficult worldwide
business climate, which has resulted in lower and delayed
information technology spending across the enterprise software
market.

Hosted Messaging.We
recognized $7.0 million in hosted messaging revenues during
the first quarter of 2002, compared to $14.4 million in the
same quarter in 2001. This decrease in 2002 hosted messaging
revenues resulted primarily from the Company having either
exited or sold, as part of its 2001 restructuring initiatives,
certain non-core hosted messaging services during the second
half of 2001. These non-core services accounted for a
significant portion of first quarter 2001 hosted messaging
revenues.

Professional Services.We recognized $1.9 million in
professional services revenues during the first quarter of 2002,
compared to $3.4 million in the same quarter in 2001. This
decrease in 2002 was due primarily to higher first quarter 2001
professional services revenues directly resulting from the
Companys September 2000 acquisition of PeerLogic, Inc. In
addition, the Companys 2001 restructuring initiatives
eliminated certain non-core products, reducing the professional
services revenues derived from these products.

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Maintenance and Support.We recognized $3.9 million in
maintenance and support revenues during the first quarter of
2002, compared to $3.7 million for the same quarter in
2001. This increase in 2002 resulted primarily from the higher
software license revenues levels compared to the first quarter
of 2001, partially offset by the loss of maintenance and support
revenues from the elimination of certain non-core products and
services as part of the Companys 2001 restructuring
initiatives.

Critical Paths international operations
accounted for approximately 52% of net revenues in the first
quarter of 2002. Revenues from international operations
accounted for approximately 30% of net revenues in the first
quarter of 2001. This significant increase in the percentage of
international revenues related primarily to a dramatic reduction
in enterprise information technology spending during the first
quarter of 2001, as it impacted the sale of our license products
in international markets.

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 cost of net software license revenues
for the first quarter of 2002 was comparable to the year ago
period.

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 cost of net hosted messaging revenues were significantly
lower in the first quarter of 2002 compared to the prior year
primarily due to the Companys restructuring initiatives
undertaken in the second half of 2001. As a result of these
initiatives, the costs associated with the Companys hosted
messaging revenues were reduced through the sale or exit of
several non-core services, the termination of employees and
reduction in employee-related costs, the retirement of surplus
network infrastructure equipment and software, and the
consolidation of data centers.

Professional Services.Cost of net professional services
revenues consist 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 Companys 2001 restructuring
initiatives, personnel and certain overhead costs were reduced,
resulting in lower professional services cost of net revenues in
the first quarter of 2002, in comparison to the same period in
the prior year.

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. The
cost of net maintenance and support revenues was lower in the
first quarter of 2002 in comparison to the year ago period, due
primarily to a decrease in staffing levels and a reduction in
employee-related costs.

Operations, customer support, and professional
services staff decreased to 192 employees at March 31, 2002
from 349 employees at March 31, 2001.

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. Sales and marketing expenses
for the first quarter of 2002 decreased significantly over the
prior years first quarter due primarily to cost savings
generated from the Companys 2001 restructuring
initiatives. With actions taken as part of the restructuring,
sales and marketing staffing levels were reduced to
143 employees at March 31, 2002 from
286 employees at March 31, 2001. The savings in
personnel and personnel-related costs together with the
termination of certain strategic marketing relationships related
to non-core services accounts for the reduction in sales and
marketing expenses from the first quarter of 2001 to the same
quarter of 2002.

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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. This significant decrease in
first quarter 2002 research and development expenses resulted
primarily from a reduction in headcount and related personnel
costs as part of the Companys 2001 restructuring
initiatives. These actions have contributed to a decrease in
research and development staffing to 156 employees at
March 31, 2002, from 244 employees at March 31, 2001.
In addition, savings realized from the termination of certain
outside consulting arrangements and consolidation of facilities
also contributed to this decrease in research and development
expenses.

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. The significant decrease in first
quarter 2002 general and administrative expenses in comparison
to the same period in the prior year was due primarily to cost
savings realized from the Companys 2001 restructuring
initiatives. Savings were realized from a decrease in general
and administrative staffing levels to 92 employees at
March 31, 2002 from 132 employees at March 31,
2001, as well as lower facilities costs resulting from the
Companys reduction in facilities from 77 at
December 31, 2000 to 27 at March 31, 2002. In
addition, as a result of the restatement of certain previously
released 2000 financial results, the Company incurred higher
fees for outside professional services in the first quarter of
2001, in particular higher legal and accounting fees related to
the SEC investigation and extended outside audit work.

Amortization
of Intangible Assets

In connection with the acquisitions we 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 2000 and 2001, we recorded
charges of $1.3 billion and $26.6 million,
respectively, related to the impairment of certain long-lived
assets, including intangible assets. In addition, with the
adoption of SFAS No. 142, Goodwill and Other Intangible
Assets, in the beginning of 2002, approximately
$5.5 million of the Companys intangible assets
related to acquired workforce and goodwill will no longer be
subject to amortization, but instead will be periodically tested
for impairment. As a result of the 2001 impairment charge and
the adoption of SFAS No. 142, first quarter 2002
amortization expense decreased significantly from the first
quarter of 2001. Based upon the types of identifiable
intangibles acquired, first quarter 2002 amortization expense of
$4.6 million was allocated to cost of net revenues and the
remaining amortization expense of $6.1 million was
allocated to operating expenses.

Acquisition-Related
Retention Bonuses

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

Stock-Based
Expenses

Stock-based expenses are comprised of charges
related to certain stock options and warrants granted to
employees, directors and consultants from 1998 through 2001 and
common stock issued to certain employees, directors and advisors
in 1998 and 1999. The decline in stock-based expenses in the
first quarter of 2002 in comparison to the first quarter of 2001
was primarily the result of certain stock-based charges related
to 1998 grant activity becoming fully amortized in the
second-half of 2001.

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Interest and
Other Income (Expense)

Interest and other income (expense) consists
primarily of interest earnings on cash and cash equivalents as
well as net realized gains (losses) on foreign exchange
transactions. Interest income amounted to $336,000 and
$2.3 million in the first quarters of 2002 and 2001,
respectively. Interest income was lower for the first quarter of
2002 compared to the same period in the prior year due to lower
cash balances available for investing. Cash balances declined
during the twelve months ended March 31, 2002, due
primarily to the funding of the Companys net losses and
cash utilized in 2001 to retire a significant portion of the
Companys convertible debt obligations. Also included in
interest and other income (expense) were net gains recognized
from foreign currency transactions associated with our
international operations in the amounts of $202,000 and $136,000
for the first quarter of 2002 and 2001, respectively.

Interest
Expense

Interest expense consists primarily of the
interest, amortization of related issuance costs associated with
the Convertible Subordinated Notes we issued in March 2000, and
interest on certain capital leases. Because of the retirement of
a significant portion of our convertible subordinated notes and
capital leases during 2001, interest expense for the first
quarter of 2002 declined to $783,000 from $5.1 million for
the first quarter of 2001. For the first quarter of 2002, we
incurred approximately $552,000 in interest expense on the
Convertible Subordinated Notes, and approximately $69,000 from
the amortization of debt issuance costs. We incurred
approximately $4.3 million in interest expense on the
Convertible Subordinated Notes, and approximately $538,000
related to amortization of debt issuance costs during the first
quarter of 2001. The amortization of the issuance costs
associated with the redeemable convertible preferred shares
which the Company issued in the fourth quarter of 2001 totalled
$139,000 for the first quarter of 2002 and is also reported as a
component of interest expense. Interest on capital leases and
other long-term obligations amounted to approximately $23,000
for the first quarter of 2002 and $264,000 during the first
quarter of 2001.

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 first quarter
of 2002, we recorded equity in net loss of joint venture of
approximately $403,000, compared to a net loss of $776,000
recorded in the first quarter of 2001.



| |                           
| | --------------------------
| | Provision for Income Taxes

An $800,000 benefit for U.S. federal income taxes
was recorded during the first quarter of 2002 due to the repeal
of the federal corporate alternative minimum tax. No current
provision 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.
As a partial offset to the U.S. tax benefit we recorded, we
recognized a provision for foreign income taxes during the first
quarter of 2002 as certain of our European operations generated
income taxable in certain European jurisdictions.

Liquidity and Capital Resources

As of March 31, 2002, our cash, cash
equivalents and short-term investments totaled
$63.5 million, comprised of $52.2 million in cash and
cash equivalents and $11.3 million in short-term
investments. Our working capital amounted to approximately
$52.2 million. During the first quarter of 2002, we used
approximately $7.0 million in cash.

We used cash of $3.1 million to fund
operating activities during the first quarter of 2002 primarily
due to our net loss, adjusted for non-cash charges, as operating
costs, primarily employee and employee related costs,

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exceeded the related sales of our software
products and services. In addition, we used cash to make certain
insurance, and software and hardware support and maintenance
renewal payments during the quarter, accounting for the
$3.2 million in cash used for other assets. These uses of
cash to fund operating activities were partially offset by the
growth in our accounts payable balances by $5.4 million.


We used cash in investing activities during the
first quarter of 2002 totaling $2.7 million. Cash was
primarily used to purchase additional short-term investments of
$1.6 million and $1.3 million was used to purchase
additional network infrastructure equipment and to fund a
portion of the tenant improvements in the Companys new San
Francisco office.

We used cash from financing activities during the
first quarter of 2002 of $1.2 million. Cash was principally
used to retire $3.1 million in principal on capital lease
obligations. This use of cash was partially offset by proceeds
the Company received from the repayment of notes receivable from
former officers and shareholders totaling $1.2 million and
$677,000 from the sale of the Companys common stock.

Our primary sources of capital have come from
both debt and equity financings, that have been completed by
Critical Path over the past three years. Revenues generated from
the sale of our products and services may not increase to a
level that exceeds our operating expenses or could fluctuate
significantly as a result of changes in customer demand or
acceptance of future products. We also expect to experience
increased operating expenses, including moderate increases in
strategic areas, such as sales and marketing, and we anticipate
that operating expenses and capital expenditures will constitute
a material use of our cash. Accordingly, our cash flow from
operations may continue to be negatively impacted. We believe
that our cash, cash equivalents and anticipated cash from
operations will be sufficient to maintain current and planned
operations for at least the next twelve months.

Additionally, we have no present understandings,
commitments or agreements for any material acquisitions of, or
investments in, other complementary businesses, products or
technologies. We continually evaluate potential acquisitions of,
or investments in, other businesses, products and technologies,
and may in the future utilize our cash resources or may require
additional equity or debt financing to accomplish any
acquisitions or investments. Currently, we are considering
several alternatives to expend our presence in the Asian markets
and potentially other international markets. These alternatives
could increase liquidity through the infusion of investment
capital by third-party investors or decrease our liquidity as a
result of Critical Path seeking to fund expansion into these
markets. Such expansions might also cause an increase in capital
expenditures and operating expenses.

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 integration of acquisitions
we completed in 1999 and 2000, our recent strategic and
operational 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, 30% in 2001
and 46% for the first quarter of 2002. Our revenues have in some
quarters and could continue to 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 demand for outsourced messaging services
    generally and the use of messaging and directory infrastructure
    products and services in particular;
|
| |  | the demand for licensed solutions for messaging,
    directory, and other products;                                                                      
|
| |  | our ability to attract and retain customers and
    maintain customer satisfaction;                                                                      

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| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to attract and retain qualified
    personnel with industry expertise, particularly sales personnel;                                                                                       
|
| |  | the ability to upgrade, develop and maintain our
    systems and infrastructure and to effectively respond to the
    rapid technology change of the messaging and directory
    infrastructure market;
|
| |  | 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 quickly handle and alleviate
    technical difficulties or system outages;                                                                                                              
|
| |  | the announcement or introduction of new or
    enhanced services by competitors; and                                                                                                                   
|
| |  | general economic and market conditions and their
    affect on our operations and that of our customers.                                                                                               

In addition to the factors set forth above,
operating results have been and will continue to 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.

Although we have largely exited non-core product
lines, 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 any other offerings of a product
or service would involve other factors affecting operational
results including the expenditure of capital, the realization of
losses, further reductions 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, we do not believe
that period-to-period comparisons of operating results are 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 prove volatile and/or decline.



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on strategic relationships as
    well as other sales channels and the loss of any key 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 aggressively marketing our 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 our acceptance
as a supplier of outsourced messaging solutions. We also depend
on joint marketing and product development through strategic
relationships to achieve further 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. In addition to
strategic relationships, we also depend on the ability of our
customers to aggressively sell and market our services to their
end-users. If we lose any strategic relationships, fail to renew
these agreements or relationships, fail to fully exploit our
relationships, or fail to develop new strategic relationships,
our business and financial results will suffer. The loss of any
key strategic relationships would have an adverse impact on our
current and future revenues.

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| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 quarter of 2001, in response to the
restatement of our financial results, we announced a series of
changes in our management that included the departure of many
senior executives. In the second quarter of 2001, we announced a
series of additional changes in our management and board of
directors that also included the departures of senior executives
and board members. 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 and successfully meet
operational challenges could be severely impaired. We do not
have long-term employment agreements with any of our executive
officers. It is possible this high turnover at our senior
management levels may also continue for a variety of reasons.
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 March 31, 2002, we had an accumulated
deficit, including other comprehensive income, of approximately
$2.1 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 do expect that our operating expenses
will continue to decrease as a result of our strategic and
operational restructuring and other cost-cutting efforts.
However, we will continue to spend resources on maintaining and
strengthening our business, and this may, in the near term, have
a negative effect on our operating results and our financial
condition.

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 to 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 related 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 also,
in turn, cause the price of our common stock to demonstrate
volatility and/or to decline.



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to improve our sales and
    marketing results, we may be unable to grow our business which
    would negatively impact our operating results.

Our ability to increase revenues will depend on
our ability to successfully recruit, train and retain
experienced and effective 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,
and ultimately, grow revenues. This would also adversely impact
the timing and extent of our 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 organiza-

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tions of our competitors. If we do not
successfully operate and grow our sales and marketing
activities, our business could suffer and the price of our
common stock could decline.




| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A limited number of customers account for a
    high percentage of our revenues and if we lose a major customer
    or are unable to attract new customers, revenues could
    decline.

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. In addition, a
number of our technology industry customers have also suffered
from falling revenue, job losses, restructuring and decreased
technology spending in the recent economic downturn. If our
customers terminate their agreements for any reason 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 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 who offer hosted exchange services. Our
primary 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;                                                                                                                                                                           
|
| |  | scalability, reliability and performance, and
    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; and
|
| |  | total cost of ownership and operation.                                                                                                                                                                                              

We believe competition will continue to be fierce
and further 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 and market 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.

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| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Our sales cycle is lengthy and our results
    could be harmed by delays or cancellations in
    orders.

Because we sell complex and sophisticated
technology, our sales cycle can be long and unpredictable, often
taking between two to twelve months. Because of the nature of
our product and service offerings it can take many months of
customer education and product evaluation before a purchase
decision is made. In addition, many factors can influence the
decision to purchase our product and service offerings including
budgetary restraints and decreases in capital expenditures,
quarterly fluctuations in operating results of customers and
potential customers, the emerging and evolving nature of the
internet-based services and wireless services markets.
Furthermore, general global economic conditions, and a slowdown
in technology spending in particular, have further lengthened
and affected our sales cycle, leading to delays and
postponements in purchasing decisions. Any delay or cancellation
in sales of our products or services could cause our operating
results to differ from those projected and cause our stock price
to decline.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | 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, 2003. 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 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 but
not limited to the resources to maintain worldwide operations,
our 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 or other derivative instruments, our existing
shareholders may experience significant dilution.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pending litigation could harm relationships
    with existing or potential strategic partners and customers, and
    divert managements attention, either of which could 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 and August
2001, and certain of our current and former officers and
directors and some of our subsidiaries, as well as other
lawsuits related to acquisitions, employee terminations and
copyright infringement. While these lawsuits vary greatly 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, our ability to obtain new customers and
our ability to operate certain aspects of our business.

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. While we maintain
customary business insurance coverage, we have not set aside any
financial reserves relating to potential damages associated with
any of these lawsuits.



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

Although the Company has reached settlement
agreements in connection with the securities class action
pending in the U.S. District Court for the Northern District of
California, we cannot provide assurance that a

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final settlement shall be approved in accordance
with the settlement agreement, or at all. The approval of the
definitive settlement agreements between the parties is subject
to other factors, such as court review and approval, before the
subject actions are dismissed. In addition, the definitive
settlement agreements entered into between the parties are also
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 the
settlement. If the settlement were not given final approval, it
could have a number of materially detrimental effects on the
Companys financial condition and business.


Should the Court fail to approve the settlement,
and the litigation continue, there can be no assurance that fees
and expenses, and any ultimate resolution 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 settlement agreement are within the coverage limits of the
Companys directors and officers insurance, should the
current agreement in principle fail to be approved by the court,
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. A failure to complete the settlement could
also cast doubt as to the prospects of the Company in the eyes
of our customers, potential customers and investors, and cause
the Companys stock price to decline.



| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Although concluded without penalty to the
    Company, lingering effects of the recent 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. In February 2002, the SEC announced the conclusion
of the investigation as to the Company. Although the SEC did not
impose any penalties against the Company, we consented without
admitting or denying liability, to an administrative order that
the Company violated certain non-fraud provisions of the federal
securities laws and to a cease and desist order. In addition,
the SEC and the Department of Justice charged two former
employees of the Company with various violations of the
securities laws. Despite the conclusion of the investigation of
the Company, lingering concerns about the actions leading up to
the restatement of financials for the third quarter of 2000 has
nevertheless cast doubt on the future of the Company in the eyes
of customers and investors and could continue to harm our
business and cause the price of our common stock to continue to
fluctuate and/or 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 March 31, 2002 we were in
compliance with all Nasdaq National Market listing requirements.
However, there were periods in the second and third quarters of
2001 when the closing bid price per share for our common stock
was well 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 again slips below $1 per share for more than
60 days, our common stock may not remain listed on The
Nasdaq National Market. Also effective November 1, 2002, we
will need to comply with the Nasdaq National Markets
revised quantitative maintenance criteria including a new
minimum requirement of $10.0 million in stockholders
equity. The Nasdaq National Markets Audit Committee Rules
require that our audit committee be comprised of at least three
independent members. We believe that we currently comply with
this requirement. However, there can be no assurance that we
will be able to comply with the quantitative maintenance
criteria or any of the Nasdaq National Markets rules in
the future. If we fail to maintain continued listing on the
Nasdaq National Market and must move to a market with less
liquidity, our financial condition could be harmed and our stock
price would likely decline. 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.

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| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our stock price has demonstrated volatility
    during recent quarters and continued volatility in the stock
    market may cause further fluctuations and/or 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 fourth quarter of 2001, the closing sale
prices of our common stock on the Nasdaq National Market ranged
from $0.51 on October 1, 2001 to $2.74 on December 31,
2001, and the closing price of our stock on March 28, 2002
was $2.16 per share. Our stock price may further fluctuate or
decline in response to any number of factors and events, such as
announcements related to litigation, technological innovations,
strategic and sales relationships, new product and service
offerings by us or our competitors, changes in senior
management, 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 quarters. This volatility and decline has
affected many companies, including our company, irrespective of
the specific operating performance 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
director and officer liability insurance, that was in place
through March 2002, and our current insurance that was renewed
through March 2003, contain 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. The Company has made payments in connection with
the indemnification of officers and directors in connection with
currently pending lawsuits and has reserved for estimated future
amounts to be paid in connection with legal expenses and others
costs of defense of pending lawsuits.



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 carefully manage expenses
    and growth could cause our operating results to
    suffer.

In the past, our management of operational
expenses and the growth of our business have contributed to our
history of losses. In addition, the expansion of our operations
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

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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 effectively, our business and operating results could
suffer.




| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are not successful in implementing
    our strategic plan, including the exit of certain non-core
    products and services, 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 quarters of 2001,
implementation of the plan occurred and, accordingly, products
and services determined to be non-core to our strategy were
exited. As a result, revenue from non-core products and services
comprising approximately 37% of total revenues in the first
quarter of 2001, had declined to approximately 24% of total
revenues in the second quarter of 2001, approximately 18% of
total revenues in the third quarter of 2001, and approximately
3% of total revenues in the fourth quarter of 2001 and none in
2002. Our strategic plan also included initiatives aimed at
reducing operating costs through headcount reduction and
consolidation of approximately two-thirds of our office space
and related contracts and leases, all in keeping with our
increased focus on core messaging products and services. During
the fourth quarter of 2001 we incurred additional charges in
connection with previously announced reductions in force and
were able to finalize the consolidation of additional facilities
and related contracts and expenses associated with those
facilities.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may face continued technical,
    operational and strategic challenges preventing us from
    successfully continuing the integration or divestiture of
    acquired businesses.

Acquisitions involve risks related to the
integration and management of acquired technology, operations
and personnel. In addition, in connection with our strategic
restructuring, the Company elected to divest or discontinue many
of the acquired businesses. Both the integration and divestiture
of acquired businesses have been and will continue to be
complex, time consuming and expensive processes, which may
disrupt and distract our management from its core business. With
respect to integration, 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. With divestitures, the
timing and transition of those businesses and their customers to
other entities has required and will continue to require
resources from our legal, finance and corporate development
teams as well as expenses associated with the conclusion of
those transactions.

Consequently, we may not be successful or
efficient in integrating or divesting acquired businesses or
technologies and may not achieve anticipated revenues and
benefits and/or cost reductions. 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 be realized. In
addition, if we are not successful in divesting non-core
acquired businesses, we will incur costs associated with the
cessation of operations or wind up of acquired businesses. In
either event, we will likely further 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.
Such decisions to eliminate or limit our offering of an acquired
product or service involved and could continue to include the
expenditure of capital,

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the realization of losses, further 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 currently license many third-party
    technologies and may need to license further technologies and we
    face risks in doing so that could cause our operating results to
    suffer.

We intend to continue to license certain
technologies from third parties and incorporate such
technologies into our products and services, including web
server technology, virus and anti-spam solutions 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. To the extent we cannot license needed
technologies or solutions, we may have to devote Company
resources to the development of such technologies which could
materially harm our business and operations.

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,
potential patent and copyright infringement issues, 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. In addition, an inability to obtain needed
licenses could delay product and service development until
equivalent technology can be identified, licensed and
integrated. Any delays in services or integration problems 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 remain 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.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Changes in the regulatory environment for
    the operation of our business or those of our customers could
    pose risks.

Few laws currently apply directly to activity on
the Internet and the messaging business, however new laws are
proposed and other laws made applicable to Internet
communications every year. In particular, the Company faces
risks associated with privacy, confidentiality of user data and
communications, consumer protection, taxation, content,
copyright, trade secrets, trademarks, antitrust, defamation and
other legal issues. In particular, legal concerns with respect
to communication of confidential data have affected our
financial services and health care customers due to newly
enacted federal legislation. The growth of the industry and the
proliferation of Internet-based messaging devices and services
may prompt further legislative attention to our industry and
thus invite more regulatory control of our business. The
imposition of more stringent protections and/or new regulations
and application of laws to our business could burden our company
and those with which we do business. Further, the adoption of
additional laws and regulations could limit the growth of our
business and that of our business partners and customers. Any
decreased generalized demand for our services or the loss of, or
decrease, in business by a key partner due to regulation or the
expense of compliance with any regulation, could either increase
the costs associated with our business or affect revenue, either
of which could harm our financial condition or operating
results. Certain of our service offerings include operations
subject to the Digital Millenium Copyright Act of 1998. The
Company has expended resources and implemented

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processes and controls in order to remain in
compliance with DMCA but there can be no assurance that our
efforts will be sufficient and/or new legislation and case law
will not affect the operation of certain services.


In addition, the applicability of laws and
regulations directly applicable to the businesses of our
customers, particularly customers in the fields of banking and
health care, will continue to affect us. The security of
information about our customers end-users continues to be
an area where a variety of laws and regulations with respect to
privacy and confidentiality are enacted. As our customers
implement the protections and prohibitions with respect to the
transmission of end user data, our customers will look to us to
assist them in remaining in compliance with this evolving area
of regulation. In particular the Gramm-Leach-Blilely Act
contains restrictions with respect to the use and protection of
banking records for end-users whose information may pass through
our system.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | 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. In some instances, we may be subject to criminal
liability in connection with Internet content transmission.

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 might 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
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.

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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, trade
    secret laws, contractual restrictions and patents to protect our
    proprietary rights, and if these rights are not sufficiently
    protected, our ability to compete and generate revenue could be
    harmed.

We rely on a combination of trademark, copyright
and trade secret laws, contractual restrictions, such as
confidentiality agreements and licenses, and patents to
establish and protect our proprietary rights, which we view as
critical to our success. 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
that impose certain restrictions on the licensees ability
to utilize the software. Despite these precautions, unauthorized
third parties may infringe or copy portions of our services or
reverse engineer or obtain and use information that we regard as
proprietary, which could harm our competitive position and
market share. 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. In addition, we have several patents
pending in the United States and may seek additional patents in
the future. However, 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 do not know if our patent applications or any of our
future patent applications will be issued with the scope of the
claims sought, if at all, or whether any patents we have
received or will receive will be challenged or invalidated.

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;                                       
|
| |  | 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;
    and
|
| |  | end user license provisions in our contracts that
    protect us against unauthorized use, copying, transfer and
    disclosure of the licensed program may be unenforceable.              

In addition, the laws of some foreign countries
may 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 no claims of alleged patent infringement
are currently pending, 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.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | 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 do not properly identify the
feature preferences of prospective customers, or if we fail to
deliver email features that meet the standards of these
customers, our ability to market our service successfully and to
increase revenues could be impaired. The development of
proprietary

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technology and necessary service enhancements
entails significant technical and business risks and requires
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.




| |                                                                              
| | -----------------------------------------------------------------------------
| | 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, some 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 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 our 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.



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

We derived 52% of our revenues from international
sales in the quarter ended March 31, 2002 and 30% of our
revenues from international sales in the first quarter of 2001.
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 or operate 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;                     
|
| |  | 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.



| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on a continuous power supply to
    conduct our operations, and any significance disruption in
    Californias energy supply could harm our operations and
    increase our expenses.

During 2000 and 2001 California experienced a
serious energy crisis that could have and may in the future
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

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operate. Any interruption in our ability to
continue operations could delay the development of 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 their operations, could harm their
business, and ultimately could also harm our business if they
were to terminate or fail to renew contracts. We do not carry
sufficient business interruption insurance to compensate us for
losses that may occur as a result of blackouts, 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 ALTERNATIVE MEASUREMENT FINANCIAL
DATA

The following supplemental alternative
measurement financial information presents Critical Paths
condensed consolidated results of operations during the
three-month periods of 2001 and 2002, excluding the impact of
certain special charges consisting of (i) amortization of
intangible assets associated with purchase business combinations
and financing transactions, (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 restructuring initiatives,
(v) write-down of investments, (vi) gain on adjustment
to market of the preferred stock instrument, and
(vii) accretion on redeemable convertible preferred shares.
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.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
DATA

Excluding Certain Special Charges


(In thousands, except per share
amounts)


|                                                |                            |                            |         |           |        |   |         |        |        | 
|----------------------------------------------- | -------------------------- | -------------------------- | ------- | --------- | ------ | - | ------- | ------ | ------ | 
|                                                |                            |                           
|                                                |                            | Three Months Ended        
|                                                |                            |                           
|                                                |                            | March 31,                  |         | March 31,
|                                                |                            | 2001                       |         | 2002     
|                                                |                            |                            |         |          
|                                                |                            |                           
|                                                |                            | (Unaudited)               
|Net revenues                                    |                            |                            |         |           |        |   |         |       
|                                                | Software license           |                            | $       | 5,550     |        |   | $       | 10,911 |       
|                                                | Hosted messaging           |                            |         | 14,440    |        |   |         | 6,964  |       
|                                                | Professional services      |                            |         | 3,416     |        |   |         | 1,937  |       
|                                                | Maintenance and support    |                            |         | 3,737     |        |   |         | 3,877  |       
|                                                |                            |                            |         |           |        |   |         |       
|                                                |                            | Total net revenues         |         |           | 27,143 |   |         |        | 23,689 | 
|                                                |                            |                            |         |           |        |   |         |       
|Cost of net revenues                            |                            |                            |         |           |        |   |         |       
|                                                | Software license           |                            |         | 291       |        |   |         | 287    |       
|                                                | Hosted messaging           |                            |         | 17,938    |        |   |         | 7,817  |       
|                                                | Professional services      |                            |         | 2,966     |        |   |         | 2,443  |       
|                                                | Maintenance and support    |                            |         | 2,586     |        |   |         | 2,103  |       
|                                                |                            |                            |         |           |        |   |         |       
|                                                |                            | Total cost of net revenues |         |           | 23,781 |   |         |        | 12,650 | 
|                                                |                            |                            |         |           |        |   |         |       
|Gross profit                                    |                            |                            | 3,362   |           |        |   | 11,039  |       
|                                                |                            |                            |         |           |        |   |         |       
|Operating expenses                              |                            |                            |         |           |        |   |         |       
|                                                | Sales and marketing        |                            |         | 18,712    |        |   |         | 10,943 |       
|                                                | Research and development   |                            |         | 9,934     |        |   |         | 5,002  |       
|                                                | General and administrative |                            |         | 13,293    |        |   |         | 6,678  |       
|                                                |                            |                            |         |           |        |   |         |       
|                                                |                            | Total operating expenses   |         |           | 41,939 |   |         |        | 22,623 | 
|                                                |                            |                            |         |           |        |   |         |       
|Loss from operations                            |                            |                            | (38,577 | )         |        |   | (11,584 | )     
|Interest and other income (expense), net        |                            |                            | 2,425   |           |        |   | 533     |       
|Interest expense                                |                            |                            | (5,051  | )         |        |   | (570    | )     
|Equity in net loss of joint venture             |                            |                            | (776    | )         |        |   | (403    | )     
|                                                |                            |                            |         |           |        |   |         |       
|Loss before income taxes                        |                            |                            | (41,979 | )         |        |   | (12,024 | )     
|Benefit from (provision for) income taxes       |                            |                            | (343    | )         |        |   | 573     |       
|                                                |                            |                            |         |           |        |   |         |       
|Net loss                                        |                            | $                          | (42,322 | )         |        | $ | (11,451 | )     
|                                                |                            |                            |         |           |        |   |         |       
|Net loss per share  basic and diluted          |                            | $                          | (0.59   | )         |        | $ | (0.15   | )     
|                                                |                            |                            |         |           |        |   |         |       
|Weighted average shares  basic and
    diluted |                            |                            | 72,137  |           |        |   | 76,514  |       
|EBITDA(1)                                       |                            | $                          | (27,393 | )         |        | $ | (3,784  | )     
|                                                |                            |                            |         |           |        |   |         |       



---



|    |                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings before interest, taxes, depreciation and
    amortization, equity in net loss of joint venture and one-time
    charges identified in the following table. EBITDA is calculated
    by adding depreciation, approximately $7.8 million, back
    into loss from operations.

29



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The following table reconciles the alternative
measurement financial data presented above to the consolidated
operating results prepared and presented in accordance with
generally accepted accounting principles (GAAP).

|                                              |                                                                  |                    |         |           |   |   |         |         |  
|--------------------------------------------- | ---------------------------------------------------------------- | ------------------ | ------- | --------- | - | - | ------- | ------- | -
|                                              |                                                                  |                   
|                                              |                                                                  | Three Months Ended
|                                              |                                                                  |                   
|                                              |                                                                  | March 31,          |         | March 31,
|                                              |                                                                  | 2001               |         | 2002     
|                                              |                                                                  |                    |         |          
|                                              |                                                                  |                   
|                                              |                                                                  | (Unaudited)       
|Supplemental alternative measurement net loss |                                                                  | $                  | (42,322 | )         |   | $ | (11,451 | )      
|                                              | Amortization of purchased technology                             |                    |         | (5,672    | ) |   |         | (4,630  | )
|                                              | Amortization of intangible assets                                |                    |         | (8,966    | ) |   |         | (6,131  | )
|                                              | Acquisition-related retention bonuses in
    operating expenses  |                    |         | (170      | ) |   |         | (10     | )
|                                              | Stock-based expense in cost of revenue                           |                    |         | (1,303    | ) |   |         | (417    | )
|                                              | Stock-based expense in operating expenses                        |                    |         | (11,597   | ) |   |         | (3,255  | )
|                                              | Amortization of debt issuance costs in
    non-operating expense |                    |         | (16       | ) |   |         | (213    | )
|                                              | Loss on investments in non-operating expense                     |                    |         |          |   |   |         | (104    | )
|                                              | Preferred stock instrument marked to market                      |                    |         |          |   |   |         | 200     |  
|                                              |                                                                  |                    |         |           |   |   |         |        
|                                              | Subtotal of amounts excluded from pro forma net
    loss         |                    |         | (27,724   | ) |   |         | (14,560 | )
|                                              |                                                                  |                    |         |           |   |   |         |        
|GAAP net loss                                 |                                                                  |                    | (70,046 | )         |   |   | (26,011 | )      
|                                              | Accretion on redeemable convertible preferred
    shares         |                    |         |          |   |   |         | (3,206  | )
|                                              |                                                                  |                    |         |           |   |   |         |        
|GAAP net loss attributable to common shares   |                                                                  | $                  | (70,046 | )         |   | $ | (29,217 | )      
|                                              |                                                                  |                    |         |           |   |   |         |        

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

As of March 31, 2002, our investment
portfolio consisted of available-for-sale securities, excluding
those classified as cash equivalents, of $17.5 million.
These securities consist of $6.2 million of strategic
equity investments in corporate partners, certain of which are
publicly traded and marketable and certain of which are
privately held and $11.3 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 $38.4 million of face value
5.75% Convertible Subordinated Notes due April 2005, and certain
fixed rate capital leases. We do not plan 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 rate
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 disclosures 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 sheets of Critical Path, Inc. and its
subsidiaries as of March 31, 2002 and the related condensed
consolidated statement of operations for the three month period
ended March 31, 2002 and the condensed consolidated
statement of cash flow for the three month period ended
March 31, 2002. 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, 2001, 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
February 5, 2002 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, 2001, 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

May 8, 2002


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PART 2  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 the Company, and certain of our
current and former officers and directors in the United States
District Court for the Northern District of California. The
complaints were filed as purported class actions by individuals
who allege that they purchased the Companys common stock
during a purported class period and sought an unspecified amount
in damages; the alleged class periods vary among the complaints.
The complaints were consolidated into a single action which
alleged 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. In addition, on
September 24, 2001, certain former shareholders of
PeerLogic, Inc. 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 sought an
unspecified amount in damages. We subsequently removed the
PeerLogic 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. In February 2002, the Court
gave preliminary approval to the settlement of the class action
litigation. The Court also set the hearing date for final
approval of the settlement agreement for May 23, 2002.

On April 30, 2002, MBCP PeerLogic LLC and
other named plaintiffs filed suit in the U.S. District
Court for the Southern District of New York against Critical
Path and certain of its former officers. The plaintiff
shareholders opted out of the shareholder litigation settlement
currently pending in the U.S. District Court for the Northern
District of California. The complaint, which has not been served
on the Company, alleges breach of contract, unjust enrichment,
common law fraud and violations of federal securities laws and
seeks compensatory and punitive damages in an unnamed amount but
in excess of $200 million.

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. The
Company fully cooperated with the SEC in its investigation. The
SECs investigation was concluded against the Company in
January 2002 with no imposition of fines or penalties against
the Company. The Company consented without admitting or denying
liability, to an administrative order that the Company violated
certain non-fraud provisions of the federal securities laws and
to a cease and desist order. The investigation has thus far
resulted with charges being filed against two former executive
officers of the Company. The investigation of former executives
officers and directors of the Company is continuing and while
the Company is fully cooperating with such investigation we do
not know the status of the investigation with respect to many of
such former officers.

Derivative Actions in Northern District of
California.Beginning on
February 5, 2001, Critical Path was 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
alleged 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 sought unspecified damages on the
Companys behalf from each of the defendants. Because

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##### Table of Contents



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 has been
reached to settle the derivative action.


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 purported class action complaints were filed 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.

Lease Dispute.In
July 2000, PeerLogic, an acquired subsidiary of Critical Path,
signed a lease for office space at 292 Ivy Street in
San Francisco, CA. The landlord and PeerLogic had begun
construction work to build out the space, when Critical Path
acquired PeerLogic in December 2000. After reviewing its
obligations under the lease, Critical Path noted that local
zoning laws likely prohibited a business like Critical Path or
PeerLogic from occupying the leased premises, and promptly
sought a zoning determination from the San Francisco Zoning
Administrator to resolve the matter. The preliminary zoning
determination stated that Critical Paths proposed use of
the leased premises was not permitted. The landlord appealed
this determination and prevailed before the San Francisco
Board of Appeals. Critical Path appealed that determination but
upon rehearing the Board of Appeals confirmed its decision. As
anticipated, thereafter the landlord filed suit for back rent
and breach of contract against Critical Path on April 30,
2002. The complaint seeks compensatory damages of approximately
$7 million and unspecified punitive damages. The Company
intends to vigorously defend its rights but there can be no
assurance as to the outcome of this litigation.

The uncertainty associated with these and other
unresolved or threatened lawsuits could seriously harm the
Companys business and financial condition. In particular,
the lawsuits or the continued effects of 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 SEC investigation could also result in the
diversion of managements time and attention away from
business operations, which could harm the Companys
business. Although some of the named lawsuits are in the final
stages of settlement, there can be no assurance that the
applicable courts will accept the final settlement as executed,
or at all. Negative developments with respect to the settlements
or the lawsuits 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 payments could seriously harm the Companys financial
condition.




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

| |     |  |  |                                                                                                               
| | --- |  |  | --------------------------------------------------------------------------------------------------------------
| | 4.1 |  |  | Warrant to Purchase Common Stock dated June 2000
    issued by the Registrant to i2 Technologies, Inc.        
| | 4.2 |  |  | Warrant to Purchase Common Stock dated June 2000
    issued by the Registrant to i2 Technologies, Inc.        
| | 4.3 |  |  | Warrant to Purchase Shares of Common Stock dated
    as of October 20, 1999 by Registrant to U.S. Telesource. 
| | 4.4 |  |  | Warrant to Purchase Shares of Common Stock dated
    as of May 9, 2001 by Registrant to LaHorgue Family Trust.
| | 4.5 |  |  | Warrant to Purchase Shares of Common Stock dated
    as of May 9, 2001 by Registrant to Rajiv Surendra Patel. 

33



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| |      |  |  |                                                                                                                       
| | ---- |  |  | ----------------------------------------------------------------------------------------------------------------------
| | 10.1 |  |  | First Amendment to Email Services Agreement by
    and between Registrant and ICQ, Inc.                               
| | 10.2 |  |  | Amendment to Employment Agreement dated as of
    February 12, 2002 by and between Registrant and David C.
    Hayden.
| | 15.1 |  |  | Letter of PricewaterhouseCoopers LLP on Unaudited
    Interim Financial Information                                   



---

(b) Reports on Form 8-K

None.

34



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##### Table of Contents






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.



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



| |     |                    
| | --- | -------------------
| | By: | /s/ LAUREEN DEBUONO

| |                                       
| | --------------------------------------
| |                                       
| | Laureen DeBuono                       
| | Executive Vice President,             
| | Chief Financial Officer               
| | (Duly Authorized Officer and Principal
| | Financial and Accounting Officer)     

Date: May 15, 2002

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##### Table of Contents






INDEX TO EXHIBITS

|        |      |                     |  |                                                                                                                       
|------- | ---- | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                    
|Number  |      | Exhibit Description
|        |      |                    
|        | 4.1  |                     |  | Warrant to Purchase Common Stock dated June 2000
    issued by the Registrant to i2 Technologies, Inc.                
|        | 4.2  |                     |  | Warrant to Purchase Common Stock dated June 2000
    issued by the Registrant to i2 Technologies, Inc.                
|        | 4.3  |                     |  | Warrant to Purchase Shares of Common Stock dated
    as of October 20,1999 by Registrant to U.S. Telesource.          
|        | 4.4  |                     |  | Warrant to Purchase Shares of Common Stock dated
    as of May 9, 2001 by Registrant to LaHorgue Family Trust.        
|        | 4.5  |                     |  | Warrant to Purchase Shares of Common Stock dated
    as of May 9, 2001 by Registrant to Rajiv Surendro Patel.         
|        | 10.1 |                     |  | First Amendment to Email Services Agreement by
    and between Registrant and ICQ, Inc.                               
|        | 10.2 |                     |  | Amendment to Employment Agreement dated as of
    February 12, 2002 by and between Registrant and David C.
    Hayden.
|        | 15.1 |                     |  | Letter of PricewaterhouseCoopers LLP on Unaudited
    Interim Financial Information                                   



---



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

36