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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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

For the three months ended March 31, 2006



| ̈ | 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



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Critical Path, Inc.



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

2 Harrison Street, 2nd Floor

San Francisco, California 94105

415-541-2500



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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Check one:

Large Accelerated Filer ̈Accelerated
Filer ̈Non-accelerated Filer  x

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

As of April 28, 2006, the Company had outstanding 37,478,491 shares of common stock, $0.001 par value per share (including 40,521 shares of Class A Non-Voting
preference shares of our Nova Scotia subsidiary Critical Path Messaging Co. which can be exchanged at any time for our common stock upon the election of the holder).



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##### Table of Contents

TABLE OF CONTENTS



|                              |  |                                                                                      |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------ |  | --
|PART 1-
FINANCIAL INFORMATION |  | 3                                                                                   
|                              |  |                                                                                     
|ITEM 1                        |  | UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                |  | 3 
|ITEM 2                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 22
|ITEM 3                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           |  | 35
|ITEM 4                        |  | CONTROLS AND PROCEDURES                                                              |  | 36
|                              | 
|PART II-
OTHER INFORMATION    |  | 38                                                                                  
|                              |  |                                                                                     
|ITEM 1                        |  | LEGAL PROCEEDINGS                                                                    |  | 38
|ITEM 1A                       |  | RISK FACTORS                                                                         |  | 38
|ITEM 2                        |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                          |  | 51
|ITEM 3                        |  | DEFAULTS UPON SENIOR SECURITIES                                                      |  | 51
|ITEM 4                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  |  | 51
|ITEM 5                        |  | OTHER INFORMATION                                                                    |  | 51
|ITEM 6                        |  | EXHIBITS                                                                             |  | 51
|SIGNATURE                     |  | 52                                                                                  
|Exhibit Index                 |  | 53                                                                                  
|                              |  |                                                                                     
|EX-31.1                       |  |                                                                                      |  |   
|                              |  |                                                                                     
|EX-31.2                       |  |                                                                                      |  |   
|                              |  |                                                                                     
|EX-32.1                       |  |                                                                                      |  |   
|                              |  |                                                                                     
|EX-32.2                       |  |                                                                                      |  |   



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##### Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CRITICAL PATH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                         |  |                           |            |   |                |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | -------------- | - | ---------- | -
|                                                                                                                                         |  | December 31, 2005*        |            |   | March 31, 2006 |  
|                                                                                                                                         |  | (in thousands; unaudited) |           
|Assets                                                                                                                                   |  |                           |            |   |                |   |            |  
|Current assets                                                                                                                           |  |                           |            |   |                |   |            |  
|Cash and cash equivalents                                                                                                                |  | $                         | 18,707     |   |                | $ | 19,068     |  
|Accounts receivable, net                                                                                                                 |  |                           | 10,096     |   |                |   | 14,962     |  
|Prepaid and other current assets                                                                                                         |  |                           | 2,411      |   |                |   | 2,760      |  
|Assets held for sale                                                                                                                     |  |                           | 2,782      |   |                |   |           |  
|                                                                                                                                         |  |                           |            |   |                |   |            |  
|Total current assets                                                                                                                     |  |                           | 33,996     |   |                |   | 36,790     |  
|Property and equipment, net                                                                                                              |  |                           | 2,625      |   |                |   | 2,381      |  
|Goodwill                                                                                                                                 |  |                           | 7,047      |   |                |   | 7,141      |  
|Restricted cash                                                                                                                          |  |                           | 277        |   |                |   | 212        |  
|Other assets                                                                                                                             |  |                           | 1,479      |   |                |   | 1,423      |  
|                                                                                                                                         |  |                           |            |   |                |   |            |  
|Total assets                                                                                                                             |  | $                         | 45,424     |   |                | $ | 47,947     |  
|                                                                                                                                         |  |                           |            |   |                |   |            |  
|Liabilities, mandatorily redeemable preferred stock and shareholders deficit                                                            |  |                           |            |   |                |   |            |  
|Current liabilities                                                                                                                      |  |                           |            |   |                |   |            |  
|Accounts payable                                                                                                                         |  | $                         | 2,726      |   |                | $ | 2,747      |  
|Accrued liabilities                                                                                                                      |  |                           | 19,727     |   |                |   | 20,276     |  
|Liabilities held for sale                                                                                                                |  |                           | 219        |   |                |   |           |  
|Deferred revenue                                                                                                                         |  |                           | 6,574      |   |                |   | 10,975     |  
|Capital lease and other obligations, current                                                                                             |  |                           | 106        |   |                |   | 85         |  
|                                                                                                                                         |  |                           |            |   |                |   |            |  
|Total current liabilities                                                                                                                |  |                           | 29,352     |   |                |   | 34,083     |  
|                                                                                                                                         |  |                          
|Deferred revenue                                                                                                                         |  |                           | 710        |   |                |   | 859        |  
|Embedded derivative liability                                                                                                            |  |                           | 1,534      |   |                |   | 1,655      |  
|Notes payable, net of current portion                                                                                                    |  |                           | 18,493     |   |                |   | 19,416     |  
|Other obligations, net of current portion                                                                                                |  |                           | 50         |   |                |   | 52         |  
|                                                                                                                                         |  |                           |            |   |                |   |            |  
|Total liabilities                                                                                                                        |  |                           | 50,139     |   |                |   | 56,065     |  
|                                                                                                                                         |  |                           |            |   |                |   |            |  
|Commitments and contingencies (see Note 9)                                                                                               |  |                           |            |   |                |   |            |  
|Mandatorily redeemable preferred stock, par value $0.001                                                                                 |  |                           | 120,293    |   |                |   | 123,754    |  
|                                                                                                                                         |  |                           |            |   |                |   |            |  
|Shareholders deficit                                                                                                                    |  |                           |            |   |                |   |            |  
|Common stock and additional paid-in-capital, par value $0.001 Shares authorized: 200,000 Shares issued and outstanding 37,499 and
37,508 |  |                           | 2,177,177  |   |                |   | 2,173,319  |  
|Common stock warrants                                                                                                                    |  |                           | 5,947      |   |                |   | 5,947      |  
|Unearned compensation                                                                                                                    |  |                           | (537       | ) |                |   |           |  
|Accumulated deficit                                                                                                                      |  |                           | (2,304,377 | ) |                |   | (2,308,319 | )
|Accumulated other comprehensive loss                                                                                                     |  |                           | (3,218     | ) |                |   | (2,819     | )
|                                                                                                                                         |  |                           |            |   |                |   |            |  
|Total shareholders deficit                                                                                                              |  |                           | (125,008   | ) |                |   | (131,872   | )
|                                                                                                                                         |  |                           |            |   |                |   |            |  
|Total liabilities, mandatorily redeemable preferred stock and shareholders deficit                                                      |  | $                         | 45,424     |   |                | $ | 47,947     |  
|                                                                                                                                         |  |                           |            |   |                |   |            |  

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|* | The condensed consolidated balance sheet at December 31, 2005 has been derived from the audited financial statements at that date.
|- | ----------------------------------------------------------------------------------------------------------------------------------

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



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CRITICAL PATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts; unaudited)



|                                                                           |  |                             |         |   |      |   |        |  
|-------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                           |  | Three months endedMarch 31, |        
|                                                                           |  | 2005                        |         |   | 2006 |  
|Net revenue                                                                |  |                             |         |   |      |   |        |  
|Software licensing                                                         |  | $                           | 4,445   |   |      | $ | 2,928  |  
|Hosted messaging                                                           |  |                             | 5,211   |   |      |   | 1,222  |  
|Professional services                                                      |  |                             | 3,084   |   |      |   | 2,575  |  
|Maintenance and support                                                    |  |                             | 4,700   |   |      |   | 4,289  |  
|                                                                           |  |                             |         |   |      |   |        |  
|Total net revenue                                                          |  |                             | 17,440  |   |      |   | 11,014 |  
|                                                                           |  |                            
|Cost of net revenue                                                        |  |                             |         |   |      |   |        |  
|Software licensing                                                         |  |                             | 1,208   |   |      |   | 1,306  |  
|Hosted messaging                                                           |  |                             | 5,124   |   |      |   | 777    |  
|Professional services                                                      |  |                             | 2,426   |   |      |   | 1,976  |  
|Maintenance and support                                                    |  |                             | 1,592   |   |      |   | 1,294  |  
|                                                                           |  |                             |         |   |      |   |        |  
|Total cost of net revenue                                                  |  |                             | 10,350  |   |      |   | 5,353  |  
|                                                                           |  |                             |         |   |      |   |        |  
|Gross profit                                                               |  |                             | 7,090   |   |      |   | 5,661  |  
|                                                                           |  |                            
|Operating expenses                                                         |  |                             |         |   |      |   |        |  
|Selling and marketing                                                      |  |                             | 4,657   |   |      |   | 3,490  |  
|Research and development                                                   |  |                             | 4,911   |   |      |   | 2,320  |  
|General and administrative                                                 |  |                             | 4,130   |   |      |   | 3,269  |  
|Restructuring expense                                                      |  |                             | 1,639   |   |      |   | 915    |  
|Gain on sale of assets                                                     |  |                             |        |   |      |   | (1,971 | )
|                                                                           |  |                             |         |   |      |   |        |  
|Total operating expenses                                                   |  |                             | 15,337  |   |      |   | 8,023  |  
|                                                                           |  |                             |         |   |      |   |        |  
|Operating loss                                                             |  |                             | (8,247  | ) |      |   | (2,362 | )
|                                                                           |  |                            
|Other income (expense), net                                                |  |                             | 1,846   |   |      |   | (459   | )
|Interest income (expense), net                                             |  |                             | (660    | ) |      |   | (853   | )
|                                                                           |  |                             |         |   |      |   |        |  
|Loss before provision for income taxes                                     |  |                             | (7,061  | ) |      |   | (3,674 | )
|                                                                           |  |                            
|Provision for income taxes                                                 |  |                             | (308    | ) |      |   | (268   | )
|                                                                           |  |                             |         |   |      |   |        |  
|Net loss                                                                   |  |                             | (7,369  | ) |      |   | (3,942 | )
|Accretion on mandatorily redeemable preferred stock                        |  |                             | (5,277  | ) |      |   | (3,461 | )
|                                                                           |  |                             |         |   |      |   |        |  
|Net loss attributable to common shareholders                               |  | $                           | (12,646 | ) |      | $ | (7,403 | )
|                                                                           |  |                             |         |   |      |   |        |  
|Net loss per share attributable to common shareholders  basic and diluted |  | $                           | (0.46   | ) |      | $ | (0.20  | )
|                                                                           |  |                             |         |   |      |   |        |  
|Weighted average shares  basic and diluted                                |  |                             | 27,256  |   |      |   | 36,133 |  
|                                                                           |  |                             |         |   |      |   |        |  

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



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CRITICAL PATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                        |  |                             |        |   |      |   |        |  
|------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                        |  | Three months endedMarch 31, |       
|                                                        |  | 2005                        |        |   | 2006 |  
|                                                        |  | (in thousands; unaudited)   |       
|Cash flows from operating activities:                   |  |                             |        |   |      |   |        |  
|Net loss                                                |  | $                           | (7,369 | ) |      | $ | (3,942 | )
|Provision for allowance for doubtful accounts           |  |                             | 3      |   |      |   | 125    |  
|Depreciation                                            |  |                             | 2,903  |   |      |   | 489    |  
|Stock-based expense                                     |  |                             | 308    |   |      |   | 144    |  
|Change in fair value of embedded derivative liabilities |  |                             | (1,666 | ) |      |   | 120    |  
|Amortization                                            |  |                             | 494    |   |      |   | 224    |  
|Loss on fixed asset disposals                           |  |                             |       |   |      |   | 53     |  
|Gain on sale of certain Hosted Assets                   |  |                             |       |   |      |   | (1,971 | )
|Restructuring charges, non-cash                         |  |                             | 1,453  |   |      |   |       |  
|Changes in assets and liabilities:                      |  |                             |        |   |      |   |        |  
|Accounts receivable                                     |  |                             | (43    | ) |      |   | (4,564 | )
|Other assets                                            |  |                             | 354    |   |      |   | (159   | )
|Accounts payable                                        |  |                             | (497   | ) |      |   | (11    | )
|Accrued liabilities                                     |  |                             | 510    |   |      |   | 973    |  
|Deferred revenue                                        |  |                             | 1,930  |   |      |   | 4,439  |  
|                                                        |  |                             |        |   |      |   |        |  
|Net cash used in operating activities                   |  |                             | (1,620 | ) |      |   | (4,080 | )
|                                                        |  |                             |        |   |      |   |        |  
|Cash flows from investing activities                    |  |                             |        |   |      |   |        |  
|Proceeds from sale of certain Hosted Assets             |  |                             |       |   |      |   | 4,463  |  
|Restricted cash                                         |  |                             |       |   |      |   | 66     |  
|Purchases of property and equipment                     |  |                             | (439   | ) |      |   | (278   | )
|                                                        |  |                             |        |   |      |   |        |  
|Net cash (used in) provided by investing activities     |  |                             | (439   | ) |      |   | 4,251  |  
|                                                        |  |                            
|Cash flows from financing activities                    |  |                             |        |   |      |   |        |  
|Proceeds from the issuance of convertible notes, net    |  |                             | 7,000  |   |      |   |       |  
|Principal payments on note and lease obligations        |  |                             | (361   | ) |      |   |       |  
|                                                        |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) financing activities     |  |                             | 6,639  |   |      |   |       |  
|                                                        |  |                             |        |   |      |   |        |  
|Net change in cash and cash equivalents                 |  |                             | 4,580  |   |      |   | 171    |  
|Effect of exchange rates on cash and cash equivalents   |  |                             | (623   | ) |      |   | 190    |  
|Cash and cash equivalents, beginning of period          |  |                             | 23,239 |   |      |   | 18,707 |  
|                                                        |  |                             |        |   |      |   |        |  
|Cash and cash equivalents, end of period                |  | $                           | 27,196 |   |      | $ | 19,068 |  
|                                                        |  |                             |        |   |      |   |        |  

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



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CRITICAL PATH, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS DEFICIT

(In thousands; unaudited)



|                                                                                                         |  |                                        |        |                                             |   |                       |                     |   |                      |   |  |                                                  |       |  |       |      |   |  |   |            |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------ | ------------------------------------------- | - | --------------------- | ------------------- | - | -------------------- | - |  | ------------------------------------------------ | ----- |  | ----- | ---- | - |  | - | ---------- | - |  | - | -------- | -
|                                                                                                         |  |                                        |        |                                             |   | Shareholders deficit |                    
|                                                                                                         |  | Mandatorily redeemable preferred stock |        | Common stock and additional
paid in capital |   |                       | Commonstockwarrants |   | Unearnedcompensation |   |  | Accumulated deficit and other
comprehensive loss |       |  | Total |     
|                                                                                                         |  | Amended Series D                       |        | Series E                                    |   |                       |                     |   |                     
|Balance at December 31, 2005                                                                             |  | $                                      | 56,907 |                                             | $ | 63,386                |                     | $ | 2,177,177            |   |  | $                                                | 5,947 |  | $     | (537 | ) |  | $ | (2,307,595 | ) |  | $ | (125,008 | )
|Accretion of dividend on mandatorily redeemable preferred stock                                          |  |                                        | 847    |                                             |   | 1,053                 |                     |   | (1,900               | ) |  |                                                  |       |  |       |      |   |  |   |            |   |  |   | (1,900   | )
|Accretion to redemption value for mandatorily redeemable preferred stock                                 |  |                                        | 616    |                                             |   | 945                   |                     |   | (1,561               | ) |  |                                                  |       |  |       |      |   |  |   |            |   |  |   | (1,561   | )
|Employee Stock Purchase Plan                                                                             |  |                                        |        |                                             |   |                       |                     |   | (4                   | ) |  |                                                  |       |  |       |      |   |  |   |            |   |  |   | (4       | )
|Stock-based compensation associated with stock option grants                                             |  |                                        |        |                                             |   |                       |                     |   | 2                    |   |  |                                                  |       |  |       |      |   |  |   |            |   |  |   | 2        |  
|Stock-based compensation associated with restricted stock grants                                         |  |                                        |        |                                             |   |                       |                     |   | 142                  |   |  |                                                  |       |  |       |      |   |  |   |            |   |  |   | 142      |  
|Reclassification of unamortized unearned restricted stock compensation pursuant to adoption of SFAS 123R |  |                                        |        |                                             |   |                       |                     |   | (537                 | ) |  |                                                  |       |  |       | 537  |   |  |   |            |   |  |   |          |  
|Foreign currency translation adjustments                                                                 |  |                                        |        |                                             |   |                       |                     |   |                      |   |  |                                                  |       |  |       |      |   |  |   | 399        |   |  |   | 399      |  
|Net loss                                                                                                 |  |                                        |        |                                             |   |                       |                     |   |                      |   |  |                                                  |       |  |       |      |   |  |   | (3,942     | ) |  |   | (3,942   | )
|                                                                                                         |  |                                        |        |                                             |   |                       |                     |   |                      |   |  |                                                  |       |  |       |      |   |  |   |            |   |  |   |          |  
|Balance at March 31, 2006                                                                                |  | $                                      | 58,370 |                                             | $ | 65,384                |                     | $ | 2,173,319            |   |  | $                                                | 5,947 |  | $     |     |   |  | $ | (2,311,138 | ) |  | $ | (131,872 | )
|                                                                                                         |  |                                        |        |                                             |   |                       |                     |   |                      |   |  |                                                  |       |  |       |      |   |  |   |            |   |  |   |          |  

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



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CRITICAL PATH, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Basis of Presentation

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

These interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for
interim financial information, and the rules and regulations of the United States Securities and Exchange Commission (SEC) for interim financial statements and accounting policies, consistent, in all material respects, with those applied in
preparing the Companys audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The unaudited financial information furnished herein reflects all adjustments,
consisting only of normal recurring adjustments, that in the Companys opinion are necessary for a fair statement of its consolidated financial position, the results of operations, cash flows and shareholders deficit for the periods
presented. This Quarterly Report on Form 10-Q should be read in conjunction with the Companys audited financial statements for the year ended December 31, 2005. The condensed consolidated statement of operations for the three months ended
March 31, 2006 are not necessarily indicative of results to be expected for any subsequent periods or for the entire fiscal year ending December 31, 2006.

Liquidity and Capital Resources

The Company has focused on capital financing initiatives in order to maintain
current and planned operations. The Company has operated at a loss since inception and its history of losses from operations and cash flow deficits, in combination with its cash balances, raise concerns about the Companys ability to fund
operations. In 2003 and 2004 the Company secured additional funds through several rounds of financing that involved the sale of senior secured convertible notes all of which converted into Series E preferred stock in 2004. In the third quarter of
2004 the Company completed a rights offering and in the fourth quarter of 2004, secured and drew $11.0 million from an $18.0 million round of debt financing. In March 2005, the Company drew down the remaining $7.0 million from the $18.0 million
round of debt financing. The Company is not required to make any payments of principal or interest under this $18.0 million debt financing until maturity in December 2007. In January 2006, the Company sold its Hosted Assets for $6.3 million (see
Note 2Sale of Hosted Assets below). If the Company is unable to increase its revenues or if the Company is unable to reduce the amount of cash used by its operating activities during 2006, the Company may be required to undertake additional
restructuring alternatives, or seek additional debt financing although the Companys ability to incur additional indebtedness is subject to certain limitations as discussed in the section below captioned Ability to incur additional
indebtedness.

The Company does not believe equity financing on terms reasonably acceptable are currently available. Additionally, the Companys
common stock now trades in the over-the-counter market on the OTC Bulletin Board owned by the Nasdaq Stock Market, Inc., which was established for securities that do not meet the listing requirements of the Nasdaq National Market or the Nasdaq
SmallCap Market. The OTC Bulletin Board is generally considered less efficient than the Nasdaq National Market. Consequently, selling the Companys common stock is likely more difficult because of diminished liquidity in smaller quantities of
shares likely being bought and sold, transactions could be delayed, and securities analysts and news media coverage of the Company may be further reduced. The Company believes its listing on the OTC Bulletin Board, or further declines in its
stock price, may greatly impair the Companys ability to raise additional capital, should it be necessary, through equity or debt financing.

With the
Companys history of operating losses and cash used to support its operating activities, the Companys primary sources of capital have come from both debt and equity financings that it has completed over the past several years and the sale
of the Hosted Assets in January 2006. The Companys principal sources of liquidity include its cash and cash equivalents. As of March 31, 2006, the Company had cash and cash equivalents available for operations totaling $19.1 million, of
which $10.3 million was located in accounts outside the United States and which is not readily available for domestic operations. However, the Company intends to pursue the investigation of



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##### Table of Contents

restructuring its foreign subsidiaries which, if successful, may provide the Company easier access to the repatriation of
a greater portion of the cash located in accounts outside the United States. Accordingly, the Companys readily available cash resources in the United States as of March 31, 2006 was $8.7 million. As of March 31, 2006, the Company had
cash collateralized letters of credit totaling approximately $0.2 million. This cash is recorded as restricted cash on the Companys balance sheet and is not readily available for operations.

Based on the Companys recent financing activities, cash expected to be generated from operations, recent restructuring activities and the sale of the Hosted
Assets in January 2006, the Company believes that it has sufficient cash to meet its cash operating requirements for the next 12 months as well as the on-going investments in capital equipment to support its research and development efforts. The
Company has no present understandings, commitments or agreements for any material acquisitions of, or investments in, other complementary businesses, products or technologies. The Company continually evaluates potential acquisitions of, or
investments in, other businesses, products and technologies, and may in the future utilize its cash resources or may require additional equity or debt financing to accomplish any acquisitions or investments. These alternatives could increase
liquidity through the infusion of investment capital by third-party investors or decrease the Company 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. For the long-term, the Company believes future improvements in the Companys operating activities will be necessary to provide the liquidity and capital resources sufficient to support its business.
Additionally, as the Company approaches the December 31, 2007 maturity of $18.0 million principal amount of the 13.9% Notes, the Company may be required to restructure its debt or seek additional financing to pay the 13.9% Notes upon
maturity.

Ability to incur additional indebtedness

Subject to limited exceptions, the Company must seek the consent of its preferred shareholders and debt holders in order to incur any additional indebtedness.

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, digital communications software and services, and management uses one measure of profitability. Revenue information on a product and service basis has
been disclosed in the Companys statement of operations.

Information regarding net revenue attributable to the
Companys primary geographic regions are as follows:



|                       |  |                              |        |  |      |   |  |   |        |  |     |  
|---------------------- |  | ---------------------------- | ------ |  | ---- | - |  | - | ------ |  | --- | -
|                       |  | Three months ended March 31, |       
|                       |  | 2005                         |        |  | 2006 |  
|                       |  | (in thousands)               |       
|United States          |  | $                            | 4,080  |  | 23   | % |  | $ | 2,490  |  | 23  | %
|Europe                 |  |                              | 12,608 |  | 72   | % |  |   | 8,322  |  | 75  | %
|Latin America          |  |                              | 253    |  | 1    | % |  |   | 74     |  | 1   | %
|Asia Pacific           |  |                              | 499    |  | 3    | % |  |   | 128    |  | 1   | %
|                       |  |                              |        |  |      |   |  |   |        |  |     |  
|Subtotal International |  |                              | 13,360 |  | 77   | % |  |   | 8,524  |  | 77  | %
|                       |  |                              |        |  |      |   |  |   |        |  |     |  
|                       |  | $                            | 17,440 |  | 100  | % |  | $ | 11,014 |  | 100 | %
|                       |  |                              |        |  |      |   |  |   |        |  |     |  



8



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Customer Concentration

During each of the three months ended March 31, 2005 and 2006, the Company did not have any customers that accounted for more than 10% of net revenues; however, during the three months ended March 31, 2005 the Company had one
customer that accounted for 9.6% of net revenue. At March 31, 2005, one customer accounted for 15.5% and another customer accounted for 11.8% of the Companys accounts receivable and at March 31, 2006, one customer accounted for 12.8% of the
Companys accounts receivable.

Stock-Based Compensation Accounting Policy

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised in 2004) (SFAS 123R), Share-Based Payment, which revised SFAS 123, Accounting for
Stock-Based Compensation. SFAS 123R requires all share-based payment transactions with employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period based on their relative fair
values. SFAS 123R is a new and very complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility and expected option
lives, as well as expected option forfeiture rates, to value equity-based compensation. There is little experience or guidance available with respect to developing these assumptions and models. There is also uncertainty as to how the standard will
be interpreted and applied as more companies adopt the standard and companies and their advisors gain experience with the standard. SFAS 123R requires the recognition of the fair value of stock-based compensation in net income. Prior to the adoption
of SFAS 123R, stock-based compensation expense related to employee stock options was not recognized in the statement of operations. In connection with the adoption of SFAS 123R, stock-based compensation expense of approximately $2,000 was recorded
in the condensed consolidated statement of operations associated with the fair value and initial vesting of employee stock options granted during the period. There was no cumulative effect of adoption.

Recent Accounting Pronouncements

In February 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 replaces SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 resolves issues addressed in Statement 133 Implementation Issue No.
D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. This statement will be effective for all financial instruments acquired or issued after the beginning of an entitys fiscal year that begins
after September 15, 2006. The Company is currently analyzing whether this new standard will have impact on its financial position and results of operations.

Note 2Sale of Hosted Assets

On December 14, 2005, the Company entered into an Asset Purchase Agreement with Tucows.com (Tucows)
for the sale of a portion of Critical Paths hosted messaging assets, including a portion of its hosted messaging customer base, assembled hosted messaging workforce, and hosted messaging hardware (the Hosted Assets). On
January 3, 2006, Critical Path completed the sale of its Hosted Assets. Under the Agreement, Tucows also acquired a software license for the Companys Memova product and assumed certain contractual liabilities related to the Hosted
Assets. Tucows has paid Critical Path $6.3 million in cash, of which $0.8 million has been allocated to deferred revenue for the future maintenance and support services to be provided by Critical Path in connection with the Memova license provided
to Tucows under the Asset Purchase Agreement. Tucows will also pay up to an additional $1.8 million to Critical Path by October 31, 2006 if certain post-closing conditions are satisfied by such date.

For the first quarter ended March 31, 2006, the Company recognized a gain of approximately $1.9 million associated with the sale of these assets. The gain, which is
reported as a component of the Companys operating expenses, was calculated as follows:



|                                            |  |   |        |  
|------------------------------------------- |  | - | ------ | -
|Net proceeds from sale of the Hosted Assets |  | $ | 5,500  |  
|Less: Net assets sold                       |  |   | (2,492 | )
|Transaction costs                           |  |   | (843   | )
|Transition services costs                   |  |   | (194   | )
|                                            |  |   |        |  
|Gain on sale of the Hosted Assets           |  | $ | 1,971  |  
|                                            |  |   |        |  



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In connection with the Asset Purchase Agreement, Critical Path also agreed to perform certain transition services during
a six month period following the close of the transaction. The Company agreed to provide such services to insure a smooth transition of the hosted email service to Tucows in an effort to minimize customer disruption. The Company estimated the cost
of these services to be approximately $0.2 million which were recorded as a reduction to the gain on sale during the three months ended March 31, 2006.

In connection with the Asset Purchase Agreement, Critical Path also provided Tucows with a license to the Companys Memova product. This license was for a fixed number of users and provided two years of free maintenance and support
services. In connection with this free support, the Company recorded approximately $0.8 million of the proceeds received from the sale to deferred revenue based upon the maintenance renewal rate provided in the license agreement. This deferred
revenue will be amortized over a period of two years beginning from the closing date of the sale. During the three months ended March 31, 2006, the Company recognized in its maintenance and support revenues approximately $0.1 million of this
deferred revenue.

Note 3  Restructuring Activities

During the three months ended March 31, 2006, the Company recorded restructuring expenses totaling $0.9 million primarily related to severance benefits paid to employees terminated in connection with the sale of the Hosted Assets as
well as employees terminated in connection with the reorganization of the Companys sales force. At March 31, 2006, the Company carried a remaining restructuring liability of $0.4 million, the majority of which is expected to be utilized
by December 31, 2006. The Company expects to record additional restructuring charges in connection with the sale of the Hosted Assets during the three months ending June 30, 2006 totaling approximately $0.1 million, comprised primarily of
employees severance benefits. The following table summarizes the strategic restructuring costs incurred by the Company during the three months ended March 31, 2006.



|                               |  |                     |      |   |                                                         |   |     |       |  |   |      |  
|------------------------------ |  | ------------------- | ---- | - | ------------------------------------------------------- | - | --- | ----- |  | - | ---- | -
|                               |  | Workforce reduction |      |   | Facility and operations consolidation and other charges |   |     | Total | 
|                               |  | (in thousands)      |     
|Liability at December 31, 2005 |  | $                   | 84   |   |                                                         | $ | 303 |       |  | $ | 387  |  
|Restructuring charge           |  |                     | 855  |   |                                                         |   | 60  |       |  |   | 915  |  
|Cash payments                  |  |                     | (827 | ) |                                                         |   | (70 | )     |  |   | (897 | )
|Adjustments                    |  |                     |     |   |                                                         |   | (8  | )     |  |   | (8   | )
|                               |  |                     |      |   |                                                         |   |     |       |  |   |      |  
|Liability at March 31, 2006    |  | $                   | 112  |   |                                                         | $ | 285 |       |  | $ | 397  |  
|                               |  |                     |      |   |                                                         |   |     |       |  |   |      |  

Note 4  Goodwill

At March 31, 2006, the Company was carrying $7.1 million of goodwill assets, which, in accordance with SFAS No. 142, are not amortized. The change in the balance subsequent to December 31, 2005 was due to the effect of the
movement in foreign currency exchange rates upon the revaluation of foreign currency denominated goodwill balances.



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##### Table of Contents

The Company tests its goodwill assets for impairment on an annual basis and on a more frequent basis if events occur or
circumstances change that would more likely than not reduce the fair value of any of the Companys reporting units below their carrying value.

Note 5  Promissory Notes

13.9% Notes

In December 2004, the Company issued $11.0 million in principal amount of 13.9% Notes to General Atlantic Partners 74, L.P., Gapstar, LLC, GAP Coinvestment Partners II, L.P., GAPCO GmbH & Co. KG., Cenwell Limited, Campina
Enterprises Limited, Great Affluent Limited, Dragonfield Limited, Lion Cosmos Limited and Richmond III, LLC (referred to collectively as the 13.9% Note Investors). As part of the financing transaction, the Company issued warrants to the 13.9% Note
Investors to purchase 235,712 shares of Series F preferred stock at a per share purchase price of $14 per share, which is equivalent to $1.40 per share on a common stock equivalent basis.

In March 2005, the Company issued an additional $7.0 million of the 13.9% Notes to the 13.9% Note Investors. As part of this financing transaction, the Company issued
warrants to purchase 149,998 shares of Series F preferred stock.

The 13.9% Notes accrue interest at a rate of 13.9% per annum; however, the
Company is not obligated to make interest payments on the notes prior to their maturity date of December 30, 2007. The Notes are due and payable on the earlier to occur of the maturity of the 13.9% Notes on December 30, 2007, when declared
due and payable upon the occurrence of an event of default, or a change of control of the Company.

The $18.0 million in proceeds from the financing
transaction were allocated to the 13.9% Notes and warrants based upon their relative estimated fair values. The estimated fair value of the warrants has been classified as a derivative instrument and recorded as a liability on the Companys
balance sheet in accordance with current authoritative guidance. In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments, the Company is required to adjust the carrying value of the instrument to its fair value
at each balance sheet date and recognize any change since the prior balance sheet date as a component of Other Income (Expense). The warrant derivative liability is being carried on the Companys books at its fair value of $0.5 million at
March 31, 2006.

These 13.9% Notes are carried on the balance sheet as long-term Notes payable as
follows:



|                                                                                                         |  |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | - | ------ | -
|Proceeds from the issuance of the 13.9% Notes                                                            |  | $ | 18,000 |  
|Less: proceeds allocated to the fair value of the Series F preferred stock warrant derivative instrument |  |   | (2,711 | )
|Add: accretion to redemption value                                                                       |  |   | 1,041  |  
|Add: accrued interest                                                                                    |  |   | 3,086  |  
|                                                                                                         |  |   |        |  
|Carrying value of 13.9% Notes                                                                            |  | $ | 19,416 |  
|                                                                                                         |  |   |        |  

Note 6  Comprehensive Loss

The components of comprehensive loss are as follows:



|                                         |  |                             |         |   |      |   |        |  
|---------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                         |  | Three months endedMarch 31, |        
|                                         |  | 2005                        |         |   | 2006 |  
|                                         |  | (in thousands)              |        
|Net loss attributable to common shares   |  | $                           | (12,646 | ) |      | $ | (7,403 | )
|Foreign currency translation adjustments |  |                             | (462    | ) |      |   | 399    |  
|                                         |  |                             |         |   |      |   |        |  
|Total comprehensive loss                 |  | $                           | (13,108 | ) |      | $ | (7,004 | )
|                                         |  |                             |         |   |      |   |        |  



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There were no tax effects allocated to any components of comprehensive loss during the three months ended March 31,
2005 and 2006.

Note 7  Net Loss per Share Attributed to Common Shareholders

Net loss per common share is calculated as follows:



|                                                                                                                  |  |                                          |         |   |      |   |        |  
|----------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                                  |  | Three months ended March 31,             |        
|                                                                                                                  |  | 2005                                     |         |   | 2006 |  
|                                                                                                                  |  | (in thousands, except per share amounts) |        
|Net loss attributable to common shares                                                                            |  | $                                        | (12,646 | ) |      | $ | (7,403 | )
|Weighted average shares outstanding                                                                               |  |                                          | 29,094  |   |      |   | 37,526 |  
|Weighted average shares subject to repurchase agreements                                                          |  |                                          | (1,791  | ) |      |   | (1,353 | )
|Weighted average shares held in escrow related to acquisitions                                                    |  |                                          | (47     | ) |      |   | (41    | )
|                                                                                                                  |  |                                          |         |   |      |   |        |  
|Shares used in the computation of basic and diluted net loss attributable to common shareholders per common share |  |                                          | 27,256  |   |      |   | 36,133 |  
|                                                                                                                  |  |                                          |         |   |      |   |        |  
|Net loss attributable to common shareholders per common share - basic and diluted                                 |  | $                                        | (0.46   | ) |      | $ | (0.20  | )
|                                                                                                                  |  |                                          |         |   |      |   |        |  

As of March 31, 2005 and 2006, there were 119.5 million and 113.8 million, respectively, potential
common shares that were excluded from the determination of diluted net loss per share, as the effect of such shares on a weighted average basis is anti-dilutive. The weighted average exercise prices of the potential common shares excluded from the
determination of diluted net loss per share at March 31, 2005 and 2006 were $4.07 and $3.79, respectively.

Note 8  Mandatorily Redeemable
Preferred stock

Series F Redeemable Convertible Preferred Stock

In December 2004, the Companys Board of Directors authorized the issuance of up to 0.5 million shares of Series F Redeemable Convertible Preferred Stock (Series F preferred stock). The
Series F preferred stock will rank equally with the Series E preferred stock, and will rank senior to all other capital stock with respect to rights on liquidation, dissolution and winding up. The Series F preferred stock will accrue
dividends at a simple annual rate of 53/4% of the purchase price of $14.00 (equivalent to $1.40 per share on a
common stock equivalent basis), whether or not declared by the board of directors. Dividends in respect of the Series F preferred stock will not be paid in cash but will be added to the value of the Series F preferred stock and will be
taken into account for purposes of determining the liquidation and change in control preference, conversion rate and voting rights.

The Company
must declare or pay dividends on the Series F preferred stock when the Company declares or pay dividends to the holders of common stock. Holders of Series F preferred stock are entitled to notice of all shareholders meetings and are
entitled to vote on all matters submitted to the shareholders for a vote, voting together with the holders of the common stock and all other classes of capital stock entitled to vote, voting as a single class (except where a separate vote is
required by the Companys amended and restated articles of incorporation, its bylaws or California law). The holders of Series F preferred stock will be entitled to vote as a separate class on any amendment to the terms or authorized
number of shares of Series F preferred stock, the issuance of any equity security ranking senior to the Series F preferred stock and the redemption of or the payment of a dividend in respect of any junior security. At any time, holders of
Series F preferred stock may elect to convert their Series F preferred stock into shares of common stock. Each share of Series F preferred stock is currently



12



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##### Table of Contents

convertible into ten shares of common stock. After three years from the date the Series E preferred stock is first
issued, the Company may call for redemption of the Series F preferred stock under certain circumstances. On the fourth anniversary of the date the Series E preferred stock is first issued, the Company must call for redemption of the
Series F preferred stock.

At March 31, 2006, no shares of Series F preferred stock have been issued or were outstanding. Warrants to
purchase 0.4 million shares of Series F preferred stock were issued and outstanding as of March 31, 2006 in connection with the issuance of the 13.9% Notes.

Series E Redeemable Convertible Preferred Stock

During the three months ended September 30, 2004, the
Company issued a total of approximately 55.9 million shares of Series E Redeemable Convertible Preferred Stock (Series E preferred stock) as follows: in July 2004, the Company issued approximately 30.6 million shares of
Series E preferred stock to convert $45.5 million of the Senior Notes plus accrued interest, 21.9 million shares of Series E preferred stock to convert $32.8 million of the 53/4% Notes and approximately 0.8 million shares of Series E preferred stock to convert certain holders of Series D preferred stock into
Series E preferred stock; and in August 2004, the Company issued approximately 2.6 million shares of Series E preferred stock in connection with its rights offering from which the Company received gross proceeds of approximately $4.0
million.

The Series E preferred stock ranks pari passu to the Series F preferred stock, none of which was issued or outstanding as of
March 31, 2006, and senior to all other preferred and common stock of the Company in priority of dividends, rights of redemption and payment upon liquidation. The principal terms of the Series E preferred stock include an automatic
redemption on July 9, 2008, cumulative dividends at a rate of 53/4% per year, dividends are not paid
in cash but are added to the value of the Series E preferred stock on June 30 and December 31 each year, and conversion into shares of common stock calculated based on the quotient of the Series E accreted value divided by the
Series E conversion price of $1.50.

At issuance, the total amount of costs associated with converting the Companys debt into
Series E preferred stock and costs associated with the rights offering, totaling approximately $4.6 million, will accrete over the term of the Series E preferred stock. Additionally, the conversion of the $45.5 million Senior Notes into
the Series E preferred stock was deemed to have a beneficial conversion feature totaling approximately $16.3 million. The value of the beneficial conversion feature, at issuance, was initially recorded as a reduction of the carrying amount of
the Series E preferred stock and will accrete over the term of the Series E preferred stock.

As of March 31, 2006, there were approximately
48.8 million shares of Series E preferred stock outstanding. The carrying value of the Series E preferred stock is as follows (in thousands):



|                                                                |  |   |       
|--------------------------------------------------------------- |  | - | ------
|Beginning balance-Series E preferred stock at December 31, 2005 |  | $ | 63,386
|Add amortization and accretion                                  |  |   | 1,998 
|                                                                |  |   |       
|Carrying value of Series E preferred stock at March 31, 2006    |  | $ | 65,384
|                                                                |  |   |       
|Liquidation value of Series E preferred stock at March 31, 2006 |  | $ | 80,470
|                                                                |  |   |       

Series D Cumulative Redeemable Convertible Preferred Stock

In December 2001, the Company completed a financing transaction with a group of investors and their affiliated entities. In connection with this financing transaction,
the Company issued 4.0 million shares of its Series D Cumulative Redeemable Convertible Preferred Stock (Series D preferred stock), in a private offering, resulting in gross cash proceeds of approximately $30.0 million, and the
simultaneous retirement of approximately $65.0 million in face value of the Companys outstanding convertible subordinated notes. The investors were led by General Atlantic Partners LLC and affiliates and included Hutchison Whampoa Limited and
affiliates and Vectis Group LLC and affiliates. In addition, General Atlantic LLC was granted warrants to purchase 0.6 million shares of the Companys Common Stock in connection with this offering.

At issuance, costs of $3.1 million were recorded as a reduction of the carrying amount of the Series D preferred stock and will accrete over the term of the
Series D preferred stock. Additionally, at issuance, the Series D preferred



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##### Table of Contents

stock was deemed to have an embedded beneficial conversion feature which was limited to the net proceeds allocable to
preferred stock of approximately $42.0 million. The value of the beneficial conversion feature, at issuance, was initially recorded as a reduction of the carrying amount of the Series D preferred stock and will accrete over the term of the
Series D preferred stock.

The Series D preferred stock issued in the financing transaction ranks senior to all of the Companys Common
Stock in priority of dividends, rights of redemption and payment upon liquidation. The fair value ascribed to the preferred stock was based on actual cash paid by independent investors and the approximate fair value of the 53/4% Notes retired in connection with the offering. The original principal terms of the Series D preferred stock
included an automatic redemption on November 8, 2006, cumulative dividends at a rate of 8% per year, compounded on a semi-annual basis and payable in cash or additional shares of Series D preferred stock, conversion into shares of
Common Stock calculated based on the Accreted Value which is, the purchase price plus accrued dividends divided by $4.20, and preference in the return of equity in any liquidation or change of control.

The purchase agreement provides for a preferential return of equity to the Series D preferred stockholders, before any return of equity to the common shareholders,
and also provides for the Series D preferred stockholders to participate on a pro rata basis with the common shareholders, in any remaining equity, once the preferential return has been satisfied. Under the terms of this provision, the
preferential return of equity is equal to the purchase price of the Series D preferred stock plus all dividends that would have accrued during the term of the preferred stock, even if a change in control occurs prior to the redemption date. The
right to receive a preferential return lapses if either: (i) Critical Path is sold for a price per share of Series D preferred stock, had each such share been converted into Common Stock prior to change in control of at least four times
the Accreted Value, or (ii) Critical Paths stock trades on NASDAQ for 60 days prior to the change-in-control at an average price of not less than four times the Accreted Value.

The warrants are exercisable at any time after November 8, 2002 until November 8, 2006 at an exercise price of $4.20, and convert into one share of the
Companys Common Stock. A portion of the proceeds received for the Series D preferred stock was allocated to the warrants and the preferred stock, based upon their relative fair market values. As a result of this allocation, approximately
$5.3 million of the proceeds were allocated to the warrants, which was recorded as a reduction of the carrying value of the Series D preferred stock. Using the Black-Scholes option pricing model, assuming a four-year term, 200% volatility, a
risk-free rate of 6.0% and no dividend yield, the fair market value of the warrants was $6.2 million. As part of the Companys November 2003 private placement of 10% Senior Secured Convertible Notes (Senior Notes), the Company agreed to seek
shareholder approval to amend the warrants to reduce the exercise price per share from $4.20 to $1.50. As of March 31, 2006 these warrants remain unexercised.

As part of the Companys November 2003 private placement of 10% Senior Secured Convertible Notes, the Company agreed to seek shareholder approval to amend the terms of the Series D preferred stock to, among other things, amend the
Series D preferred stock liquidation preference upon a liquidation and change of control, to eliminate the participation feature, to reduce the conversion price from $4.20 to $1.50 and to reduce the amount of dividends to which the holders of
Series D preferred stock are entitled. In July 2004, at a special meeting of shareholders, the Companys shareholders approved proposals to amend and restate the certificate of determination of preferences of Series D preferred stock
(the Amended Series D). As part of this amendment, the automatic redemption date was changed to July 2008, the dividend accrual rate was reduced to 53/4% and the conversion price was reduced to $1.50. The dividends which had accrued on the Series D preferred stock totaling approximately $12.2 million were recorded as a reduction to the carrying
value of the Amended Series D. This amount was recorded as a reduction of the carrying amount of the Amended Series D and will accrete over the term of the Amended Series D. As of March 31, 2006, the conversion value of all
Amended Series D preferred stock, as accreted is $64.8 million. Additionally, the Amended Series D preferred stock currently contains a liquidation preference of $22 per share.

As of March 31, 2006, there were approximately 3.5 million shares of Series D preferred stock outstanding The following table sets forth the carrying
value and liquidation values of the Amended Series D preferred stock (in thousands):



|                                                                                           |  |   |       
|------------------------------------------------------------------------------------------ |  | - | ------
|Beginning balance-Amended Series D preferred stock at December 31, 2005                    |  | $ | 56,907
|Add amortization and accretion                                                             |  |   | 1,463 
|                                                                                           |  |   |       
|Carrying value of Amended Series D preferred stock at March 31, 2006                       |  | $ | 58,370
|                                                                                           |  |   |       
|Liquidation value of Amended Series D preferred stock at March 31, 2006 (at $22 per share) |  | $ | 77,452
|                                                                                           |  |   |       



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Accretion on Mandatorily Redeemable Preferred Stock

Accretion on mandatorily redeemable preferred stock represents the accrued dividends and accretion of the beneficial conversion features of the outstanding Series D and Series E preferred stock as well as the
accretion to the redemption value of the outstanding Series D preferred stock. The following table sets forth the accretion on mandatorily redeemable preferred stock for the periods indicated:



|                                                                           |  |                             |       |      |   |      
|-------------------------------------------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                                                           |  | Three months endedMarch 31,
|                                                                           |  | 2005                        |       | 2006
|                                                                           |  | (in thousands)             
|Accrued dividends                                                          |  | $                           | 2,039 |      | $ | 1,900
|Accretion of the redemption value and of the beneficial conversion feature |  |                             | 3,238 |      |   | 1,561
|                                                                           |  |                             |       |      |   |      
|                                                                           |  | $                           | 5,277 |      | $ | 3,461
|                                                                           |  |                             |       |      |   |      

Note 9  Commitments and Contingencies

Leases

The Company leases office space and equipment under noncancelable operating and capital leases with various
expiration dates through 2014. Rent expense for the three months ended March 31, 2006 totaled $0.7 million. Future minimum lease payments under noncancelable operating and capital leases are as follows:



|                                                      |  |                |    |                  |   |       
|----------------------------------------------------- |  | -------------- | -- | ---------------- | - | ------
|                                                      |  | Capital Leases |    | Operating Leases
|                                                      |  | (In thousands)
|Year Ending December 31                               |  |                |    |                  |   |       
|2006 (remaining nine months ending December 31, 2006) |  | $              | 67 |                  | $ | 2,250 
|2007                                                  |  |                | 20 |                  |   | 2,462 
|2008                                                  |  |                |   |                  |   | 2,316 
|2009                                                  |  |                |   |                  |   | 2,309 
|2010                                                  |  |                |   |                  |   | 2,290 
|2011 and beyond                                       |  |                |   |                  |   | 6,472 
|                                                      |  |                |    |                  |   |       
|Total minimum lease payments                          |  |                | 87 |                  | $ | 18,099
|                                                      |  |                |    |                  |   |       
|Less amount representing interest                     |  |                | 5  |                  |   |       
|                                                      |  |                |    |                  |   |       
|Present value of capital lease obligations            |  | $              | 82 |                  |   |       
|                                                      |  |                |    |                  |   |       

Other Contractual Obligations

The Company entered into other contractual obligations which total $3.0 million at March 31, 2006. These obligations are primarily associated with the future purchase of equipment and software, the maintenance of
hardware and software products being utilized within engineering and hosted operations, and the management of data center operations and network infrastructure storage for the Companys hosted operations. These obligations are expected to be
completed over the next 2 years, including $3.0 million in 2006.



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Relocation of San Francisco Offices

During the first quarter of 2005, the Company recorded a restructuring charge totaling $1.6 million, of which, $1.3 million is related to the relocation of our headquarters facility as discussed below and the balance
related to consolidation of data centers and the elimination of certain employee positions.

On May 5, 2005, the Company entered into the Second
Amendment to Lease with PPF Off 345 Spear Street, L.P., to amend the Lease dated as of November 16, 2001, as amended, under which the Company leased its headquarter facilities in San Francisco, California. Under the terms of the second
amendment, the Company moved into new office space at 2 Harrison Street, 2ndFloor, San Francisco, California and
vacated its facility at 350 The Embarcadero on June 29, 2005. The new office space into which the Company relocated is comprised of two suites consisting of approximately 22,881 square feet and will be leased for a term of five years, however;
the Company has an early termination option whereby the Company can reduce the occupancy of the premises to one of the two suites after 18 months. In connection with the second amendment, the Company made a lease termination payment related to the
facility at 350 the Embarcadero payment totaling approximately $1.3 million during the three months ended June 30, 2005; however, the annual rent, on a cash basis, for the Companys new headquarter facility will decline from approximately
$2.5 million per year to less than approximately $0.7 million per year on average over the term of the lease.

Service Level Agreements

Certain net revenues are derived from contractual relationships that typically have one to three year terms. Certain agreements require minimum performance standards
regarding the availability and response time of email services. If these standards are not met, such contracts are subject to termination and the Company could be subject to monetary penalties.

Litigation and Investigations

The Company is a party to lawsuits in
the normal course of its 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, the Company is not a party to any other material legal proceedings.

Action in the Superior Court
of San Diego. In December 2003, the Company was named in a lawsuit filed by former shareholders of Remedy Corporation against current and former officers and directors of Peregrine Systems, Inc., Peregrines former accountants, some of
Peregrines customers, including us, and various other unnamed defendants. The operative complaint alleges that the Company, as Peregrines customer, engaged in a fraudulent transaction with Peregrine that was not accounted for by
Peregrine in conformity with generally accepted accounting principles (GAAP) and that this substantially inflated the value of Peregrine securities issued as consideration in Remedys merger with Peregrine approximately one year later in August
2001. The operative complaint alleges causes of action against Critical Path for fraud and deceit, violations of California Corporations Code provisions regarding aiding and abetting securities fraud, common law conspiracy to commit fraud, and
common law aiding and abetting the commission of fraud. The complaint seeks an unspecified amount of compensatory and punitive damages, along with rescission of the Peregrine securities purchased in the Remedy merger, interest and attorneys fees.
Effective as of January 2005, the Company entered into a settlement agreement providing that the claims against us would be dismissed immediately without prejudice. Thereafter, upon Critical Paths satisfaction of certain conditions, the
plaintiffs are obligated to dismiss the claims with prejudice. Such conditions consist principally of informal discovery such as, for example, providing access to employees and consultants who may have knowledge relevant to the plaintiffs
continuing case against the remaining defendants and providing documents which may be relevant to such case. The settlement involved no cash or other financial consideration. The Company had not recorded a liability against this claim as of
March 31, 2006.

Action in the Superior Court of San Diego. In April 2006, the Company was added as a named defendant in a lawsuit previously
filed by a former shareholder of Extricity, Inc. against current and former officers and directors of Peregrine Systems, Inc., Peregrines former accountants, some of Peregrines customers, including Critical Path, and various other
unnamed defendants. Although the Company was added as a defendant, the complaint does not specify what causes of action are being asserted against Critical Path nor does it contain any specific factual allegations against the Company. The complaint
alleges against certain of



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the other named defendants that they, as Peregrines customers, engaged in fraudulent transactions with Peregrine
that were not accounted for by Peregrine in conformity with GAAP and that this substantially inflated the value of Peregrine securities issued as consideration in Extricitys merger with Peregrine. When, if ever, the complaint is amended to
make specific factual allegations against the Company and assert specific causes of action, the Company will then be in a position to make a determination as to the merits of the lawsuit. Nevertheless, due to the similarity of this complaint with
the complaint described above involving the Remedy shareholders, the Company expects such allegations and causes of action to be similar to the Remedy lawsuit. In such case, the Company believes the allegations to be without merit and intends to
defend itself vigorously.

Securities Class Action in Southern District of New York. Beginning in July 2001, a number of securities class action
complaints were filed against Critical Path, and certain of the Companys former officers and directors and underwriters connected with the Companys initial public offering (IPO) of common stock in the U.S. District Court for the Southern
District of New York (In re Initial Public Offering Sec. Litig.). The purported class action complaints were filed by individuals who allege that they purchased Critical Path common stock at the initial and secondary public offerings between
March 29, 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 excess commissions received by the
underwriters as well as allegations of laddering whereby underwriters required their customers to purchase additional shares in the aftermarket in exchange for an allocation of IPO shares. The complaints seek an unspecified amount in
damages on behalf of persons who purchased the Companys common stock during the specified period. Similar complaints have been filed against 55 underwriters and more than 300 other companies and other individuals. The over 1,000 complaints
have been consolidated into a single action. The Company has reached an agreement in principle with the plaintiffs to resolve the cases. The proposed settlement involves no monetary payment by the Company and no admission of liability. The
settlement has been preliminarily approved by the Court. However, the settlement is subject to final approval by the Court which has not yet occurred. The Company had not recorded a liability against this claim as of March 31, 2006.

Cable & Wireless Liquidating Trust. In December 2005, the Company was named in a complaint for avoidance and recovery of preferential transfers filed
by Cable & Wireless Liquidating Trust, or the Trust, in respect of the Trusts claim that Cable & Wireless, USA, Inc. made a preferential payment to Critical Path of approximately $1.1 million within the 90-day preference
period before Cable & Wireless filed for bankruptcy protection. The Company does not believe that it received any preferential payments from Cable & Wireless and intends to defend itself vigorously. The Company had not recorded a
liability against this claim as of March 31, 2006.

Indemnifications. The Company provides general indemnification provisions in its license
agreements. In these agreements, the Company generally states that it will defend or settle, at its own expense, any claim against the customer by a third party asserting a patent, copyright, trademark, trade secret or proprietary right violation
related to any products that the Company has licensed to the customer. The Company agrees to indemnify its customers against any loss, expense or liability, including reasonable attorneys fees, from any damages alleged against the customer by
a third party in its course of using products sold by the Company. The Company has not received any claims under this indemnification and does not know of any instances in which such a claim may be brought against the Company in the future.

Under California law, in connection with the Companys charter documents and indemnification agreements the Company entered into with its executive
officers and directors, the Company must indemnify its 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 past lawsuits and governmental investigations.

Note 10  Stock-Based Compensation

The Company adopted SFAS
No. 123R (revised in 2004), Share-based payment, on January 1, 2006. SFAS 123R requires the measurement and recognition of compensation expense, using a fair-value based method, for all share-based awards made to the Companys
employees and directors, including grants of stock options, restricted stock and other stock-based plans. The Company recognizes the stock compensation expense over the requisite service period of the individual grants, which generally equals the
vesting period.



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The Company has elected to follow the modified prospective transition method in adopting SFAS 123R. Under this method,
the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption and the Companys prior period consolidated financial statements have not been restated to reflect the impact of SFAS 123R.

In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, which provided guidance on the adoption of SFAS 123R as it
relates to certain SEC rules and regulations. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

Prior to January 1,
2006, the Company followed the intrinsic value method for stock-based awards to employees and directors in accordance with Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, as allowed under SFAS
No. 123, Accounting for Stock-based Compensation. Under the intrinsic value method, stock-based compensation expense was recognized in the Companys Condensed Consolidated Statement of Operations for the fair value of restricted
stock granted prior to January 1, 2006. However, no stock-based compensation expense had been recognized in the Companys Condensed Consolidated Statement of Operations for any period prior to the Companys adoption of SFAS 123R on
January 1, 2006, for stock options granted to employees and directors, when the exercise price of the stock options granted equaled the fair market value of the underlying stock at the date of grant.

Valuation of stock options granted

The Company utilized the
Black-Scholes valuation model to estimate the fair value of stock options granted and stock-based compensation expense recognized in the first quarter of 2006, and as presented in the pro-forma disclosure below for the first quarter of 2005, as
required under SFAS 123. The Company used the following weighted-average assumptions:



|                          |  |                              |   |  |      |  
|------------------------- |  | ---------------------------- | - |  | ---- | -
|                          |  | Three months ended March 31, |  
|                          |  | 2005                         |   |  | 2006 |  
|Risk free interest rate   |  | 4.1                          | % |  | 4.8  | %
|Expected lives (in years) |  | 4.0                          |   |  | 6.25 |  
|Dividend yield            |  | 0.0                          | % |  | 0.0  | %
|Expected volatility       |  | 133                          | % |  | 137  | %

The risk-free interest rate was derived from the U.S. treasury zero-coupon rate in effect at the end of the
quarter in which the stock option was granted, utilizing the yield offered by an instrument with a maturity approximating the expected life of the option. The expected life assumption for 2006 option grants utilizes the simplified method
provided under SAB 107, which allows companies with traditional service-based option grants to use an expected life assumption equal to the midpoint between the vesting period and contractual term of the options. The 2005 expected life assumption
was based upon the weighted average period the stock options are expected to remain outstanding for stock options granted during the period. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no
present intention to pay cash dividends. The expected volatility assumption is based upon the historical volatility of our common stock.



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Stock-based compensation expense

Under the provisions of SFAS 123R, the Company recorded in its unaudited condensed consolidated statement of operations for the three months ended March 31, 2006, approximately $2,000 of stock-based compensation
associated with first quarter 2006 stock option grants. Because the Company accelerated the vesting of all outstanding options held by employees as of December 27, 2005, there was no remaining unamortized expense associated with any stock
option awards as of the date of the Companys adoption of SFAS 123R. The Company also recognized compensation expense associated with the vesting of restricted stock and restricted stock units in the amount of $301,000 and $142,000 in the three
month periods ended March 31, 2005 and 2006, respectively. Also during the first quarter of 2005, the Company recognized $7,000 in stock-based compensation expense associated with the granting of stock options to a non-employee contractor.

The following table details stock-based compensation expense, related to all of the Companys stock-based awards, on a functional basis as reported
in the Companys Consolidated Statement of Operations for the three months ended March 31, 2005 and 2006.



|                                                                        |  |                              |     |      |   |    
|----------------------------------------------------------------------- |  | ---------------------------- | --- | ---- | - | ---
|                                                                        |  | Three Months Ended March 31,
|                                                                        |  | 2005                         |     | 2006
|Stock-based compensation expense reported in cost of net revenues:      |  |                              |     |      |   |    
|Hosted messaging                                                        |  | $                            | 20  |      | $ | 5  
|Professional services                                                   |  |                              | 42  |      |   | 11 
|Maintenance and support                                                 |  |                              | 2   |      |   | 1  
|                                                                        |  |                              |     |      |   |    
|Total stock-based compensation expense reported in cost of net revenues |  |                              | 64  |      |   | 17 
|                                                                        |  |                              |     |      |   |    
|Stock-based compensation expense reported in operating expenses:        |  |                              |     |      |   |    
|Sales and marketing                                                     |  |                              | 10  |      |   | 10 
|Research and development                                                |  |                              | 18  |      |   | 11 
|General and administrative                                              |  |                              | 216 |      |   | 106
|                                                                        |  |                              |     |      |   |    
|Total stock-based compensation expense reported in operating expenses   |  |                              | 244 |      |   | 127
|                                                                        |  |                              |     |      |   |    
|Total stock-based compensation expenses                                 |  | $                            | 308 |      | $ | 144
|                                                                        |  |                              |     |      |   |    

Stock-based compensation expense recognized in the Consolidated Statement of Operations for the first quarter of
2006 was calculated based upon awards ultimately expected to vest and has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant, and revised, if necessary, in subsequent periods if actual
forfeitures differ from estimates.

The value of the portion of the stock award that is ultimately expected to vest is recognized as expense on a
straight-line basis over the requisite service periods. Total stock-based compensation of stock options granted but not yet vested, as of March 31, 2006, was approximately $17,000, net of estimated forfeitures, which is expected to be
recognized as expense over the future weighted average vesting period of 3.8 years.

The adoption of SFAS 123R did not
have any impact upon the Companys income tax expense or cash flows.

SFAS 123R requires the Company to present pro forma information for the
comparative period prior year period as if the Company had accounted for all employee stock options under the fair value method of the original SFAS 123. The following table illustrates the effect on net loss and net loss per share if we had applied
the fair value recognition provisions of SFAS 123 to stock-based employee compensation in the prior-year period (dollars in thousands, except per-share data).



|                                                               |  |                                   |         |  
|-------------------------------------------------------------- |  | --------------------------------- | ------- | -
|                                                               |  | Three Months Ended March 31, 2005 |        
|Net loss as reported                                           |  | $                                 | (12,646 | )
|Add: employee stock compensation included in reported net loss |  |                                   | 308     |  
|Less: employee stock compensation under SFAS No. 123           |  |                                   | (1,403  | )
|                                                               |  |                                   |         |  
|Pro forma net loss                                             |  | $                                 | (13,741 | )
|                                                               |  |                                   |         |  
|Net loss per basic and diluted share as reported               |  | $                                 | (0.46   | )
|                                                               |  |                                   |         |  
|Pro forma net loss per basic and diluted share                 |  | $                                 | (0.50   | )
|                                                               |  |                                   |         |  



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Stock plan activity

Stock options

The Company grants stock options through its 1998 Stock Option Plan and the 1999 Nonstatutory Stock
Option Plan, respectively (together, the Option Plans and each a Plan). The 1998 Plan grants options to purchase shares of common stock to employees, officers, directors and consultants, with an increase annually on
January 1 of each year by an amount equal to 2% of the total number of shares of the Companys Common Stock authorized for issuance at the end of the most recently concluded fiscal year. The 1999 Plan provides for the granting of options
to purchase shares of common stock to non-executive officer employees or the initial employment grant for executive officers. The 1998 Plan is a shareholder approved plan and allows for options to be granted as either incentive stock options (ISOs)
or nonqualified stock options (NSOs). Options granted under the 1999 Plan may only be nonqualified stock options (NSOs). ISOs may be granted only to Company employees, including officers and employee directors. NSOs may be granted to Company
employees, non-employee directors and consultants.

Stock options granted generally expire ten years from the date of grant and vest over four years. The
Company has no stock option awards with market or performance conditions.

The following table summarizes activity under all stock option plans for the
three month period ended March 31, 2006 (in thousands, except for per share amounts):



|                             |  |                          |   |  |                   |   |  |                                       |      
|---------------------------- |  | ------------------------ | - |  | ----------------- | - |  | ------------------------------------- | -----
|                             |  | SharesAvailable forGrant |   |  | NumberOutstanding |   |  | WeightedAverageExercisePrice perShare
|Balance at December 31, 2005 |  | 11,506                   |   |  | 11,437            |   |  | $                                     | 11.49
|Additional shares authorized |  | 4,000                    |   |  |                  |   |  |                                       |      
|Options granted              |  | (145                     | ) |  | 145               |   |  |                                       | 0.23 
|Options exercised            |  |                         |   |  | (1                | ) |  |                                       | 0.08 
|Options forfeited            |  | 298                      |   |  | (298              | ) |  |                                       | 28.23
|                             |  |                          |   |  |                   |   |  |                                       |      
|Balance at March 31, 2006    |  | 11,659                   |   |  | 11,283            |   |  | $                                     | 10.91
|                             |  |                          |   |  |                   |   |  |                                       |      
|Exercisable, March 31, 2006  |  |                          |   |  | 11,152            |   |  | $                                     | 11.03
|                             |  |                          |   |  |                   |   |  |                                       |      

Based on the assumptions utilized in the Black-Scholes valuation model as discussed above, the weighted-average
fair value of options granted under the stock option plans for the three months ended March 31, 2005 and 2006 was approximately $1.14 and $0.21, respectively.

The Company issues new shares of common stock upon exercise of stock options. During the three months ended March 31, 2005 and 2006, zero and 921 stock options were exercised, respectively. The stock options exercised during the three
months ended March 31, 2006, had an insignificant aggregate intrinsic value. The aggregate intrinsic value represents the difference between the option exercise price and the closing stock price on the date of exercise for each option exercised
during the period.



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##### Table of Contents

The aggregate intrinsic value of stock options outstanding at March 31, 2005 and 2006 was $211,000 and $15,000,
respectively. The aggregate intrinsic value of vested stock options at March 31, 2005 and 2006 was $32,000 and $9,000, respectively. The aggregate intrinsic value, for purposes of this calculation, represents, on a pretax basis, the difference
between the Companys closing stock price as of the end of the first quarter of 2005 and 2006, respectively, and the option exercise price, multiplied by the number of options outstanding or exercisable. Stock options with exercise prices which
are greater than the closing quarter end stock price are excluded from this calculation.

The following table summarizes information about stock options
outstanding at March 31, 2006 (options in thousands):



|                          |  |                     |  |                                            |  |                                 |        |                    |        |                                 |   |       
|------------------------- |  | ------------------- |  | ------------------------------------------ |  | ------------------------------- | ------ | ------------------ | ------ | ------------------------------- | - | ------
|                          |  | Options Outstanding |  | Options Exercisable                       
|Range of Exercise Prices  |  | Number Outstanding  |  | Weighted Average RemainingContractual Life |  | Weighted Average Exercise Price |        | Number Exercisable |        | Weighted Average Exercise Price
|$      0.19 - $      0.60 |  | 1,768               |  | 8.81                                       |  | $                               | 0.53   |                    | 1,637  |                                 | $ | 0.56  
|$      0.61 - $      0.73 |  | 1,211               |  | 8.65                                       |  |                                 | 0.66   |                    | 1,211  |                                 |   | 0.66  
|$      0.74 - $      1.44 |  | 570                 |  | 8.09                                       |  |                                 | 1.17   |                    | 570    |                                 |   | 1.17  
|$      1.45 - $      1.56 |  | 1,234               |  | 7.86                                       |  |                                 | 1.56   |                    | 1,234  |                                 |   | 1.56  
|$      1.57 - $      2.11 |  | 2,127               |  | 7.51                                       |  |                                 | 1.95   |                    | 2,127  |                                 |   | 1.95  
|$      2.12 - $      3.12 |  | 1,616               |  | 7.46                                       |  |                                 | 2.72   |                    | 1,616  |                                 |   | 2.72  
|$      3.13 - $      4.36 |  | 1,224               |  | 5.44                                       |  |                                 | 3.81   |                    | 1,224  |                                 |   | 3.81  
|$      4.37 - $    51.52  |  | 1,129               |  | 5.60                                       |  |                                 | 7.99   |                    | 1,129  |                                 |   | 7.99  
|$    51.53 - $  100.00    |  | 6                   |  | 3.68                                       |  |                                 | 80.96  |                    | 6      |                                 |   | 80.96 
|$  101.00 - $  309.00     |  | 398                 |  | 4.08                                       |  |                                 | 241.57 |                    | 398    |                                 |   | 241.57
|                          |  |                     |  |                                            |  |                                 |        |                    |        |                                 |   |       
|                          |  | 11,283              |  | 7.36                                       |  | $                               | 10.91  |                    | 11,152 |                                 | $ | 11.03 
|                          |  |                     |  |                                            |  |                                 |        |                    |        |                                 |   |       

As of March 31, 2005, there were 14,289,913 options outstanding and 7,775,994 options exercisable.

Restricted stock and other stock-based plans

The
Company has granted shares of restricted stock and restricted stock units to certain key employees and executive officers through its 1998 Plan. In March and August 2004, the Company issued 707,368 and 680,823 shares of restricted stock,
respectively, to Mark Ferrer, the Companys Chief Executive Officer, in connection with Mr. Ferrers employment agreement. In November 2004, the Company issued 515,000 shares of restricted stock and 277,708 restricted stock units to
Executive Officers and certain key employees of the Company. During 2005, the Company issued 130,000 shares of restricted stock and 20,000 restricted stock units to certain key employees. The Company did not issue any shares of restricted stock or
restricted stock units during the three month period ended March 31, 2006.

The restricted stock gives employees certain ownership rights, including
the right to vote on shareholder matters; whereas, restricted stock units do not convey any voting rights, but present the holder with the right to receive shares of Critical Path common stock as the underlying units vest. The restricted stock and
restricted stock units vest 25 percent every 6 months over a term of 2 years, with any unvested shares/units forfeited if a recipient terminates their employment with the Company.

The following table reflects the activity associated with shares of unvested restricted stock and restricted stock units during the three months ended March 31, 2006 (in thousands):



|                                                |  |        |   |  |                                        |     
|----------------------------------------------- |  | ------ | - |  | -------------------------------------- | ----
|                                                |  | Shares |   |  | Weighted Average Grant Date Fair
Value
|Unvested restricted shares at December 31, 2005 |  | 1,297  |   |  | $                                      | 1.07
|Granted                                         |  |       |   |  |                                        |    
|Vested                                          |  | (91    | ) |  |                                        | 1.31
|Forfeited                                       |  | (14    | ) |  |                                        | 0.68
|                                                |  |        |   |  |                                        |     
|Unvested restricted shares at March 31, 2006    |  | 1,192  |   |  | $                                      | 1.06
|                                                |  |        |   |  |                                        |     

The fair value of restricted stock and restricted stock units which vested during the three month period ended
March 31, 2006 totalled approximately $28,000.

As of March 31, 2006, there was approximately $0.4 million in total unrecognized compensation cost
associated with the unvested shares of restricted stock and restricted stock units. The cost is expected to be recognized over the future weighted average vesting period of 0.9 years.

In January 2006, the Company terminated its Employee Stock Purchase Plan (ESPP). No purchases were made under the ESPP during the three months ended March 31, 2006 and there is no compensation expense to be
recognized in accordance with SFAS 123R.



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CRITICAL PATH, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

This Quarterly
Report on Form 10-Q and the following disclosures contain 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, proposed, 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 ability to operate in the future, our ability to obtain funding, the adequacy of funds to meet anticipated operating needs, our future strategic,
operational and financial plans, possible financing, strategic or business combination or divestiture transactions, anticipated or projected revenues, margins, expenses and operational growth, markets and potential customers for our products and
services, the amount of compensation expense to be incurred or avoided in the future, the continued seasonality of our business, development and timing of release of new and upgraded products and service offerings, 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, our litigation strategy, use of future earnings, the features,
benefits and performance of our current and future products and services, plans to reduce operating costs through continued expense reduction, the effect of the repayment of debt, our plans and ability to improve our internal control over financial
reporting and our disclosure controls and procedures, our intent to restructure our foreign subsidiaries in order to repatriate cash located in accounts outside of the United States, the substance of the allegations and causes of action that may be
made against us in the action filed in April 2006 in the Superior Court of San Diego, 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,
our management of expenses and restructuring activities, failure to obtain additional financing on favorable terms or at all, the effect of the conversion of our preferred stock, the liquidation preference of our preferred stock, the accrual of
dividends for our preferred stock, risks associated with our internal controls over financial reporting and our ability to address any material weaknesses in our internal controls over financial reporting, difficulties of forecasting future results
due to our evolving business strategy, failure to meet sales and revenue forecasts, the emerging nature of the market for our products and services, turnover within and integration of senior management, board of directors members and other key
personnel, rate of growth of the messaging and directory infrastructure market, difficulties in our strategic plans to exit certain products and services offerings, the grant of a significant number of options to our employees, consultants and
directors, 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 we do business, risks associated with
our international operations, inability to predict future trading prices of our common stock which have fluctuated significantly in the past, foreign currency fluctuations, unplanned system interruptions and capacity constraints, software defects,
and those discussed in Managements Discussion and Analysis of Financial Conditions and Results of Operations and Risk Factors 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 mean 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.

Recent Events

On December 14, 2005, we entered into an Asset Purchase Agreement with Tucows.com Co. (Tucows) for the sale of a portion of our hosted messaging assets, including a portion of our hosted messaging customer base, assembled hosted
messaging workforce and hosted messaging hardware (the Hosted Assets). On January 3, 2006, we



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completed the sale of our Hosted Assets to Tucows. Under the Agreement, Tucows also acquired a software license for
Memova® Messaging and assumed certain contractual
liabilities related to the Hosted Assets. Tucows has paid us $6.3 million in cash and will also pay up to an additional $1.8 million by October 31, 2006 if certain post-closing conditions are satisfied by such date.

Overview

We deliver software and services that enable the rapid
deployment of highly scalable value-added solutions for messaging and identity management. Our messaging and identity management solutions help organizations expand the range of digital communications services they provide while helping to reduce
overall costs. Our messaging solutions, which were available in 2005 and prior years both as licensed software and as hosted services, provided integrated access to a broad range of communication and collaboration applications from wireless devices,
web browsers, desktop clients, and voice systems. In January 2006, we sold the assets related to our hosted messaging business to Tucows and do not intend to directly offer hosted messaging services, other than our news group services, in the
future. Our identity management solutions are designed to reduce burdens on helpdesks, simplify the deployment of key security infrastructure, enable compliance with new regulatory mandates, and help reduce the cost and effort of deploying
applications and services to distributed organizations, mobile users, suppliers, and customers.

Our target markets for our messaging and identity
management solutions include wireless carriers and service providers as well as enterprises and government agencies. We generate most of our revenues from telecommunications operators and from large enterprises. We believe wireless carriers,
Internet service providers, or ISPs, and fixed-line service providers purchase our products and services primarily to offer new services to their subscribers. While they may also purchase our products and services to lower their cost of operating
existing services or infrastructure, their spending is often tied to the level of investment they are willing to make on new revenue-generating services. Large enterprises typically buy our products and services to reduce their costs of operations
particularly for handling distributed workforces or consolidations of multiple organizations, improve the security of their infrastructure, facilitate compliance with new regulatory mandates, and to enable new applications to be deployed for their
employees or users.

We generate revenues from four primary sources:

Software license sales. Our Memova® Messaging applications are primarily sold as a perpetual license on a per-user basis, one for each person who might access the capabilities provided by
the software. Revenue from our Memova® Anti-Abuse
(anti-spam and anti-virus) application is generally recognized over a term of twelve months. Our Memova® Mobile applications, a newly released set of solutions, have recently been sold primarily as a perpetual license on a per-user basis, however, we also intend to license the Memova Mobile
application on a subscription type basis. Our identity management software is usually sold as a perpetual license according to the number of data elements and different business systems being managed. These layered applications are usually licensed
per user.

Professional services. We offer a range of different services designed to help our customers make more effective use of our products and
services. Our licensed messaging and identity management software often require integration with customers existing infrastructure or customization to provide special features or capabilities. In addition, our consultants offer expertise and
experience in designing and delivering new services that our customers can use to supplement their own resources.

Maintenance and support services.
We offer a variety of software support and maintenance plans that enable customers of our licensed software to receive expedited technical support and access to new releases of our software. Most customers initially subscribe to these services when
purchasing our software and then renew their subscriptions on a regular basis.

Hosted messaging services. For the hosted messaging services we
offered prior to our sale of the Hosted Assets, customers paid initial setup fees and regular monthly, quarterly or annual subscriptions for the services they wanted to be able to access. In connection with the sale of the Hosted Assets to Tucows in
January 2006, we sold our hosted email, calendar and reserve solutions and as a result hosted revenues going forward will only be comprised of our news group service.



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We believe that wireless carriers and service providers are increasingly seeking to offer more differentiated services
and diversify into new markets. In addition, enterprises and government agencies are faced with similar needs to deliver a broader range of information services while reducing the costs of operating such services and ensuring that privacy and
security are maintained. We believe this provides a growth opportunity for the messaging and directory infrastructure market. However, the growth of this market and our business is also faced with many challenges, including the emerging nature of
the market, the demand for licensed solutions for messaging and identity management products and outsourced messaging services, rapid technological change, competition and the recent decline in worldwide technology spending.

Restructuring Initiatives

We have operated at a loss since our
inception and as of March 31, 2006, we had an accumulated deficit of approximately $2.3 billion, which includes a $1.3 billion charge for impairment of goodwill and other long-lived assets that we recorded in fiscal year 2000. We have
undertaken numerous restructuring initiatives in an effort to align our operating structure not only to the business and economic environments through which we have operated but also in response to our changing business in an effort to generate net
income. Most recently for example:



| |  |  | During 2005, we recorded restructuring charges totaling $1.9 million, of which, $1.3 million was related to the relocation of our headquarters facility and the balance related to
consolidation of data centers and the elimination of certain employee positions. On May 5, 2005, we entered into the Second Amendment to Lease with PPF Off 345 Spear Street, L.P., to amend the Lease dated as of November 16, 2001, as
amended, under which we leased our headquarter facilities in San Francisco, California. Under the terms of the second amendment, we moved into new office space at 2 Harrison Street, 2nd Floor, San Francisco, California and vacated our facility at
350 The Embarcadero on June 29, 2005. The new office space into which we relocated is comprised of two suites consisting of approximately 22,881 square feet and will be leased for a term of five years, however; we have an early termination
option whereby we can reduce the occupancy of the premises to one of the two suites after 18 months. In connection with the second amendment, we made a lease termination payment totaling approximately $1.3 million related to our former headquarter
facility at 350 the Embarcadero during the three months ended June 30, 2005; however, the annual rent, on a cash basis, for our new headquarter facility declined from approximately $2.5 million per year to less than approximately $0.7
million per year on average over the term of the lease.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On December 14, 2005, we entered into an Asset Purchase Agreement with Tucows for the sale of our Hosted Assets. On January 3, 2006, we completed the sale of the Hosted
Assets. Under the Agreement, Tucows also acquired a software license for our Memova product and assumed certain contractual liabilities related to the Hosted Assets. Tucows has paid us $6.3 million in cash and will also pay up to an additional $1.8
million to Critical Path by October 31, 2006 if certain post-closing conditions are satisfied by such date. As part of this sale, the U.S. based hosted employees will continue to work for Critical Path through the transition of sale, at which
point they will be terminated. In connection with the sale of hosted assets we recorded a $0.3 million of restructuring charges during the three months ended December 31, 2005 comprised of employee severance benefits and facility closure costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the three months ended March 31, 2006, in connection with the sale of the Hosted Assets we recorded an additional restructure charge of $0.3 million primarily related to
employee severance benefits. We expect to record additional restructuring charges in connection with the sale of the Hosted Assets during the three months ending June 30, 2006 totaling approximately $0.1 million, comprised primarily of
employees severance benefits.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the three months ended March 31, 2006, we also recorded $0.6 million of restructuring charges related to the reorganization of our sales force.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to these formal restructuring initiatives, we have sought to aggressively manage our cost structure, identifying incremental savings where possible. We
intend to continue to aggressively manage our expenses while maintaining strong service levels to our customers.



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Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. We believe our most critical accounting policies and estimates include:

Revenue recognition. Our revenues are derived from four primary sources: software license sales, professional services, maintenance and support services and
hosted messaging services. Revenues are recognized once the related products or services have been delivered and collection of the associated fees is considered probable.



| |  |  | Software license revenues are generated from the sale of our messaging and identity management products as well as the resale of third-party software under perpetual and term
licenses. Software license revenues are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software to the customer has occurred and the collection of a fixed or determinable license fee is considered probable. We
generally recognize license revenue from the sale of perpetual licenses upfront after the preceding criteria have been met while we recognize license revenue from the sale of term licenses ratably over the term of such licenses. Our revenue
recognition policies require that revenues recognized from software arrangements be allocated to each undelivered element of the arrangement based on the fair values of the elements, such as post contract customer support, installation, training or
other services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We also sell our license software products through resellers. Revenues from reseller agreements may include a nonrefundable, advance royalty which is payable upon the signing of the
contract and license fees based on the contracted value of our products purchased by the reseller. Additionally, revenues from reseller agreements may include nonrefundable fees related to software license products and related services for an
identified customer of the reseller. Guaranteed license fees from resellers, where no right of return exists, are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software has occurred and the collection of a
fixed or determinable license fee is considered probable. Non-guaranteed per-copy license fees from resellers are initially deferred and are recognized when they are reported as sold to end-users by the reseller.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Professional service revenues are generated from fees primarily related to training, installation and configuration services associated with implementing and maintaining our license
software products for our customers. Professional service revenues are recognized in the period in which the services are performed.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintenance and support service revenues are generated from fees for post-contract customer support agreements associated primarily with our software license products. Maintenance
services typically include rights to future update and upgrade product releases and dial-up phone services and the associated fees are typically paid up-front by the customer, deferred and recognized ratably over the term of the support contract,
which is generally one year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hosted messaging revenues are generated from fees for hosting services we offer related to our news group service. These are primarily based upon monthly contractual per unit rates
for the services involved, which are recognized on a monthly basis over the term of the contract normally beginning with the month in which service delivery starts.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also enter into arrangements that include multiple products and services where the services are deemed essential to the functionality of a delivered element, under such circumstances we normally recognize the
entire arrangement fee using the percentage of completion method. Under this method, individual contract revenues are recorded based on the percentage relationship of the contract input hours incurred as compared to managements estimate of the
total input hours to complete the contract.

Estimating allowance for doubtful accounts and contingencies. The preparation of financial statements
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingencies at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. For
this reason, actual results could differ from those estimates. Management must make estimates surrounding their ability to collect revenues and related accounts receivable. Management specifically analyzes



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accounts receivable, historical and current economic trends, previous bad debts, customer concentrations, credit
worthiness of customers, and payment terms of customer accounts, when evaluating adequacy of the allowance for doubtful accounts.

Management estimates
liabilities and contingencies at the end of each period. The current financial statement presentation reflects managements best estimates of liabilities and pending litigation which are probable and where the amount and range of loss can be
estimated. We record the minimum liability related to those claims where there is a range of loss. Because of the uncertainties related to the probability of loss and the amount and range of loss on the pending litigation, management may not be able
to make an accurate estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will continue to assess the potential exposure related to our pending litigation and update our estimates
and related disclosures. Such future revisions in our estimates could materially impact our financial results.

Valuation and impairment of long-lived
assets and identifiable intangible assets. Finite-lived intangible assets are presented at cost, net of accumulated amortization. Amortization is calculated using the straight-line method over estimated useful lives of the assets, which has
historically been between 3 and 5 years. We will record an impairment charge on finite-lived intangibles or long-lived assets when we determine that the carrying value of intangibles and long-lived assets may not be recoverable. Factors considered
important which could trigger impairment, include, but are not limited to:



| |  |  | significant under performance relative to expected historical or projected future operating results;
| | - |  | ----------------------------------------------------------------------------------------------------



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



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



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



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

Based upon the
existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current
business model.

Stock-based compensation. Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004) (SFAS 123R), Share-Based Payment, which revised SFAS 123, Accounting for Stock-Based Compensation. SFAS 123R requires all share-based payment transactions with employees, including grants of employee stock
options, to be recognized as compensation expense over the requisite service period based on their relative fair values. SFAS 123R is a new and very complex accounting standard, the application of which requires significant judgment and the use of
estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility and expected option lives, as well as expected option forfeiture rates, to value equity-based compensation. There is little experience or guidance available
with respect to developing these assumptions and models. There is also uncertainty as to how the standard will be interpreted and applied as more companies adopt the standard and companies and their advisors gain experience with the standard. SFAS
123R requires the recognition of the fair value of stock compensation in net income. Prior to the adoption of SFAS 123R, stock-based compensation expense related to employee stock options was not recognized in the statement of operations. In the
three months ended March 31, 2006, stock-compensation expense of approximately $2,000 was recorded in the condensed consolidated statement of operations in connection with adoption of SFAS 123R. There was no cumulative effect of adoption.

Liquidity and Capital Resources

We have focused on
capital financing initiatives in order to maintain current and planned operations. We have operated at a loss since inception and our history of losses from operations and cash flow deficits, in combination with our cash balances, raise concerns
about our ability to fund our operations. In 2003 and 2004 we secured additional funds through several rounds of financing that involved the sale of senior secured convertible notes all of which converted into Series E preferred stock in 2004, in
the third quarter of 2004 we completed a rights offering and in the fourth quarter of 2004 we secured and drew $11.0 million from an $18.0 million round of debt financing. In March 2005, we drew down the remaining $7.0 million from the $18.0 million
round of debt financing. We are not required to make any payments of principal or interest under this $18.0 million debt financing until maturity in



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December 2007. In January 2006, we sold our Hosted Assets for $6.3 million. If we are unable to increase our revenues or
if we are unable to reduce the amount of cash used by our operating activities during 2006, we may be required to undertake additional restructuring alternatives, or seek additional debt financing although our ability to incur additional
indebtedness is subject to certain limitations as discussed in the section below captioned Ability to incur additional indebtedness. We do not believe equity financing on terms reasonably acceptable to us is currently available.
Additionally, our common stock now trades in the over-the-counter market on the OTC Bulletin Board owned by the Nasdaq Stock Market, Inc., which was established for securities that do not meet the listing requirements of the Nasdaq National Market
or the Nasdaq SmallCap Market. The OTC Bulletin Board is generally considered less efficient than the Nasdaq National Market. Consequently, selling our common stock is likely more difficult because of diminished liquidity in smaller quantities of
shares likely being bought and sold, transactions could be delayed, and securities analysts and news media coverage of us may be further reduced. We believe our listing on the OTC Bulletin Board, or further declines in our stock price, may
greatly impair our ability to raise additional capital, should it be necessary, through equity or debt financing.

The following table sets forth our net
losses attributable to common shareholders and the cash used to support our operating activities for the recent periods indicated:



|                                             |  |                              |         |   |        |   |        |   |  |   |        |   |  |     |  
|-------------------------------------------- |  | ---------------------------- | ------- | - | ------ | - | ------ | - |  | - | ------ | - |  | --- | -
|                                             |  | Three months ended March 31, |         |   | Change |  
|                                             |  | 2005                         |         |   | 2006   |   |        | $ |  |   | %      |  
|                                             |  | (in thousands)               |        
|Net loss attributable to common shareholders |  | $                            | (12,646 | ) |        | $ | (7,403 | ) |  | $ | 6,335  |   |  | -50 | %
|Net cash used in operating activities        |  |                              | (1,620  | ) |        |   | (4,080 | ) |  |   | (2,460 | ) |  | 152 | %

With our history of operating losses and cash used to support our operating activities, our primary sources of
capital have come from both debt and equity financings that we have completed over the past several years and the sale the Hosted Assets in January 2006. Our principal sources of liquidity include our cash and cash equivalents. As of March 31,
2006, we had cash and cash equivalents available for operations totaling $19.1 million, of which $10.3 million was located in accounts outside the United States and which is not readily available for our domestic operations. However, we intend to
pursue the investigation of restructuring our foreign subsidiaries which, if successful, may provide us easier access to the repatriation of a greater portion of the cash located in accounts outside the United States. Accordingly, our readily
available cash resources in the United States as of March 31, 2006 was $8.7 million. As of March 31, 2006, we had cash collateralized letters of credit totaling approximately $0.2 million. This cash is recorded as restricted cash on our
balance sheet and is not readily available for our operations.

Based on our recent financing activities, cash expected to be generated from operations,
recent restructuring activities and the sale of the Hosted Assets in January 2006, we believe that we have sufficient cash to meet our cash operating requirements for the next 12 months as well as the on-going investments in capital equipment to
support our research and development efforts. 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. These
alternatives could increase liquidity through the infusion of investment capital by third-party investors or decrease our liquidity as a result of our seeking to fund expansion into these markets. Such expansions might also cause an increase in
capital expenditures and operating expenses. For the long-term, we believe future improvements in our operating activities will be necessary to provide the liquidity and capital resources sufficient to support our business. Additionally, as we
approach the December 31, 2007 maturity of $18.0 million principal amount of our 13.9% Notes, we may be required to restructure our debt or seek additional financing to pay the 13.9% Notes upon maturity.



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Cash and cash equivalents

The following table sets forth our cash and cash equivalents balances as of the dates indicated:



|                          |  |                 |        |              |   |        |  |   |     |  |   |  
|------------------------- |  | --------------- | ------ | ------------ | - | ------ |  | - | --- |  | - | -
|                          |  |                 |        |              |   | Change | 
|                          |  | December 312005 |        | March 312006 |   | $      |  | % |    
|                          |  | (in thousands)  |       
|Cash and cash equivalents |  | $               | 18,707 |              | $ | 19,068 |  | $ | 361 |  | 2 | %

Total cash and cash equivalents increased primarily as a result of the cash provided by our investing activities
in connection with the sale of the Hosted Assets partially offset by cash used to support our operating activities as set forth in the table below (in thousands):



|                                                      |  |   |        |  
|----------------------------------------------------- |  | - | ------ | -
|Beginning balance at December 31, 2005                |  | $ | 18,707 |  
|Net cash used by operating activities                 |  |   | (4,080 | )
|Net cash provided (used) by investing activities      |  |   | 4,251  |  
|Net cash provided by financing activities             |  |   |       |  
|                                                      |  |   |        |  
|Net decrease in cash and cash equivalents             |  |   | 171    |  
|Effect of exchange rates on cash and cash equivalents |  |   | 190    |  
|                                                      |  |   |        |  
|Ending balance at March 31, 2006                      |  | $ | 19,068 |  
|                                                      |  |   |        |  

Net cash used by operating activities. Our operating activities used $4.1 million of cash during the
three months ended March 31, 2006. This cash was used to support our net loss of $3.9 million which, when adjusted for non-cash items such as: depreciation and amortization of $0.7 million, a $0.1 million loss due to the decrease in the fair
value of embedded derivative liabilities, amortization of stock-based expenses of $0.1 million, accretion of debt discount of $0.2 million and gain on the sale of the Hosted Assets of $2.0 million; totaled $4.8 million. Additionally, cash was used
by our operating activities in connection with a $4.6 million increase in accounts receivable million however, this use of cash was partially offset by a $4.4 million increase in deferred revenue, primarily a result of maintenance and third-party
software billings for which the related revenue will be recognized ratably over the related service period.

Our primary source of operating cash flow is
the collection of accounts receivable from our customers and the timing of payments to our vendors and service providers. We measure the effectiveness of our collections efforts by an analysis of the average number of days our accounts receivable
are outstanding, or DSOs. The following table sets forth our accounts receivable balances and DSOs as of the dates indicated:



|                         |  |                                      |        |               |   |        |  |       |  |     |  
|------------------------ |  | ------------------------------------ | ------ | ------------- | - | ------ |  | ----- |  | --- | -
|                         |  |                                      |        |               |   | Change | 
|                         |  | December 31,2005                     |        | March 31,2006 |   | $      |  | %     | 
|                         |  | (dollars in thousands; DSOs in days) |       
|Accounts receivable, net |  | $                                    | 10,096 |               | $ | 14,962 |  | 4,866 |  | 48  | %
|DSOs                     |  |                                      | 60     |               |   | 123    |  | 63    |  | 105 | %

Accounts receivable balances and DSOs increased primarily due to longer payment terms in Europe which, while
within the norms in such countries, increased first quarter DSOs, an increase in deferred revenue due to higher maintenance and third-party software billings and the timing of such billings later in the quarter as well as collections performance
that was affected by the efforts in completing the sale of the Hosted Assets.



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A number of non-cash items, such as: depreciation and amortization, stock-based expenses, deferred interest on debt and
certain restructuring charges have been charged to expense and impacted our net results during the three months ended March 31, 2006. To the extent these non- cash items increase or decrease in amount and increase or decrease our future
operating results, there will be no corresponding impact on our cash flows. Our operating cash flows will be impacted in the future based on our operating results, our ability to collect our accounts receivable on a timely basis, and the timing of
payments to our vendors for accounts payable.

We face restrictions on our ability to use cash held outside of the United States for purposes other than
the operation of each of our respective foreign subsidiaries that hold that cash. For example, our ability to use cash held in a given European subsidiary for any reason other than the operation of this subsidiary may result in certain tax
liabilities and may be subject to local laws that could prevent the transfer of cash from Europe to any other foreign or domestic account. Additionally, we are exposed to foreign currency exchange rate risk inherent in our sales commitments,
anticipated sales, contracts with vendors, and working capital, as a significant portion or our worldwide operations have a functional currency other than the United States dollar. 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.

Revenue generated from the sale of our products
and services may not increase to a level that exceeds our expenses or could fluctuate significantly as a result of changes in customer demand or acceptance of future products. Although we expect to continue to review our operating expenses, if we
are not successful in achieving a cost reduction or generating sufficient revenues, our cash flow from operations will continue to be negatively impacted.

Net cash provided (used) by investing activities. Our investing activities provided $4.3 million of cash during the three months ended March 31, 2006 primarily as a result of cash proceeds from the sale of the Hosted
Assets. The cash provided from the proceeds of the sale was partially offset by purchases of equipment primarily used to support our remaining hosted news group service infrastructure and research and development efforts. We believe we will be
required to continue to make investments in capital equipment during 2006 and we expect to fund these purchases through the use of our available cash resources. We do not believe leasing arrangements on terms we find reasonably acceptable are
currently available.

Ability to incur additional indebtedness

Subject to limited exceptions, we must seek the consent of our preferred shareholders and debt holders in order to incur any additional indebtedness.

Contractual Obligations and Commitments

The table below sets forth our significant cash obligations and
commitments as of March 31, 2006.



|                                           |  |                |         |                                    |      |                                 |      |   |        |  |      |         |            |   |       |  |   |       |  |   |      
|------------------------------------------ |  | -------------- | ------- | ---------------------------------- | ---- | ------------------------------- | ---- | - | ------ |  | ---- | ------- | ---------- | - | ----- |  | - | ----- |  | - | -----
|                                           |  |                |         | Nine monthsendingDecember 31, 2006 |      | Fiscal year ending December 31,
|                                           |  | Total          |         |                                    | 2007 |                                 | 2008 |   | 2009   |  | 2010 |         | Thereafter
|                                           |  | (in thousands)
|Mandatorily redeemable preferred stock (a) |  | $              | 162,514 |                                    | $    |                                |      | $ |       |  | $    | 162,514 |            | $ |      |  | $ |      |  | $ |     
|13.9% Notes (b)                            |  |                | 26,792  |                                    |      |                                |      |   | 26,792 |  |      |        |            |   |      |  |   |      |  |   |     
|Operating lease obligations                |  |                | 18,099  |                                    |      | 2,250                           |      |   | 2,462  |  |      | 2,316   |            |   | 2,309 |  |   | 2,290 |  |   | 6,472
|Capital lease obligations                  |  |                | 87      |                                    |      | 67                              |      |   | 20     |  |      |        |            |   |      |  |   |      |  |   |     
|Other purchase obligations (c)             |  |                | 3,045   |                                    |      | 3,012                           |      |   | 33     |  |      |        |            |   |      |  |   |      |  |   |     
|                                           |  |                |         |                                    |      |                                 |      |   |        |  |      |         |            |   |       |  |   |       |  |   |      
|                                           |  | $              | 210,537 |                                    | $    | 5,329                           |      | $ | 29,307 |  | $    | 164,830 |            | $ | 2,309 |  | $ | 2,290 |  | $ | 6,472
|                                           |  |                |         |                                    |      |                                 |      |   |        |  |      |         |            |   |       |  |   |       |  |   |      

---

|(a) | Includes dividends totaling $10.0 million (see also Note 8Mandatorily Redeemable Preferred Stock in the Notes to Consolidated Financial Statements) due in 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Includes interest totaling $8.8 million due in 2007.
|--- | ----------------------------------------------------

|(c) | Represents certain contractual obligations related to licensed software, maintenance contracts and network infrastructure storage costs.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------



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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 over 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. We do not believe that our historical fluctuations in revenues, expenses, or personnel
are indicative of future results.

The following table sets forth our results of operations for the periods indicated:



|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|------------------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | ------ | - | ------ | - |  | - | ------ | - |  | ---- | -
|                                                                         |  | Three months ended March 31,             |         |   | Change |  
|                                                                         |  | 2005                                     |         |   | 2006   |   |        | $ |  |   | %      |  
|                                                                         |  | (in thousands, except per share amounts) |        
|NET REVENUE                                                              |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|Software licensing                                                       |  | $                                        | 4,445   |   |        | $ | 2,928  |   |  | $ | (1,517 | ) |  | -34  | %
|Hosted messaging                                                         |  |                                          | 5,211   |   |        |   | 1,222  |   |  |   | (3,989 | ) |  | -77  | %
|Professional services                                                    |  |                                          | 3,084   |   |        |   | 2,575  |   |  |   | (509   | ) |  | -17  | %
|Maintenance and support                                                  |  |                                          | 4,700   |   |        |   | 4,289  |   |  |   | (411   | ) |  | -9   | %
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|Total net revenue                                                        |  |                                          | 17,440  |   |        |   | 11,014 |   |  |   | (6,426 | ) |  | -37  | %
|COST OF NET REVENUE                                                      |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|Software licensing                                                       |  |                                          | 1,208   |   |        |   | 1,306  |   |  |   | 98     |   |  | 8    | %
|Hosted messaging                                                         |  |                                          | 5,124   |   |        |   | 777    |   |  |   | (4,367 | ) |  | -85  | %
|Professional services                                                    |  |                                          | 2,404   |   |        |   | 1,976  |   |  |   | (470   | ) |  | -19  | %
|Maintenance and support                                                  |  |                                          | 1,550   |   |        |   | 1,294  |   |  |   | (258   | ) |  | -17  | %
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|Total cost of net revenue                                                |  |                                          | 10,350  |   |        |   | 5,353  |   |  |   | (4,997 | ) |  | -48  | %
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|GROSS PROFIT                                                             |  |                                          | 7,090   |   |        |   | 5,661  |   |  |   | (1,429 | ) |  | -20  | %
|OPERATING EXPENSES                                                       |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|Selling and marketing                                                    |  |                                          | 4,647   |   |        |   | 3,490  |   |  |   | (1,167 | ) |  | -25  | %
|Research and development                                                 |  |                                          | 4,893   |   |        |   | 2,320  |   |  |   | (2,591 | ) |  | -53  | %
|General and administrative                                               |  |                                          | 3,914   |   |        |   | 3,269  |   |  |   | (861   | ) |  | -21  | %
|Restructuring expense                                                    |  |                                          | 1,639   |   |        |   | 915    |   |  |   | (724   | ) |  | -44  | %
|Gain on sale of assets                                                   |  |                                          |        |   |        |   | (1,971 | ) |  |   | (1,971 | ) |  | 0    | %
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|Total operating expenses                                                 |  |                                          | 15,337  |   |        |   | 8,023  |   |  |   | (7,314 | ) |  | -48  | %
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|OPERATING LOSS                                                           |  |                                          | (8,247  | ) |        |   | (2,362 | ) |  |   | 5,885  |   |  | -71  | %
|Other income (expense), net                                              |  |                                          | 1,846   |   |        |   | (459   | ) |  |   | (2,305 | ) |  | -125 | %
|Interest income (expense), net                                           |  |                                          | (660    | ) |        |   | (853   | ) |  |   | (193   | ) |  | 29   | %
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|Loss before provision for income taxes                                   |  |                                          | (7,061  | ) |        |   | (3,674 | ) |  |   | 3,427  |   |  | -47  | %
|Provision for income taxes                                               |  |                                          | (308    | ) |        |   | (268   | ) |  |   | 40     |   |  | -13  | %
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|NET LOSS                                                                 |  |                                          | (7,369  | ) |        |   | (3,942 | ) |  |   | 3,427  |   |  | -47  | %
|Accretion on mandatorily redeemable preferred stock                      |  |                                          | (5,277  | ) |        |   | (3,461 | ) |  |   | 1,816  |   |  | -13  | %
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                             |  | $                                        | (12,646 | ) |        | $ | (7,403 | ) |  | $ | 5,243  |   |  | -41  | %
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|Basic and diluted net loss per share attributable to common shareholders |  | $                                        | (0.46   | ) |        | $ | (0.20  | ) |  |   |        |   |  |      |  
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  
|Weighted average shares - basic and diluted                              |  |                                          | 27,256  |   |        |   | 36,133 |   |  |   |        |   |  |      |  
|                                                                         |  |                                          |         |   |        |   |        |   |  |   |        |   |  |      |  



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NET REVENUE

Total net revenues decreased in each of our four primary areas of revenues as follows:



| |  |  | Software licensing. Software license revenues decreased primarily due to decreased licensing of our messaging and identity management platforms (each marketed as components
of Memova Messaging) as a result of a large transaction for identity management in the three months ended March 31 2005 with no similar transaction in the three months ended March 31, 2006 and a decrease in the number of license
transactions closed during the three months ended March 31, 2006 as compared to the three months ended March 31, 2005. This decrease was partially offset by revenue from our new Memova Mobile application, which was introduced during the
three months ended March 31, 2005 and had no related sales in such quarter and increased revenue recognized from Memova Anti-Abuse as a result of sales made during 2005 and the three months ended March 31, 2006 (revenue from the sale of
our Memova Anti-Abuse product is recognized ratably over a twelve month period and was introduced during the three months ended March 31, 2005).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hosted messaging. Hosted messaging revenues decreased primarily due to the sale of our Hosted Assets in January 2006. The revenue reported as hosted messaging revenue during
the three months ended March 31, 2006 is related to our hosted newsgroup service, Supernews, which we retained. We expect revenues from our Supernews service will remain approximately $1.2 million per quarter during the remainder of 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Professional services. Professional services revenues decreased primarily as a result of decreased revenues from one large engagement with a customer in Sweden.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintenance and support. Maintenance and support revenues decreased primarily due to of the expiration of maintenance contracts in Europe that were not renewed and
maintenance contracts that renewed at lower rates.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We expect our total revenues to decrease in 2006 from 2005 primarily as a result of the
sale of the Hosted Assets and the related revenue.

The following table sets forth our total revenues by region for the
periods indicated:



|                       |  |                              |        |  |        |   |  |   |        |  |     |   |  |   |        |   |  |     |  
|---------------------- |  | ---------------------------- | ------ |  | ------ | - |  | - | ------ |  | --- | - |  | - | ------ | - |  | --- | -
|                       |  | Three months ended March 31, |        |  | Change |  
|                       |  | 2005                         |        |  | 2006   |   |  | $ |        |  | %   |  
|                       |  | (in thousands)               |       
|North America          |  | $                            | 4,080  |  | 23     | % |  | $ | 2,490  |  | 23  | % |  | $ | (1,590 | ) |  | -39 | %
|                       |  |                              |        |  |        |   |  |   |        |  |     |   |  |   |        |   |  |     |  
|Europe                 |  |                              | 12,608 |  | 72     | % |  |   | 8,322  |  | 75  | % |  |   | (4,286 | ) |  | -34 | %
|Latin America          |  |                              | 253    |  | 1      | % |  |   | 74     |  | 1   | % |  |   | (179   | ) |  | -71 | %
|Asia Pacific           |  |                              | 499    |  | 3      | % |  |   | 128    |  | 1   | % |  |   | (371   | ) |  | -74 | %
|                       |  |                              |        |  |        |   |  |   |        |  |     |   |  |   |        |   |  |     |  
|Subtotal International |  |                              | 13,360 |  | 77     | % |  |   | 8,524  |  | 77  | % |  |   | (4,836 | ) |  | -36 | %
|                       |  |                              |        |  |        |   |  |   |        |  |     |   |  |   |        |   |  |     |  
|                       |  | $                            | 17,440 |  | 100    | % |  | $ | 11,014 |  | 100 | % |  | $ | (6,426 | ) |  | -37 | %
|                       |  |                              |        |  |        |   |  |   |        |  |     |   |  |   |        |   |  |     |  

North American revenues decreased primarily due to the sale of the Hosted Assets because the majority of our
hosted messaging customers were located in North America. International revenues decreased in total but increased as a proportion of total primarily due to decreased licensing of our messaging and identity management platforms, decreased
professional services revenue as a result of decreased revenues from the repeat delivery of previously developed professional service solutions, decreased maintenance revenues primarily due to of the expiration of maintenance contracts in Europe
that were renewed at lower rates and maintenance contracts that were not renewed as well as the sale of the Hosted Assets.



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COST OF NET REVENUES AND GROSS MARGIN

Cost of net revenue decreased primarily as a result of decreased cost related to our hosted messaging, professional services and our maintenance and support services
partially offset by a slight increase from costs related to our software licensing.



| |  |  | Software licensing. Software license cost of revenues consists primarily of third-party royalty costs. Software license cost of revenues increased slightly primarily due to
third-party royalty costs incurred in connection with the license of our Memova Mobile product.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hosted messaging. Hosted messaging cost of revenues consists primarily of costs incurred in the delivery and support of news group services, including employee related costs,
depreciation expenses, Internet co-location and connection fees, hardware maintenance costs as well as other direct and allocated costs. Hosted messaging costs decreased primarily due to the sale of the Hosted Assets.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Professional services. Professional services cost of revenues consists primarily of employee related and third party contractor costs providing installation, migration,
training services and custom engineering for our licensed solutions as well as other direct and allocated indirect costs. Professional services costs decreased primarily due to a decrease in employee related costs and a decrease in the use of
third-party contractors.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintenance and support. Maintenance and support cost of revenues consists primarily of employee related and third party contractor costs related to the customer support
functions for our licensed solutions as well as other direct and allocated indirect costs. Maintenance and support costs decreased during the three months ended March 31, 2006 as compared to the three months ended March 31, 2005 primarily
due to decreased employee related costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our total gross margin, which is gross profit divided by total net revenue, increased to 51% for
the three months ended March 31, 2006 from 41% for the three months ended March 31, 2005 primarily due to the increase in hosted messaging, professional services and maintenance and support gross margins as a result of the cost decreases
discussed above. This increase was partially offset by decreased margins from our software licenses.

OPERATING EXPENSES

Total operating expenses decreased primarily due to reduced selling and marketing costs, research and development costs, general and administrative
expense, restructuring costs and the gain on the sale of our Hosted Assets.



| |  |  | Sales and marketing. Sales and marketing expense consists primarily of employee costs, including commissions, as well as travel and entertainment, third party contractor
costs, advertising, public relations, other marketing related costs as well as other direct and allocated costs. Sales and marketing expenses decreased primarily as a result of a $0.8 million decrease in employee-related costs, including
commissions, as we restructured our sales and marketing staff which decreased by 6 employees from an average of 54 employees in the three months ended March 31, 2005 to an average of 48 employees in the three months ended March 31, 2006 as
well as a $0.3 million decrease in facility related costs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Research and development. Research and development expense consists primarily of employee related costs, depreciation and amortization of capital equipment associated with
research and development activities, facility related costs, third-party contractor costs as well as other direct and allocated costs. Research and development expenses decreased primarily as a result of the reduction of employee costs, third party
contractors and facility costs in connection with the sale of the Hosted Assets and a $1.6 million decrease in depreciation expense. Employee related costs decreased $0.7 million, the cost of utilizing third party contractors decreased $0.2 million
and certain facility costs decreased $0.3 million. Depreciation expenses decreased primarily as a result of the acceleration of depreciation on certain assets we recorded during the three months ended March 31, 2005 related to a messaging
provisioning platform after it was determined the assets would be taken out of service before the end of their originally estimated useful life. There was no similar acceleration of depreciation during the three months ended March 31, 2006. Our
research and development staff decreased by 23 employees, 13 of which were related to development of the Hosted Assets, from an average of 94 employees in the three months ended March 31, 2005 to an average of 71 employees in the three months
ended March 31, 2006. We currently expect that our research and development staff will increase during the three months ended June 30, 2006 as we hire engineering resources to develop our new product offerings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | General and administrative. General and administrative expense consists primarily of employee-related costs, fees for outside professional services, insurance and other
direct and allocated indirect costs. General and administrative expenses decreased primarily due to a $0.9 million decrease in accounting costs primarily as a result of compliance costs incurred in connection with the our initial efforts to comply
with the attestation requirements of Section 404 of the Sarbanes-Oxley Act during the three months ended March 31, 2005. This decrease was partially offset by a $0.1 million increase in both our employee related costs and bad debt expense.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In December 2005, we suspended our on-going testing efforts after the SEC adopted certain rules that no longer require us to
comply with Section 404 for the fiscal years ended December 31, 2005 and 2006; however, we intend to continue our efforts to remediate the material weaknesses identified in connection with our initial 2004 implementation and compliance
efforts with Section 404. As a result of our on-going remediation of material weaknesses and significant deficiencies resulting from our initial compliance efforts, we expect that general and administrative expenses may increase in future
periods.



| |  |  | Restructuring expense. Restructuring expenses consist primarily of employee severance costs as well as facility and operations consolidation and lease termination costs
incurred primarily as a result of our restructuring actions. The following table provides additional information with respect to the types of restructuring charges included in our operating expenses for the periods indicated:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                       |  |                              |       |        |   |     |  |   |        |   |  |      |  
|-------------------------------------- |  | ---------------------------- | ----- | ------ | - | --- |  | - | ------ | - |  | ---- | -
|                                       |  | Three months ended March 31, |       | Change |  
|                                       |  | 2005                         |       | 2006   |   | $   |  |   | %      |  
|                                       |  | (in thousands)               |      
|Employee severance benefits            |  | $                            | 247   |        | $ | 855 |  | $ | 608    |   |  | 246  | %
|Facility and operations consolidations |  |                              | 1,340 |        |   | 60  |  |   | (1,280 | ) |  | -96  | %
|Non-core product divestitures          |  |                              | 52    |        |   |    |  |   | (52    | ) |  | -100 | %
|                                       |  |                              |       |        |   |     |  |   |        |   |  |      |  
|                                       |  | $                            | 1,639 |        | $ | 915 |  | $ | (724   | ) |  | -44  | %
|                                       |  |                              |       |        |   |     |  |   |        |   |  |      |  

During the three months ended March 31, 2006, we recorded restructuring expenses totaling
$0.9 million primarily related to severance benefits paid to employees terminated in connection with the sale of the Hosted Assets as well as employees terminated in connection with the reorganization of our sales force. At March 31, 2006, we
carried a remaining restructuring liability of $0.4 million, the majority of which is expected to be utilized by December 31, 2006. We expect to record additional restructuring charges in connection with the sale of the Hosted Assets during the
three months ending June 30, 2006 totaling approximately $0.1 million, comprised primarily of employees severance benefits.



| |  |  | Gain on the Sale of Hosted Assets. On December 14, 2005, we entered into an Asset Purchase Agreement with Tucows for the sale of our Hosted Assets. On January 3,
2006, we completed the sale of our Hosted Assets. Under the Agreement, Tucows also acquired a software license for Memova Messaging and assumed certain contractual liabilities related to the Hosted Assets. Tucows has paid Critical Path $6.3 million
in cash of which, $0.8 million has been allocated to deferred revenue for future maintenance and support services to be provided by us in connection with the Memova license provided to Tucows under the Asset Purchase Agreement. Tucows will also pay
up to an additional $1.8 million by October 31, 2006 if certain post-closing conditions are satisfied by such date.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the three months ended March 31, 2006, we recorded a gain of approximately $1.9 million associated with the sale of the Hosted Assets. The gain was calculated as follows:



|                                            |  |   |        |  
|------------------------------------------- |  | - | ------ | -
|Net proceeds from sale of the Hosted Assets |  | $ | 5,500  |  
|Less: Net assets sold                       |  |   | (2,492 | )
|Transaction costs                           |  |   | (843   | )
|Transition services costs                   |  |   | (194   | )
|                                            |  |   |        |  
|Gain on sale of the Hosted Assets           |  | $ | 1,971  |  
|                                            |  |   |        |  



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Our operating expenses have decreased primarily due to our restructuring activities and efforts to control our costs. We
expect that our operating expenses will decline in the remaining nine months of 2006 primarily as a result of the restructuring activities undertaken in 2005.

OTHER INCOME (EXPENSE), NET

Other income
(expense), net consists primarily of gains and losses on foreign exchange transactions and changes in the fair value of the embedded derivative in the Series D preferred stock that we issued in connection with a financing transaction in December
2001. In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments, we are required to adjust the carrying value of the derivative to its fair value at each balance sheet date and recognize any change since
the prior balance sheet date as a component of other income or expense. The following table sets forth the components of other income (expense), net for the periods indicated.



|                                                                     |  |                             |       |      |        |      |   |  |   |        |   |  |      |  
|-------------------------------------------------------------------- |  | --------------------------- | ----- | ---- | ------ | ---- | - |  | - | ------ | - |  | ---- | -
|                                                                     |  | Three months endedMarch 31, |       |      | Change |     
|                                                                     |  | 2005                        |       | 2006 |        |      | $ |  |   | %      |  
|                                                                     |  | (in thousands)              |      
|Foreign exchange gain (loss)                                         |  | $                           | 47    |      | $      | (286 | ) |  | $ | (333   | ) |  | -709 | %
|Gain (loss) from changes in the fair value of derivative instruments |  |                             | 1,666 |      |        | (120 | ) |  |   | (1,786 | ) |  | -107 | %
|Other                                                                |  |                             | 133   |      |        | (53  | ) |  |   | (186   | ) |  | -140 | %
|                                                                     |  |                             |       |      |        |      |   |  |   |        |   |  |      |  
|                                                                     |  | $                           | 1,846 |      | $      | (459 | ) |  | $ | (2,305 | ) |  | -125 | %
|                                                                     |  |                             |       |      |        |      |   |  |   |        |   |  |      |  

Foreign exchange gain (loss) will change primarily based upon fluctuations in the foreign currency rates between
the U.S. dollar and the Euro. During the three months ended March 31, 2006, the Euro strengthened against the dollar which generated a loss from foreign currency transactions associated with our international operations.

INTEREST INCOME (EXPENSE)

Interest income
consists primarily of interest earnings on cash, cash equivalents and short-term investments. Interest expense consists primarily of the interest expense and amortization of issuance costs related to the 13.9% Notes issued in December 2004 and March
2005 and interest on certain capital leases and other long-term obligations. The following table sets forth the components of interest income (expense) for the periods indicated:



|                                               |  |                             |      |   |        |   |      |   |  |   |      |   |  |      |  
|---------------------------------------------- |  | --------------------------- | ---- | - | ------ | - | ---- | - |  | - | ---- | - |  | ---- | -
|                                               |  | Three months endedMarch 31, |      |   | Change |  
|                                               |  | 2005                        |      |   | 2006   |   |      | $ |  |   | %    |  
|                                               |  | (in thousands)              |     
|Interest Income                                |  | $                           | 138  |   |        | $ | 135  |   |  | $ | (3   | ) |  | -2   | %
|53/4%
Notes                                    |  |                             | (80  | ) |        |   |     |   |  |   | 80   |   |  | -100 | %
|13.9% Notes                                    |  |                             | (575 | ) |        |   | (697 | ) |  |   | (122 | ) |  | 21   | %
|Amortization of debt issuance costs            |  |                             | (9   | ) |        |   | (256 | ) |  |   | (247 | ) |  | 2744 | %
|Line of credit facility                        |  |                             | (90  | ) |        |   | (1   | ) |  |   | 89   |   |  | -99  | %
|Capital leases and other long-term obligations |  |                             | (44  | ) |        |   | (34  | ) |  |   | 10   |   |  | -23  | %
|                                               |  |                             |      |   |        |   |      |   |  |   |      |   |  |      |  
|                                               |  | $                           | (660 | ) |        | $ | (853 | ) |  | $ | (193 | ) |  | 29   | %
|                                               |  |                             |      |   |        |   |      |   |  |   |      |   |  |      |  

Interest expense, net, increased primarily as a result of the interest and amortization of debt issuance costs
related to the 13.9% Notes.



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##### Table of Contents

PROVISION FOR INCOME TAXES

The provision for income taxes represents the tax on the income generated by certain of our European subsidiaries operations. Since our inception, we have incurred net operating losses for income tax purposes in the
U.S. and have incurred taxes only in those states which levy taxes on a state minimum or franchise tax basis. Additionally, 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.

ACCRUED DIVIDENDS AND
ACCRETION ON MANDATORILY REDEEMABLE PREFERRED STOCK

Accretion on mandatorily redeemable preferred stock represents the accrued dividends and accretion of
the beneficial conversion features of our outstanding Series D and E preferred stock as well as the accretion to the redemption value of the outstanding Series D preferred stock (see Note 8  Mandatorily Redeemable Preferred Stock). The
following table sets forth the components of the accretion on mandatorily redeemable preferred stock for the periods indicated.



|                                                                |  |                             |       |        |   |       |  |   |        |   |  |     |  
|--------------------------------------------------------------- |  | --------------------------- | ----- | ------ | - | ----- |  | - | ------ | - |  | --- | -
|                                                                |  | Three months endedMarch 31, |       | Change |  
|                                                                |  | 2005                        |       | 2006   |   | $     |  |   | %      |  
|                                                                |  | (in thousands)              |      
|Accrued dividends                                               |  | $                           | 2,039 |        | $ | 1,900 |  | $ | (139   | ) |  | -7  | %
|Accretion to redemption value and beneficial conversion feature |  |                             | 3,238 |        |   | 1,561 |  |   | (1,677 | ) |  | -52 | %
|                                                                |  |                             |       |        |   |       |  |   |        |   |  |     |  
|                                                                |  | $                           | 5,277 |        | $ | 3,461 |  | $ | (1,816 | ) |  | -34 | %
|                                                                |  |                             |       |        |   |       |  |   |        |   |  |     |  

Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 replaces SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 resolves issues addressed in Statement 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. This statement will be effective for all financial instruments acquired or issued after the beginning of an entitys
fiscal year that begins after September 15, 2006. The Company is currently analyzing whether this new standard will have impact on its financial position and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following table presents the hypothetical changes
in fair value in the 13.9% Notes at March 31, 2006. The value of the instrument is sensitive to changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of
plus or minus 50 basis points (bps), 100 bps and 150 bps over a twelve-month time horizon. The base value represents the estimated traded fair market value of the notes.



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|            |  |                                                                         |       |                            |   |                                                                         |  |   |        |  |         |       |         |   |       |  |   |       |  |   |      
|----------- |  | ----------------------------------------------------------------------- | ----- | -------------------------- | - | ----------------------------------------------------------------------- |  | - | ------ |  | ------- | ----- | ------- | - | ----- |  | - | ----- |  | - | -----
|            |  | Valuation of borrowing given aninterest rate decrease of X basis points |       | No change in interest rate |   | Valuation of borrowing given aninterest rate increase of X basis points
|            |  | 150 bps                                                                 |       | 100 bps                    |   | 50 bps                                                                  |  |   | 50 bps |  | 100 bps |       | 150 bps
|            |  | (in thousands)                                                         
|13.9% Notes |  | $                                                                       | 8,993 |                            | $ | 8,978                                                                   |  | $ | 8,964  |  | $       | 8,950 |         | $ | 8,936 |  | $ | 8,922 |  | $ | 8,908

As of March 31, 2006, we had cash and cash equivalents of $19.1 million and no investments in marketable
securities and our long-term obligations consisted of our $18.0 million three year, 13.9% Notes due December 2007 and certain fixed rate capital leases. Accordingly, an immediate 10% change in interest rates would not affect our long-term
obligations or our results of operations.

A significant portion of our international 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 with any certainty; however, our exposure to foreign currency exchange rate risk is primarily associated with fluctuations in the Euro. We
realized a net loss on foreign exchange of $0.3 million during the three months ended March 31, 2006. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the
Exchange Act) designed to ensure information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required
disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our
disclosure committee and management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and
15d-15(b). During this evaluation, management considered the impact any material weaknesses and other deficiencies in our internal control over financial reporting might have on our disclosure controls and procedures. In accordance with
Section 404 of the Sarbanes-Oxley Act and the rules and regulations promulgated under this section, we were required for our Annual Report on Form 10-K for the year ended December 31, 2004 to evaluate and report on our internal control
over financial reporting. In our report contained in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004, we reported the following material weaknesses related to our:

(1) Lack of expertise and resources to analyze and apply generally accepted accounting principles to significant non-routine transactions;

(2) Inadequate controls over period-end financial reporting processes;

(3) Inadequate segregation of duties; and

(4) Inadequate controls over access to financial applications and
data.



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##### Table of Contents

Because the material weaknesses identified in connection with the assessment of our internal control over financial
reporting as of December 31, 2004, have not yet been remediated, our Chief Executive Officer and our Chief Financial Officer concluded our disclosure controls and procedures were not effective as of March 31, 2006. Notwithstanding the
material weaknesses described above, management believes the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

The certifications of our Chief Executive Officer and our Chief Financial Officer required in accordance with Section 302 of the Sarbanes-Oxley Act
of 2002 are attached as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures, referred to in paragraph 4 of the
certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Action in the Superior Court of San Diego. In April 2006, we were added as a named
defendant in a lawsuit previously filed by a former shareholder of Extricity, Inc. against current and former officers and directors of Peregrine Systems, Inc., Peregrines former accountants, some of Peregrines customers, including us,
and various other unnamed defendants. Although we were added as a defendant, the complaint does not specify what causes of action are being asserted nor does it contain any specific factual allegations against us. The complaint alleges against
certain of the other named defendants that they, as Peregrines customers, engaged in fraudulent transactions with Peregrine that were not accounted for by Peregrine in conformity with generally accepted accounting principles (GAAP) and that
this substantially inflated the value of Peregrine securities issued as consideration in Extricitys merger with Peregrine. When, if ever, the complaint is amended to assert specific causes of action against us, we will then be in a position to
make a determination as to the merits of the lawsuit. Nevertheless, due to the similarity of this complaint with the previously settled lawsuit brought by the former Remedy Corporation shareholders, we expect such causes of action to be similar as
well. In such case, we believe the allegations to be without merit and intend to defend ourselves vigorously.

ITEM 1A. RISK FACTORS

Investing in our securities involves a high degree of risk. In addition to the other information
contained in this report, you should consider the following risk factors before investing in our securities.

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

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. In addition, we intend to continue to spend resources on maintaining and strengthening our business, and this may, in the near term, cause our operating expenses
to increase and our operating results to decline.

In past quarters, we have spent heavily on technology and infrastructure development. We may continue to
spend substantial financial and other resources to further develop and introduce new messaging solutions, and to improve our sales and marketing organizations, strategic relationships and operating infrastructure. We expect that our cost of
revenues, sales and marketing expenses, general and administrative expenses, operations, research and customer support expenses and depreciation and amortization expenses could continue to increase in absolute dollars and may increase as a percent
of revenues. In addition, in future periods we may incur significant non-cash charges related to stock-based compensation. If revenues do not correspondingly increase, our operating results could decline. 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. We also may never obtain sufficient revenues to exceed our cost structure
and achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability in the future. This may also, in turn, cause the price of our common stock to demonstrate volatility and/or continue to decline.

We may need to raise additional capital, initiate other operational strategies and/or revise our existing debt obligations to continue our
operations.

If we are unable to increase our revenues or if we are unable to reduce the amount of cash used by our operating activities or if
were unable to generate positive cash flow from our operating activities, we may be required to raise additional funds or undertake additional restructuring initiatives. Additionally, as we approach the December 31, 2007 maturity of $18.0
million principal amount of our 13.9% Notes we may be required to restructure our debt or seek additional financing to pay the 13.9% Notes upon maturity. If we are required to raise additional funds, such financing may not be available in sufficient
amounts or on terms acceptable to us. Furthermore, we would need to obtain consent from holders of two-thirds in principal amount of our outstanding 13.9% Notes in order to incur certain types of indebtedness. Additionally, we face a number of
challenges in operating our business, including our ability to overcome viability concerns held by our prospective customers given our recent capital needs and the amount of resources necessary to maintain worldwide operations. The delisting of our
common stock from the Nasdaq National Market and concerns about our long-term viability may impair our ability to raise additional capital and may create a concern among our current and future customers and vendors as to whether we will be able to
fulfill our contractual obligations. As a result, current and future customers may determine not to do business with us, which would cause our revenues to decline.



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Certain of our cash resources are not readily available for our operations.

We face restrictions on our ability to use cash that we currently hold outside of the United States for purposes other than the operation of each of our respective
foreign subsidiaries that hold such cash. For example, our ability to use cash held in a given European subsidiary for any reason other than the operation of that subsidiary may result in certain tax liabilities and are subject to local laws that
could prevent the transfer of cash from that subsidiary to any other foreign or domestic account. At March 31, 2006, approximately $10.3 million was held outside of the United States. Our inability to utilize this cash could slow our ability to
grow and operate our business and reach our business objectives. We may also be forced to incur certain costs, such as tax liabilities, to be able to use this cash for domestic operations, which could cause our expenses to increase and our operating
results to decline. In addition, approximately $0.2 million of our cash is restricted, primarily to support our letters of credit related to certain facility leases and is therefore unavailable for our operating activities.

Our failure to continue to carefully manage expenses could require us to use substantial resources and cause our operating results to decline.

In the past, our management of operational expenses, including the restructurings of our operations, have placed significant strain on managerial, operational and
financial resources and contributed to our history of losses. In addition, we may need to improve or replace our existing operational, customer service and financial systems, procedures and controls and/or incur incremental costs of compliance with
legislation, such as the Sarbanes-Oxley Act of 2002. Any failure to properly manage these systems and procedural transitions or these incremental compliance costs 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. If we cannot manage restructuring activities and expenses effectively, our business and operating results could decline.

Our common stock has been delisted from the Nasdaq National Market and thus the price and liquidity of our common stock has been affected and our ability to obtain
future financing may be further impaired.

In November 2005, we were delisted from the Nasdaq National Market due to noncompliance with Marketplace
Rule 4450(b)(4), which requires companies listed to have a minimum bid price of $1.00 per share, and Rule 4450(b)(3), which requires companies listed to maintain a minimum market value of publicly held securities of at least $15 million.

Our common stock now trades in the over-the-counter market on the OTC Bulletin Board owned by the Nasdaq Stock Market, Inc., which was established for securities that
do not meet the listing requirements of the Nasdaq National Market or the Nasdaq SmallCap Market. The OTC Bulletin Board is generally considered less efficient than the Nasdaq National Market. Consequently, selling our common stock is likely more
difficult because of diminished liquidity in smaller quantities of shares likely being bought and sold, transactions could be delayed, and securities analysts and news media coverage of us may be further reduced. These factors could result in
lower prices and larger spreads in the bid and ask prices for shares of common stock.

Our listing on the OTC Bulletin Board, or further declines in our
stock price, may greatly impair our ability to raise additional capital, should it be necessary, through equity or debt financing, and significantly increase the dilution to our current stockholders caused by any issuance of equity in financing or
other transactions. The price at which we would issue shares in such transactions is generally based on the market price of our common stock and a decline in the stock price could result in our need to issue a greater number of shares to raise a
given amount of funding.

In addition, as our common stock is not listed on a principal national exchange, we are subject to Rule 15g-9 under the
Securities and Exchange Act of 1934, as amended. That rule imposes additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors.
Consequently, the rule may affect the ability of broker-dealers to sell our common stock and affect the ability of holders to sell their shares of our common stock in the secondary market. Moreover, investors may be less interested in purchasing
low-priced securities because the brokerage commissions, as a percentage of the total transaction value, tend to be higher for such securities, and some investment funds will not invest in low-priced securities (other than those which focus on
small-capitalization companies or low-priced securities).



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Our preferred stock carries a substantial liquidation preference, which could significantly impact the return to
common equity holders upon an acquisition.

After any necessary payments have been made to the holders of $18.0 million in principal amount of our
13.9% Notes, in the event of liquidation, dissolution, winding up or change of control of Critical Path, the holders of Series E preferred stock would be entitled to receive $1.50 per share of Series E preferred stock plus all accrued
dividends on such shares before any proceeds from the liquidation, dissolution or winding up is paid with respect to any other Series or class of our capital stock. Accordingly, at March 31, 2006, the approximately 48.8 million shares
of Series E preferred stock outstanding had an aggregate liquidation preference of approximately $80.5 million. The aggregate amount of the preference will increase as the shares of Series E preferred stock accrue dividends based on simple
interest at an annual rate of 53/4%. After all of the then outstanding shares of Series E preferred stock
have received payment of their liquidation preference, the holders of Series D preferred stock would be entitled to receive the greater of $13.75 per share of Series D preferred stock plus all accrued dividends on such shares (which, as of
March 31, 2006, would result in an aggregate liquidation preference of approximately $64.8 million) or $22 per share (which currently would equal a liquidation preference of $77.5 million) before any proceeds from the liquidation, dissolution,
winding up or change in control is paid to holders of our common stock. The combined liquidation preference of our Series D and Series E Preferred Stock is $158.0 million. Holders of our common stock will not receive any proceeds from a liquidation,
winding up or dissolution, including from a change of control, until after the holders of the $18.0 million in principal amount of our 13.9% Notes have been repaid and the liquidation preferences of our Series E preferred stock and our
Series D preferred stock are paid in full. Consequently, although we would likely be required under applicable law to obtain the separate class approval of the holders of our common stock for a change of control or the sale of all or
substantially all of the shares of Critical Path, it is possible that such a transaction could result in all or substantially all of the proceeds of such transaction being distributed to the holders of our 13.9% Notes, Series E preferred stock
and Series D preferred stock.

From time to time we engage in discussions with or receive proposals from third parties relating to potential
acquisitions or strategic transactions that could constitute a change of control. While we have not engaged in any transaction of this type in the past, we will in the future continue to evaluate potential business combinations or strategic
transactions which, if consummated, may constitute a change of control and trigger the liquidation preferences described above.

The conversion of
our preferred stock would result in a substantial number of additional shares of common stock outstanding, which could decrease the price of our common stock.

Our preferred stock can be converted into common stock at anytime in the discretion of the holder of preferred stock. For example, during the three months ended September 30, 2005, at the request of certain
holders of our Series E preferred stock, we converted approximately 2.1 million shares of Series E preferred stock into approximately 2.2 million shares of common stock.As of March 31, 2006, there were approximately
3.5 million shares of Series D preferred stock outstanding, which were convertible into approximately 43.2 million shares of common stock. In addition, we have approximately 48.8 million shares of Series E preferred stock
outstanding, which are convertible as of March 31, 2006, at the option of the holders, into approximately 53.6 million shares of common stock. We also have outstanding warrants to purchase 0.4 million shares of Series F preferred
stock which, if exercised, would initially be convertible into approximately 3.9 million shares of common stock. Any conversion of our preferred stock into common stock would increase the number of additional shares of common stock that may be
sold into the market, which could substantially decrease the price of our common stock.

As the preferred stock accrues dividends, the number of
shares of common stock issuable upon conversion will increase, which may increase the dilution to our holders of common stock and further decrease the price of our common stock.

Currently, shares of Series D preferred stock and shares of Series E preferred stock accrue dividends at a rate of 53/4% per year. If the maximum amount of dividends accrue on the outstanding shares of Series D preferred stock and Series E preferred stock prior to the automatic call for redemption date,
the number of shares of common stock issuable upon conversion will increase by approximately 11.5 million shares to approximately 108.3 million shares of common stock.



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We may be unable to grow our business through effective sales and marketing, which could cause our operating
results to decline.

Our ability to increase revenues will depend on our ability to successfully recruit, train and retain experienced and effective
sales and marketing personnel and for our personnel to achieve results once they are employed with us. Competition for experienced and effective personnel in certain markets is intense and we may not be able to hire and retain personnel with
relevant experience. The complexity and implementation of our messaging and identity management 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 and training 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 from quarter to quarter and overall or could jeopardize sales altogether. Because we have experienced
turnover in our sales force and have fewer resources than many of our competitors, our sales and marketing organizations may not be able to compete successfully against the sales and marketing organizations of our competitors. Moreover, our
competitors frequently have larger and more established sales forces calling upon potential enterprise customers with more frequency. In addition, certain of our competitors have longer and closer relationships with the senior management of
customers who decide whose technologies and solutions to deploy. If we do not successfully operate and grow our sales and marketing activities, our revenues and operating results could decline and the price of our common stock could continue to
decline.

We have identified material weaknesses in our disclosure controls and procedures and our internal control over financial reporting, which,
if not remedied effectively, could have an adverse effect on the trading price of our common stock and otherwise seriously harm our business.

Management through, in part, the documentation, testing and assessment of our internal control over financial reporting has concluded in the past that our disclosure controls and procedures and our internal control over financial reporting
had material weaknesses as of December 31, 2004. Management has not performed similar documentation, testing and assessments of our internal control over financial reporting as of December 31, 2005, because we are no longer currently
required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. However, we take disclosure controls and procedures seriously and have taken certain actions to begin to address those material weaknesses which were identified in
connection with the assessment of our internal controls undertaken as of December 31, 2004. Our inability to remedy our material weaknesses promptly and effectively could have a material adverse effect on our business, results of operations and
financial condition, as well as impair our ability to meet our quarterly and annual reporting requirements in a timely manner. These effects could in turn adversely affect the trading price of our common stock. Prior to the remediation of these
material weaknesses, there remains risk that the transitional controls on which we currently rely will fail to be sufficiently effective, which could result in a material misstatement of our financial position or results of operations and require a
restatement. In addition, even if we are successful in strengthening our controls and procedures, such controls and procedures may not be adequate to prevent or identify irregularities or facilitate the fair presentation of our financial statements
or SEC reporting.

Failure or circumvention of our controls and procedures could seriously harm our business.

We plan to make significant changes in our internal control over financial reporting and our disclosure controls and procedures. Any system of controls, however well
designed and operated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances that the objectives of the system are met. In addition, the effectiveness of our remediation efforts and of our internal
controls is subject to limitations, including the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, our remediation efforts to improve our internal control over
financial reporting may not prevent all improper acts or ensure that all material information will be made known to management in a timely fashion. In addition, because substantial additional costs may be necessary to implement these remedial
measures, our limited resources may cause a further delay in the remediation of all of our material weaknesses. The failure or circumvention of our controls, policies and procedures or of our remediation efforts could have a material adverse effect
on our business, results of operations and financial condition.



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Due to our evolving business strategy and the nature of the markets in which we compete, our future revenues are
difficult to predict and our quarterly operating results may fluctuate.

We cannot accurately forecast our revenues as a result of our evolving
business strategy and the emerging nature of the messaging and directory infrastructure market. Forecasting is further complicated by recent strategic and operational restructurings, such as the sale of assets relating to our hosted messaging
services, and may continue to be complicated by future restructurings. In addition, our reliance on large dollar value transactions, as well as market fluctuations, can complicate our ability to forecast accurately. Our revenues in some past
quarters fell 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 our operating margins. A number of factors are likely to
cause fluctuations in operating results, including, but not limited to:



| |  |  | the demand for licensed solutions for messaging and identity management products;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | our ability to attract and retain qualified personnel with industry expertise, particularly sales personnel;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attract and retain customers and maintain customer satisfaction;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the ability to upgrade, develop and maintain our systems and infrastructure and to effectively respond to the rapid technology change of the messaging and identity management
infrastructure market;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the budgeting and payment 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;
| | - |  | ----------------------------------------------------------------------------



| |  |  | general economic and market conditions and their affect on our operations and the operations of our customers; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of war, terrorism and any related conflicts or similar events worldwide.
| | - |  | -----------------------------------------------------------------------------------

In addition to the factors set forth above, our GAAP financial 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, during the three months ended March 31, 2006, we incurred stock-based compensation expense of approximately $0.1 million primarily relating to the issuance of common stock and the grant of options and
warrants to employees and non-employees. Grants of options and warrants also may be dilutive to existing shareholders.

Our revenues and operating results
have declined and could continue to decline as a result of the elimination of product or service offerings through termination, sale or other disposition. Future decisions to eliminate revise or limit any other offerings of a product or service
would involve other factors that could cause our revenues to decline and our expenses to increase, 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.

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 or subject to further declines.

We have in the past, and will continue in the future, to evaluate the performance of our business operations and, where appropriate, invest further in certain
business operations, and reduce investment in or divest other business operations.

In the past, due to the underperformance of some of our business
operations, we have elected to divest or discontinue certain of these business operations through termination, sale or other disposition. For example, in January 2006, we sold substantially all of the assets relating to our hosted messaging business
which contributed to a decline in our revenues for the three month period ending March 31, 2006 as compared to the previous three month period ending December 31, 2005. Furthermore, we may choose to divest certain business operations based
on our managements perception of their future growth, even if such operations have been profitable historically. Decisions to eliminate or limit certain business operations have involved in the past, and could in the future involve, the



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expenditure of capital, consumption of management resources, realization of losses, transition and wind-up expenses,
further reduction in workforce, facility consolidation and the elimination of revenues along with associated costs, any of which could cause our operating results to decline and may fail to yield the expected benefits.

A limited number of customers and markets account for a high and increasing percentage of our revenues and if we lose a major customer, are unable to attract new
customers, or the markets which we serve suffer financial difficulties, our revenues could decline.

We expect that sales of our products and
services to a limited number of customers will continue to account for a high percentage of our revenue for the foreseeable future. For example, for the three months ended March 31, 2006, our top ten customers accounted for approximately 44% of
our total revenues and for the years ended December 31, 2003, 2004 and 2005, our top 10 customers accounted for approximately 27%, 34% and 35%, respectively, of our total revenues. During the three months ended March 31, 2006, we did not
have any customers which accounted for 10% of our total revenue. Our future success depends on our ability to retain our current customers, and to attract new customers, in our target markets. The loss of one or several major customers, whether
through termination of agreements, acquisitions or bankruptcy, could significantly reduce our revenues. 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 certain notice periods that vary among our agreements and range from a period of 30 to 120 days notice.

The telecommunications industry during
the three months ended March 31, 2006, accounted for approximately 90% of the revenues from our top ten customers whereas for the fiscal years ended December 31, 2003, 2004 and 2005 it accounted for approximately 52%, 57% and 32%,
respectively, of the revenues from our top ten customers. If the relative financial performance of our customers deteriorates, it will impact our sales cycles and our ability to attract new business. If our customers terminate their agreements for
any reason before the end of the contract term, the loss of the customer would reduce our current and future revenues. Also, if we are unable to enter into agreements with new customers and develop business with our existing customers, our business
will not grow and we will not generate additional revenues.

Our sales cycle is lengthy, and any delays or cancellations in orders in a particular
quarter could cause our operating results to be below expectations, which may cause our stock price to decline.

Because we sell complex and
sophisticated technology, our sales cycle, in particular with respect to our software solutions, can be long and unpredictable, often taking between four to 18 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. Further, and particularly with regard to newer subscription based offerings, the deployment process following customer trials can add several months prior to the
generation of revenue. In addition, many factors can influence the decision to purchase our product and service offerings including budgetary constraints 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 weakness in global securities markets, continuing recessionary spending
levels, and a protracted slowdown in technology spending in particular, have further lengthened and affected our sales cycle. Such factors have led to and could continue to lead to delays and postponements in purchasing decisions and in many cases
cancellations of anticipated orders. Any delay or cancellation in sales of our products or services could cause our operating results to be lower than those projected and cause our stock price to decline.

If we are unable to successfully compete in our product market, our ability to retain our customers and attract new customers could decline as would our revenues.

Competition for the products we provide and services we offer is intense. The primary competitors of our messaging solutions include OpenWave
Systems Inc., Sun Microsystems Sun ONE software division (formerly iPlanet), Microsoft Corporation, Comverse, Inc., Mirapoint Inc., Symantec, Inc. and IronPort Systems, Inc., as well as with a variety of smaller product suppliers. In the
market for mobile email services, we primarily compete with small local technology providers and in some market geographics, Seven Networks, Inc., O3sis IT AG and Oz Communications, Inc. In the identity management market, we compete primarily with
Sun Microsystems Sun ONE software division (formerly iPlanet), IBM Corporation, Microsoft Corporation, Novell Corporation, Siemens Corporation and Computer Associates, as well as various small identity management application vendors. If our
existing customers and other consumers prefer the products and services offered by our competitors over ours, our revenues will decline.



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While these competitors and others exist in each of our individual lines of business, we believe our overall solution of
products and services serves as a competitive advantage. Our products and services are designed to help customers easily integrate our broad range of products into their infrastructure, selecting multiple products and services from us as their
requirements demand.

We believe that competitive factors affecting the market for our communications solutions include:



| |  |  | total cost of ownership and operation;
| | - |  | --------------------------------------



| |  |  | Solution orientation of messaging of offerings that allow deployment with limited customization;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | breadth of platform features and functionality;
| | - |  | -----------------------------------------------



| |  |  | ease of integration and deployment into customers existing applications and systems;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | scalability, reliability, performance and ease of expansion and upgrade;
| | - |  | ------------------------------------------------------------------------



| |  |  | ability to extensively customize, personalize and tailor solutions to different classes of users across multiple markets;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | a full range of support services include market research, marking planning and technology planning; and
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | perceived long-term stability of the vendor.
| | - |  | --------------------------------------------

The relative importance of
each of these factors depends upon the specific customer environment. Although we believe that our products and services currently compete favorably with respect to such factors, we may not be able to maintain our competitive position against
current and potential competitors.

We believe competition will increase as current competitors increase the sophistication of their offerings, as new
participants enter the market and as the market continues to grow, becoming increasingly attractive. Many 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 the development or introduction of products or services or
updates, would also allow additional time for our competitors to improve their service or product offerings, and for new competitors to develop messaging and identity management products and services for our target markets. Increased competition
could result in pricing pressures, reduced operating margins and loss of market share, any of which could cause our business to suffer.

We depend on
strategic relationships with our customers and others and the loss of such relationships could cause our revenues to decline.

We depend on
strategic relationships with our customers and others to expand distribution channels and opportunities and to undertake joint marketing efforts. Our ability to increase revenues depends upon aggressively marketing our services through new and
existing 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 fully exploit our relationships, or fail to develop new
strategic relationships, we could encounter increased difficulty in selling our products and services.

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

The messaging 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 develop or introduce and improve the performance,
features and reliability of our services, particularly in response to competitive offerings. Our success depends, in part, on our ability to develop new functionality, technology and services, 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 technology and necessary service enhancements entails significant technical and business risks and requires



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substantial expenditures and lead-time. We may not be able to keep pace with the latest technological developments. We
may also be unable to use new technologies effectively or adapt services to customer requirements or emerging industry standards.

We have
experienced significant turnover of senior management and our current management team has been together for a limited time, which could slow the growth of our business and cause our operating results to decline.

Throughout 2004 and 2005 we announced a series of changes in our management that included the departure of senior executives, and there have also been changes in our
board of directors. Two of our directors joined us in 2005 and many of the members of our current board of directors and senior executives joined us in 2004. Further, we may continue to make additional changes to our senior management team. If our
new management team is unable to accomplish our business objectives, our ability to grow our business and successfully meet operational challenges could be severely impaired. It is possible that 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 key senior executive officers could also affect our ability to successfully implement our business objectives, which could slow the growth of our business and
cause our operating results to decline. For these reasons, our shareholders may lose confidence in our management team and decide to dispose of our common stock, which could cause the price of our common stock to decline.

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

The loss of the services of key personnel may create a negative perception of our business and adversely affect our ability to
achieve our business goals. 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 products or services or continue to provide a high level of customer service, which could result in the loss of customers and
revenues. In addition, volatility and declines in our stock price may also affect our ability to retain key personnel, all of whom have been granted stock-based incentive compensation. Over the past year we have reduced our work force and eliminated
jobs to balance the size of our employee base with anticipated revenue levels. Reductions in our workforce could make it difficult to motivate and retain remaining employees or attract needed new employees, and could also affect our ability to
deliver products and solutions in a timely fashion and to provide a high level of customer service and support. 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 make it difficult to successfully implement our business objectives.

If we are not successful in implementing strategic plans for our operations, our expenses may not be offset by our corresponding sales and our financial results
could significantly decline.

In 2002, we incurred a number of restructuring charges related to the resizing of our business. These efforts included
additional facilities and equipment lease terminations, continuing expense management and headcount reductions. In 2003, we continued to restructure our operations, including consolidating some office locations and reducing our global workforce by
approximately 175 positions, or approximately 30% of the workforce. In 2004, we expanded our restructuring activities by the restructuring of contracts, consolidation of certain activities to offices in Toronto, Canada and Dublin, Ireland from
higher cost areas such as the San Francisco Bay area and the elimination of approximately 20% of employee positions and reduced use of third party contractors. In 2005, we restructured the lease for, and relocated, our headquarter facilities. In
January 2006, we completed the sale of the assets related to our hosted messaging services. We expect to continue to make determinations about the strategic future of our business and operations, and our ability to execute on such plans effectively
could affect our future operations. A failure to execute successfully on such plans and to plan appropriately could cause our expenses to continue to outpace our revenues and our financial condition to significantly decline.



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The debt and significant equity ownership by the General Atlantic Investors and the Cheung Kong Investors may limit
the ability of our other shareholders to influence significant corporate decisions which could delay or prevent a change of control or depress our stock price.

As of March 31, 2006, the General Atlantic Investors beneficially own approximately 29.3% of our outstanding securities (which represents approximately 18.1% of the voting power) and the Cheung Kong Investors
beneficially own approximately 20.6% of our outstanding securities (which represents approximately 19.4% of the voting power). As a result, the General Atlantic Investors and the Cheung Kong Investors, although not affiliated, may have the ability,
as shareholders acting together, to control the outcome of shareholder votes, including votes concerning the election of a majority of our directors, approval of merger transactions involving us and the sale of all or substantially all of our assets
or other business combination transactions, charter and bylaw amendments and other significant corporate actions, which could delay or prevent a change in control or depress our stock price.

The General Atlantic Investors and the Cheung Kong Investors also hold a significant portion of our outstanding 13.9% Notes, which require us to obtain their consent
before taking certain corporate actions (for example, incurring indebtedness or selling assets) that would not otherwise require the consent of our shareholders. As a result, we may not be able to execute a transaction favored by management if we
are not able to obtain their consent.

The debt and significant equity ownership by the General Atlantic Investors and the Cheung Kong Investors may
result in potential conflicts of interests, which could adversely affect the holders of our common stock, delay a change in control and depress our stock price.

The debt and significant equity ownership by each of the General Atlantic Investors and the Cheung Kong Investors could create conflicts of interest between these majority shareholders and our other shareholders and
between the General Atlantic Investors and the Cheung Kong Investors. For example, the General Atlantic Investors and the Cheung Kong Investors may only approve a change in control transaction that results in the payment of their liquidation
preference even if our other shareholders oppose the transaction, which could depress the price of our common stock. Alternatively, the General Atlantic Investors and the Cheung Kong Investors may prevent or delay a corporate transaction that is
favored by our other shareholders. In addition, it is also possible that the risk that the General Atlantic Investors and the Cheung Kong Investors may disagree on approving a significant corporate transaction, for example a change in control
transaction, could limit the number of potential partners willing to pursue such a transaction with us or limit the price that investors might be willing to pay for future shares of our common stock.

We may experience a decrease in market demand due to concerns of international terrorism, war and social and political instability.

Turmoil and war in the Middle East have increased the uncertainty in the global economy and may contribute to a decline in the international business environment. A
substantial portion of our business is derived from international sales, and a decline in the global economy could have a more severe impact on our financial results than on the results of some of our competitors. The effects of terrorist attacks,
particularly in Europe where we derive a significant portion of our revenue, and other similar events and the war in Iraq could affect demand for goods and services, including digital communications software and services.

We currently license many third-party technologies and may need to license further technologies, which could delay and increase the cost of product and service
developments.

We intend to continue to license certain technologies from third parties and incorporate them into our products and services,
including web server technology, virus and anti-spam solutions, storage and encryption technology and billing and customer tracking solutions. 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. Many of these suppliers are small and may not have the ability to continue to provide us with necessary technologies. To the extent we cannot license needed
technologies or solutions, we may have to devote our resources to the development of such technologies, which could delay and increase the cost of product and service developments.

In addition, we may fail to integrate successfully any licensed or hosted technology into our services. These third-party in-licenses may expose us to increased risks, including risks related to the integration of new
technology,



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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 hinder our ability to retain and attract customers and cause our business and operating results to suffer.

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

Our customers have, in the past, experienced some interruptions in our hosted services. We believe that these interruptions will continue to occur from time to time. Our
ability to retain existing customers and attract new customers will suffer and our revenues will decline 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 usenet hosting services. We expect to experience occasional temporary capacity constraints due to unanticipated 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 ability to retain existing customers and attract new customers could suffer dramatically and our revenues would decline.

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 operations of our business 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 or new regulations
and application of laws to our business could burden our company and those with which we do business. 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 cause our financial condition or operating results to decline. Certain of our service offerings include operations
subject to the Digital Millennium Copyright Act of 1998 and the European Unions recent privacy directives. Our efforts to remain in compliance with DMCA and the EU privacy directives may not be sufficient. New legislation and case law may also
affect our products and services and the manner in which we offer them, which could cause our revenues to decline.

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-Bliley Act contains restrictions with respect to the use and protection of banking records for end-users whose information may pass through
our system and the Health Insurance Portability and Accountability Act contains provisions that require our customers to ensure the confidentiality of their customers health care information.

Finally, the Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the Securities and Exchange Commission have required changes in corporate governance
practices of public companies. We are currently reviewing all of our accounting policies and practices, legal disclosure and corporate governance policies under the new legislation, including those related to our relationships with our independent
registered public accounting firm, enhanced financial disclosures, internal controls, board and board committee practices, corporate responsibility and loan practices, and intend fully to comply with such laws. We expect these new rules and
regulations to increase our general and administrative expenses and to make it more difficult for us to attract and retain qualified executive officers and qualified members of our board of directors, particularly to serve on our various committees
of the Board including, in particular, the audit committee.



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

As a provider of usenet hosting, 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 screen the content generated by our users or their customers, 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.

Our current 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 result in substantial out-of-pocket costs to us, or could result in the imposition of criminal penalties.

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

Our software products are inherently complex. Additionally, our product and service offerings depend on complex software, both internally developed and licensed from third parties. Complex software often contains
defects or errors in translation, particularly when first introduced or when new versions are released or localized for international markets. We may not discover software defects in our products or that affect new or current services or
enhancements until after they are deployed. Despite testing, it is possible that 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.

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

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. Our servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other resources to license encryption technology and
additional technologies to protect against security breaches or to alleviate problems caused by any breach. Failure to prevent security breaches may make it difficult to retain and attract customers and cause us to spend additional resources that
could cause our operating results to decline.

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. Despite the precautionary measures we take, 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. 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.



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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, we cannot be certain that our products do not infringe issued patents that may
relate to our products. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software products.

If we do not successfully address the risks inherent in the conduct of our international operations, our revenues and financial results could decline.

We derived 77% of our revenues from international sales during the three months ended March 31, 2006 and 63%, 70% and 74% of our revenues from
international sales in the years ended December 31, 2003, 2004 and 2005, respectively. 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 and our ability to increase revenue and improve our operating results could 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 and language and translation issues;
| | - |  | -------------------------------------------------------------------



| |  |  | 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
| | - |  | ---------------------------------------



| |  |  | significantly 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.

The use of our
net operating losses (NOLs) could be limited if an ownership change occurred during the preceding three-year period.

The use of our net operating
losses could be limited if an ownership change occurred during the preceding three-year period as a result of, for example, the issuance of Series E preferred stock upon conversion of the 10% Notes, the amendment to the terms of the
Series D preferred stock or the exercise of the subscription rights. In general, under applicable federal income tax rules, an ownership change is considered to have occurred if the percentage of the value of our stock owned by our
5% shareholders increased by more than 50 percentage points over the lowest percentage of the value of our stock owned by such shareholders over the preceding three-year period.

Due to the fact that a full valuation allowance has been provided for the net deferred tax asset relating to our net operating losses, we have never analyzed whether
events such as the issuance of Series E preferred stock upon conversion of the 10% notes, the amendment to the terms of the Series D preferred stock and/or the exercise of the subscription rights in the rights offering caused us to undergo
an ownership change for federal income tax purposes.



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If such an ownership change were considered to have occurred, our use of our pre-change net operating losses would
generally be limited annually to the product of the long-term tax-exempt rate as of the time the ownership change occurred and the value of our Company immediately before the ownership change. (The current long-term tax-exempt rate is 4.23%.) This
could increase our federal income tax liability if we generate taxable income in the future. There can be no assurance that the Internal Revenue Service would not be able to successfully assert that we have undergone one or more ownership changes in
the preceding three-year period.

Changes in accounting rules for employee stock options could significantly impact our GAAP financial results.

Accounting policies affecting many aspects of our business, including rules relating to employee stock option grants, have recently been revised or
are under review. The FASB and other agencies have finalized changes to U.S. generally accepted accounting principles that require us to record a charge to earnings for employee stock option grants and other equity incentives. We may have
significant and ongoing accounting charges resulting from option grant and other equity incentive expensing that could significantly harm or net results. In addition, since we historically have used equity-related compensation as a component of our
total employee compensation program, the accounting change could make the use of equity-related compensation less attractive to us and therefore make it more difficult to attract and retain employees.

Our stock price has demonstrated volatility and overall declines 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, wide fluctuations and
declines. For example, during the first quarter of 2006, the closing sale prices of our common stock on the OTC Bulletin Board ranged from $0.15 on January 20, 2006 to $0.38 for several days at the end of February 2006. Our stock price may
further decline or fluctuate in response to any number of factors and events, such as a reduction in the liquidity of our common stock as a result of moving from the Nasdaq National Market to the OTC Bulletin Board, announcements related to
technological innovations, intense regulatory scrutiny and new corporate and securities and other legislation, strategic and sales relationships, new product and service offerings by us or our competitors, litigation outcomes, 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 the market for
our stock, media interest in accounting scandals and corporate governance questions, overall market conditions and domestic and international economic factors unrelated to our performance. 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, regardless of our operating performance or other factors.

A decline in our stock price could result in securities class action litigation against us that could divert managements attention and harm our business.

We have been in the past and may in the future be subject to shareholder lawsuits, including securities class action lawsuits. In the past, securities class action
litigation has often been brought against a company after periods of volatility in the market price of securities. In the future, we may be a target of similar litigation. Securities litigation could result in substantial costs and divert our
managements attention and resources, which in turn could harm our ability to execute our business plan.

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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.

In addition, the General Atlantic Investors and the Cheung
Kong Investors own a sufficient amount of our securities to be able to control the outcome of matters submitted to a vote of our shareholders, which could have the effect of discouraging or impeding an acquisition proposal.

Limitations of our director and officer liability insurance may cause us to use our capital resources, which could cause our financial results to decline or slow
our growth.

Our current director and officer liability insurance may not be adequate for the liabilities and expenses potentially incurred in
connection with future claims. To the extent liabilities, expenses or settlements exceed the limitations or are outside of the scope of coverage, our business and financial condition could materially decline. 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.

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



|(a) | Sales of Unregistered Equity Securities
|--- | ---------------------------------------

None.



|(c) | Issuer Purchases of Equity Securities
|--- | -------------------------------------

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



|      |  |                                                                                                                                                           
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1  |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
|      | 
|31.2  |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
|      | 
|32.1* |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         
|      | 
|32.2* |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         

---

|* | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Managements Reports on Internal Control Over Financial
Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed filed for purpose of Section 18
of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE

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



CRITICAL PATH, INC.By:

/s/ James A. ClarkJames A. ClarkExecutive Vice President and Chief Financial
Officer (Duly Authorized Officer and Principal Financial and
Accounting Officer)


Date: May 16, 2006



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Exhibit Index



|      |  |                                                                                                                                                           
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1  |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
|      | 
|31.2  |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
|      | 
|32.1* |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         
|      | 
|32.2* |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         

---

|* | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Managements Reports on Internal Control Over Financial
Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed filed for purpose of Section 18
of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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