##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549





Form 10-Q





|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
| 
|  |  | For the quarterly period ended
    September 30, 2002                                           
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the transition period
    from           to           .                                     

Commission File Number: 000-25331


Critical Path, Inc.


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

350 The Embarcadero

San Francisco, California 94105


415-808-8800


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

As of October 31, 2002, the company had
outstanding 80,124,000 shares of common stock, $0.001 par value
per share.



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TABLE OF CONTENTS



|                                                                                      |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                               
|                                                                                      | Item 1. Condensed Consolidated Financial Statements (Unaudited)                              
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                      
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                      
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                 
|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                                      | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|SUPPLEMENTAL ALTERNATIVE MEASUREMENT FINANCIAL DATA                                  
|QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                                                      | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                                                      | Item 4. Controls and Procedures                                                              
|REPORT OF INDEPENDENT ACCOUNTANTS                                                    
|PART 2 -- OTHER INFORMATION                                                          
|                                                                                      | Item 1. Legal Proceedings                                                                    
|                                                                                      | Item 6. Exhibits and Report on Form 8-K                                                      
|SIGNATURE                                                                            
|CERTIFICATIONS                                                                       
|INDEX TO EXHIBITS                                                                    
|Exhibit 10.1                                                                         
|Exhibit 10.2                                                                         
|Exhibit 10.3                                                                         
|Exhibit 15.1                                                                         
|Exhibit 99.1                                                                         
|Exhibit 99.2                                                                         



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##### Table of Contents



CRITICAL PATH, INC.

INDEX

|        |  |                                                                                           |  |      |    | 
|------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|        |  |                                                                                           |  | Page
|        |  |                                                                                           |  |     
|PART I 
|Item 1. |  | Condensed Consolidated Financial Statements
    (Unaudited)                               |  |      |    | 
|        |  | Condensed Consolidated Balance Sheets                                                     |  |      | 2  | 
|        |  | Condensed Consolidated Statements of Operations                                           |  |      | 3  | 
|        |  | Condensed Consolidated Statements of Cash Flows                                           |  |      | 4  | 
|        |  | Notes to Condensed Consolidated Financial
    Statements                                  |  |      | 5  | 
|Item 2. |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 14 | 
|        |  | Supplemental Alternative Measurement Financial
    Data (Unaudited)                       |  |      | 34 | 
|Item 3. |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 36 | 
|Item 4. |  | Controls and Procedures                                                                   |  |      | 36 | 
|        |  | Report of Independent Accountants                                                         |  |      | 37 | 
|PART II
|Item 1. |  | Legal Proceedings                                                                         |  |      | 38 | 
|Item 6. |  | Exhibits and Reports on Form 8-K                                                          |  |      | 39 | 
|        |  | Signature                                                                                 |  |      | 40 | 
|        |  | Certifications                                                                            |  |      | 41 | 
|        |  | Index to Exhibits                                                                         |  |      | 43 | 

1



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##### Table of Contents






PART I




Item 1.     Condensed
Consolidated Financial Statements (Unaudited)

CRITICAL PATH, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |            |           |         | 
|------------------------------------------------------------------------------------ | ----------------------------------------------------------- | ------------------------------------------------------------------ | -------------------------------------------------------------------------------------- | ------------- | --------- | ------- | ------ | ---------- | --------- | ------- | 
|                                                                                     |                                                             | December 31,                                                       |                                                                                        | September 30,
|                                                                                     |                                                             | 2001                                                               |                                                                                        | 2002         
|                                                                                     |                                                             |                                                                    |                                                                                        |              
|                                                                                     |                                                             |                                                                    |                                                                                        | (Unaudited)  
|                                                                                     |                                                             |                                                                   
|                                                                                     |                                                             | (In thousands, except per                                         
|                                                                                     |                                                             | share amounts)                                                    
|ASSETS                                                                              
|Current assets                                                                       |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|                                                                                     | Cash and cash equivalents                                   |                                                                    | $                                                                                      | 59,463        |           |         | $      | 35,439     |          
|                                                                                     | Short-term investments                                      |                                                                    |                                                                                        | 9,702         |           |         |        | 13,773     |          
|                                                                                     | Accounts receivable, net                                    |                                                                    |                                                                                        | 26,692        |           |         |        | 22,061     |          
|                                                                                     | Other current assets                                        |                                                                    |                                                                                        | 5,367         |           |         |        | 4,553      |          
|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|                                                                                     |                                                             |                                                                    | Total current assets                                                                   |               |           | 101,224 |        |            |           | 75,826  | 
|Investments                                                                          |                                                             |                                                                    | 7,215                                                                                  |               |           |         | 1,704  |           
|Property and equipment, net                                                          |                                                             |                                                                    | 36,285                                                                                 |               |           |         | 21,686 |           
|Goodwill                                                                             |                                                             |                                                                    | 5,631                                                                                  |               |           |         | 6,613  |           
|Other intangible assets, net                                                         |                                                             |                                                                    | 43,010                                                                                 |               |           |         | 10,744 |           
|Restricted cash                                                                      |                                                             |                                                                    | 2,674                                                                                  |               |           |         | 5,715  |           
|Other assets                                                                         |                                                             |                                                                    | 3,913                                                                                  |               |           |         | 5,530  |           
|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|                                                                                     |                                                             |                                                                    | Total assets                                                                           |               | $         | 199,952 |        |            | $         | 127,818 | 
|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
    STOCK AND
    SHAREHOLDERS EQUITY
|Current liabilities                                                                  |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|                                                                                     | Accounts payable                                            |                                                                    | $                                                                                      | 25,955        |           |         | $      | 29,208     |          
|                                                                                     | Accrued expenses                                            |                                                                    |                                                                                        | 6,232         |           |         |        | 4,708      |          
|                                                                                     | Deferred revenue                                            |                                                                    |                                                                                        | 10,297        |           |         |        | 9,153      |          
|                                                                                     | Capital lease and other obligations, current                |                                                                    |                                                                                        | 3,431         |           |         |        | 3,224      |          
|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|                                                                                     |                                                             |                                                                    | Total current liabilities                                                              |               |           | 45,915  |        |            |           | 46,293  | 
|Convertible subordinated notes payable                                               |                                                             |                                                                    | 38,360                                                                                 |               |           |         | 38,360 |           
|Capital lease and other obligations, long-term                                       |                                                             |                                                                    | 1,149                                                                                  |               |           |         | 1,599  |           
|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|                                                                                     |                                                             |                                                                    | Total liabilities                                                                      |               |           | 85,424  |        |            |           | 86,252  | 
|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|Commitments and contingencies (Note 2)                                               |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|Mandatorily redeemable preferred stock                                               |                                                             |                                                                    | 5,373                                                                                  |               |           |         | 17,868 |           
|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|Shareholders equity                                                                 |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|                                                                                     | Common stock and paid-in-capital, $0.001 par value          |                                                                    |                                                                                        |               |           |         |        |            |          
|                                                                                     |                                                             | Shares authorized: 500,000                                         |                                                                                        |               |           |         |        |            |           |        
|                                                                                     |                                                             | Shares issued and outstanding: 76,581 and 79,852,
    respectively |                                                                                        |               | 2,176,370 |         |        |            | 2,169,714 |        
|                                                                                     | Common stock warrants                                       |                                                                    |                                                                                        | 5,250         |           |         |        | 5,947      |          
|                                                                                     | Notes receivable from shareholders                          |                                                                    |                                                                                        | (1,222        | )         |         |        |           |          
|                                                                                     | Unearned compensation                                       |                                                                    |                                                                                        | (7,050        | )         |         |        | (646       | )        
|                                                                                     | Accumulated deficit, including other
    comprehensive loss |                                                                    |                                                                                        | (2,064,193    | )         |         |        | (2,151,317 | )        
|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|                                                                                     |                                                             |                                                                    | Total shareholders equity                                                             |               |           | 109,155 |        |            |           | 23,698  | 
|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |           
|                                                                                     |                                                             |                                                                    | Total liabilities, mandatorily redeemable
    preferred stock and shareholders equity |               | $         | 199,952 |        |            | $         | 127,818 | 
|                                                                                     |                                                             |                                                                    |                                                                                        |               |           |         |        |           

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

2



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##### Table of Contents



CRITICAL PATH, INC.






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |        |        |        | 
|-------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------- | -------------------------- | ----------------- | ------ | ------------- | ------- | ------------- | ------ | ------ | -------- | ------ | ------- | ------ | ------- | ------ | ------ | ------ | 
|                                                                     |                                                      |                                          |                            |                  
|                                                                     |                                                      | Three Months Ended                       |                            | Nine Months Ended
|                                                                     |                                                      |                                          |                            |                  
|                                                                     |                                                      | September 30,                            |                            | September 30,     |        | September 30, |         | September 30,
|                                                                     |                                                      | 2001                                     |                            | 2002              |        | 2001          |         | 2002         
|                                                                     |                                                      |                                          |                            |                   |        |               |         |              
|                                                                     |                                                      |                                         
|                                                                     |                                                      | (Unaudited)                             
|                                                                     |                                                      | (In thousands, except per share amounts)
|Net revenues                                                         |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|                                                                     | Software license                                     |                                          | $                          | 7,724             |        |               | $       | 5,929         |        |        | $        | 22,187 |         |        | $       | 27,740 |       
|                                                                     | Hosted messaging                                     |                                          |                            | 10,000            |        |               |         | 6,461         |        |        |          | 35,580 |         |        |         | 19,007 |       
|                                                                     | Professional services                                |                                          |                            | 4,206             |        |               |         | 3,053         |        |        |          | 10,523 |         |        |         | 7,635  |       
|                                                                     | Maintenance and support                              |                                          |                            | 4,857             |        |               |         | 3,725         |        |        |          | 12,725 |         |        |         | 10,917 |       
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|                                                                     |                                                      |                                          | Total net revenues         |                   |        | 26,787        |         |               |        | 19,168 |          |        |         | 81,015 |         |        |        | 65,299 | 
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|Cost of net revenues                                                 |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|                                                                     | Software license                                     |                                          |                            | 517               |        |               |         | 563           |        |        |          | 934    |         |        |         | 1,436  |       
|                                                                     | Hosted messaging                                     |                                          |                            | 13,982            |        |               |         | 7,448         |        |        |          | 49,360 |         |        |         | 22,835 |       
|                                                                     | Professional services                                |                                          |                            | 2,565             |        |               |         | 2,393         |        |        |          | 8,125  |         |        |         | 7,002  |       
|                                                                     | Maintenance and support                              |                                          |                            | 2,837             |        |               |         | 2,222         |        |        |          | 7,837  |         |        |         | 6,549  |       
|                                                                     | Amortization of purchased technology                 |                                          |                            | 4,970             |        |               |         | 4,631         |        |        |          | 16,314 |         |        |         | 13,892 |       
|                                                                     | Stock-based expense  Hosted messaging               |                                          |                            | 339               |        |               |         | 113           |        |        |          | 1,165  |         |        |         | 530    |       
|                                                                     | Stock-based expense  Professional
    services      |                                          |                            | 161               |        |               |         | 50            |        |        |          | 1,182  |         |        |         | 196    |       
|                                                                     | Stock-based expense  Maintenance and
    support    |                                          |                            | 131               |        |               |         | 92            |        |        |          | 1,056  |         |        |         | 364    |       
|                                                                     | Impairment of long-lived assets                      |                                          |                            |                  |        |               |         |              |        |        |          | 4,207  |         |        |         |       |       
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|                                                                     |                                                      |                                          | Total cost of net revenues |                   |        | 25,502        |         |               |        | 17,512 |          |        |         | 90,180 |         |        |        | 52,804 | 
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|Gross profit (loss)                                                  |                                                      |                                          | 1,285                      |                   |        |               | 1,656   |               |        |        | (9,165   | )      |         |        | 12,495  |       
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|Operating expenses                                                   |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|                                                                     | Sales and marketing                                  |                                          |                            | 11,018            |        |               |         | 10,945        |        |        |          | 45,424 |         |        |         | 33,262 |       
|                                                                     | Research and development                             |                                          |                            | 7,322             |        |               |         | 5,154         |        |        |          | 25,589 |         |        |         | 15,329 |       
|                                                                     | General and administrative                           |                                          |                            | 9,447             |        |               |         | 5,362         |        |        |          | 34,485 |         |        |         | 18,336 |       
|                                                                     | Amortization of intangible assets                    |                                          |                            | 7,318             |        |               |         | 6,209         |        |        |          | 25,229 |         |        |         | 18,567 |       
|                                                                     | Acquisition-related retention bonuses                |                                          |                            | 92                |        |               |         |              |        |        |          | 1,055  |         |        |         | 11     |       
|                                                                     | Stock-based expense  Sales and
    marketing        |                                          |                            | 1,008             |        |               |         | 452           |        |        |          | 4,623  |         |        |         | 3,637  |       
|                                                                     | Stock-based expense  Research and
    development   |                                          |                            | 531               |        |               |         | 287           |        |        |          | 2,857  |         |        |         | 1,062  |       
|                                                                     | Stock-based expense  General and
    administrative |                                          |                            | 4,914             |        |               |         | 212           |        |        |          | 19,981 |         |        |         | 3,620  |       
|                                                                     | Restructuring expense, net                           |                                          |                            | 3,779             |        |               |         |              |        |        |          | 12,260 |         |        |         | 1,539  |       
|                                                                     | Impairment of long-lived assets                      |                                          |                            |                  |        |               |         |              |        |        |          | 9,991  |         |        |         |       |       
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|                                                                     |                                                      | Total operating expenses                 |                            |                   | 45,429 |               |         |               | 28,621 |        |          |        | 181,494 |        |         |        | 95,363 |       
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|Loss from operations                                                 |                                                      |                                          | (44,144                    | )                 |        |               | (26,965 | )             |        |        | (190,659 | )      |         |        | (82,868 | )     
|Interest and other income (expense), net                             |                                                      |                                          | 178                        |                   |        |               | 1,927   |               |        |        | 4,796    |        |         |        | (803    | )     
|Interest expense                                                     |                                                      |                                          | (3,829                     | )                 |        |               | (740    | )             |        |        | (14,211  | )      |         |        | (2,256  | )     
|Equity in net loss of joint venture                                  |                                                      |                                          | (346                       | )                 |        |               |        |               |        |        | (1,519   | )      |         |        | (1,408  | )     
|Gain on retirement of convertible subordinated
    notes, net        |                                                      |                                          | 137,222                    |                   |        |               |        |               |        |        | 141,040  |        |         |        |        |       
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|Income (loss) before income taxes                                    |                                                      |                                          | 89,081                     |                   |        |               | (25,778 | )             |        |        | (60,553  | )      |         |        | (87,335 | )     
|Provision for income taxes                                           |                                                      |                                          | (2,180                     | )                 |        |               | (234    | )             |        |        | (3,673   | )      |         |        | (255    | )     
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|Net income (loss)                                                    |                                                      |                                          | 86,901                     |                   |        |               | (26,012 | )             |        |        | (64,226  | )      |         |        | (87,590 | )     
|Accretion on mandatorily redeemable convertible
    preferred shares |                                                      |                                          |                           |                   |        |               | (3,600  | )             |        |        |         |        |         |        | (10,067 | )     
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|Net income (loss) attributable to common shares                      |                                                      | $                                        | 86,901                     |                   |        | $             | (29,612 | )             |        | $      | (64,226  | )      |         | $      | (97,657 | )     
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|Net income (loss) per share attributable to
    common shares        |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|                                                                     | Basic                                                |                                          | $                          | 1.17              |        |               | $       | (0.38         | )      |        | $        | (0.87  | )       |        | $       | (1.26  | )     
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|                                                                     | Diluted                                              |                                          | $                          | 1.15              |        |               | $       | (0.38         | )      |        | $        | $(0.87 | )       |        | $       | (1.26  | )     
|                                                                     |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|Weighted average common shares outstanding                           |                                                      |                                          |                            |                   |        |               |         |               |        |        |          |        |         |        |         |       
|                                                                     | Basic                                                |                                          |                            | 74,492            |        |               |         | 78,265        |        |        |          | 73,472 |         |        |         | 77,523 |       
|                                                                     | Diluted                                              |                                          |                            | 75,589            |        |               |         | 78,265        |        |        |          | 73,472 |         |        |         | 77,523 |       

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

3



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##### Table of Contents



CRITICAL PATH, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                          |                                                              |                                       |          |               |         |   |         |         |         |  
|--------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------- | -------- | ------------- | ------- | - | ------- | ------- | ------- | -
|                                                          |                                                              |                                      
|                                                          |                                                              | Nine Months Ended                    
|                                                          |                                                              |                                      
|                                                          |                                                              | September 30,                         |          | September 30,
|                                                          |                                                              | 2001                                  |          | 2002         
|                                                          |                                                              |                                       |          |              
|                                                          |                                                              |                                      
|                                                          |                                                              | (Unaudited)                          
|                                                          |                                                              | (In thousands)                       
|Operating                                                 |                                                              |                                       |          |               |         |   |         |        
|                                                          | Net loss                                                     |                                       | $        | (64,226       | )       |   | $       | (87,590 | )      
|                                                          | Provision for doubtful accounts                              |                                       |          | 4,647         |         |   |         | 829     |        
|                                                          | Depreciation and amortization                                |                                       |          | 35,013        |         |   |         | 22,365  |        
|                                                          | Amortization of intangible assets                            |                                       |          | 41,543        |         |   |         | 32,459  |        
|                                                          | Amortization of stock-based expenses                         |                                       |          | 30,863        |         |   |         | 9,409   |        
|                                                          | Equity in net loss of joint venture                          |                                       |          | 1,519         |         |   |         | 1,408   |        
|                                                          | Impairment of long-lived assets                              |                                       |          | 14,198        |         |   |         |        |        
|                                                          | Change in fair value of preferred stock instrument           |                                       |          |              |         |   |         | 2,160   |        
|                                                          | Gain on retirement of convertible debt, net                  |                                       |          | (141,040      | )       |   |         |        |        
|                                                          | Provision for restructured operations                        |                                       |          | 4,037         |         |   |         | 1,022   |        
|                                                          | Accounts receivable                                          |                                       |          | 3,271         |         |   |         | 4,009   |        
|                                                          | Other assets                                                 |                                       |          | 2,808         |         |   |         | 409     |        
|                                                          | Accounts payable                                             |                                       |          | (3,570        | )       |   |         | (142    | )      
|                                                          | Accrued expenses                                             |                                       |          | (2,820        | )       |   |         | (1,584  | )      
|                                                          | Deferred revenue                                             |                                       |          | 306           |         |   |         | (1,144  | )      
|                                                          |                                                              |                                       |          |               |         |   |         |        
|                                                          |                                                              | Net cash used in operating activities |          |               | (73,451 | ) |         |         | (16,390 | )
|                                                          |                                                              |                                       |          |               |         |   |         |        
|Investing                                                 |                                                              |                                       |          |               |         |   |         |        
|                                                          | Notes receivable from officers                               |                                       |          | (1,415        | )       |   |         | 371     |        
|                                                          | Property and equipment purchases                             |                                       |          | (10,613       | )       |   |         | (4,942  | )      
|                                                          | Payments for acquisitions, net of cash acquired              |                                       |          | (9,898        | )       |   |         | 4,512   |        
|                                                          | Short-term investments                                       |                                       |          | (10,752       | )       |   |         | (4,071  | )      
|                                                          | Restricted cash                                              |                                       |          | (889          | )       |   |         | (3,041  | )      
|                                                          |                                                              |                                       |          |               |         |   |         |        
|                                                          |                                                              | Net cash used in investing activities |          |               | (33,567 | ) |         |         | (7,171  | )
|                                                          |                                                              |                                       |          |               |         |   |         |        
|Financing                                                 |                                                              |                                       |          |               |         |   |         |        
|                                                          | Net proceeds from issuance of Common Stock                   |                                       |          | 1,606         |         |   |         | 1,529   |        
|                                                          | Retirement of convertible debt                               |                                       |          | (49,116       | )       |   |         |        |        
|                                                          | Proceeds from repayments of shareholder notes
    receivable |                                       |          |              |         |   |         | 1,222   |        
|                                                          | Principal payments on capital lease obligations              |                                       |          | (7,462        | )       |   |         | (3,616  | )      
|                                                          | Repurchase of Common Stock                                   |                                       |          | (54           | )       |   |         |        |        
|                                                          |                                                              |                                       |          |               |         |   |         |        
|                                                          |                                                              | Net cash used in financing activities |          |               | (55,026 | ) |         |         | (865    | )
|                                                          |                                                              |                                       |          |               |         |   |         |        
|Net change in cash and cash equivalents                   |                                                              |                                       | (162,044 | )             |         |   | (24,426 | )      
|Effect of exchange rates on cash and cash
    equivalents |                                                              |                                       | 106      |               |         |   | 402     |        
|Cash and cash equivalents at beginning of period          |                                                              |                                       | 216,542  |               |         |   | 59,463  |        
|                                                          |                                                              |                                       |          |               |         |   |         |        
|Cash and cash equivalents at end of period                |                                                              | $                                     | 54,604   |               |         | $ | 35,439  |        
|                                                          |                                                              |                                       |          |               |         |   |         |        

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

4



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##### Table of Contents



CRITICAL PATH, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


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

The
Company

Critical Path, Inc. was incorporated in
California on February 19, 1997. Critical Path, Inc., along
with its subsidiaries (collectively referred to herein as
We, Critical Path or the
Company), provides messaging and collaboration
solutions, from wireless, secure and unified messaging to basic
email and personal information management, as well as identity
management solutions that simplify user profile management and
strengthen information security. The Companys customers
are corporate enterprises, carriers and service providers,
postal authorities and government agencies.

The unaudited Condensed Consolidated Financial
Statements (Financial Statements) of the Company
furnished herein have been reviewed by independent accountants
and reflect all adjustments that are, in the opinion of
management, necessary to present fairly the financial position
and results of operations for each interim period presented. All
adjustments are normal recurring adjustments. The Financial
Statements should be read in conjunction with the condensed
consolidated financial statements and notes thereto, together
with managements discussion and analysis of financial
condition and results of operations, presented in the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2001. The results of operations for
the interim periods presented herein are not necessarily
indicative of the results to be expected for the entire year.

With respect to the unaudited condensed
consolidated financial information of the Company as of
September 30, 2002 and for the three and nine-month periods
ended September 30, 2001 and 2002 included herein,
PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for
a review of such information. However, their separate report
dated November 5, 2002, appearing herein, states that they
did not audit and they do not express an opinion on the
unaudited condensed consolidated financial information.
PricewaterhouseCoopers LLP is not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for
their report on the unaudited condensed consolidated financial
information because that report is not a report or a part of
this Form 10-Q prepared or certified by
PricewaterhouseCoopers LLP within the meaning of Sections 7
and 11 of the Act.



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

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



| |                                       
| | --------------------------------------
| | Segment and Geographic
    Information

The Company does not currently manage its
business in a manner that requires it to report financial
results on a segment basis. The Company currently operates in
one segment: Internet messaging and communication products and
services and management uses one measure of profitability.
Revenue information on a product and service basis has been
disclosed in our statements of operations.



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

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

5



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

In July 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. This
Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This
Statement requires that a liability for costs associated with an
exit or disposal activity be recognized and measured initially
at fair value only when the liability is incurred. The
provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The
Company is currently assessing the impact of SFAS No. 146
on its financial statements.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment
of SFAS No. 13, and Technical Corrections. The provisions
of SFAS No. 145 related to the rescission of SFAS
No. 4 are effective for fiscal years beginning after
May 15, 2002. Other provisions of SFAS No. 145 are
effective for financial statements issued on or after
May 15, 2002 and rescinds both SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and the amendment
to SFAS No. 4, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. Through this
rescission, SFAS No. 145 eliminates the requirement that
gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of
the related income tax effect. The Company early adopted the
rules on accounting and reporting gains and losses from
extinguishment of debt in the second quarter of fiscal 2002.
Adoption resulted in the reclassification of certain gains on
extinguishment of debt recorded in fiscal 2001.

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. This Statement addressed
financial accounting and reporting for intangible assets
acquired individually or with a group of other assets (but not
those acquired in a business combination) at acquisition and
goodwill and other intangible assets subsequent to their
acquisition. This Statement supersedes APB Opinion No. 17,
Intangible Assets. Under the provisions of this Statement, if an
intangible asset is determined to have an indefinite useful
life, it shall not be amortized until its useful life is
determined to be no longer indefinite. An intangible asset that
is not subject to amortization shall be tested for impairment
annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired.
Goodwill shall not be amortized. Goodwill shall be tested for
impairment on an annual basis and between annual tests in
certain circumstances at a level of reporting referred to as a
reporting unit. Goodwill and intangible assets acquired after
June 30, 2001 will be subject immediately to the
nonamortization and amortization provisions of this Statement.
The Company adopted the new rules on accounting for goodwill and
other intangible assets in the first quarter of fiscal 2002.
Adoption resulted in the identification of approximately $5.6
million in intangible assets related to acquired workforce and
goodwill that will no longer be amortized. These assets were
also tested upon implementation and found not to be impaired
based upon estimates of the fair values of the two reporting
units identified. See also Note 6  Intangible Assets.

Note 2  Commitments and
Contingencies

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

Securities Action in Southern District of New
York.On April 30, 2002, MBCP
PeerLogic LLC and other named plaintiffs filed suit in the U.S.
District Court for the Southern District of New York against
Critical Path and certain of its former officers. In June 2002,
the plaintiff shareholders opted out of a shareholder litigation
settlement that was approved by the U.S. District Court for the
Northern District of

6



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

California. The complaint alleged breach of
contract, unjust enrichment, common law fraud and violations of
federal securities laws and seeks compensatory and punitive
damages in an unnamed amount but in excess of $200 million.
Litigation in this matter is ongoing. The Company filed a motion
to have the case transferred to the Northern District of
California and is awaiting the courts review of such
motion.

Securities and Exchange Commission
Investigation.In 2001, the Securities
and Exchange Commission (the SEC) investigated the
Company and certain former officers, employees and directors
with respect to non-specified accounting matters, financial
reports, other public disclosures and trading activity in the
Companys securities. The SEC concluded its investigation
of the Company in January 2002 with no imposition of fines or
penalties and, without admitting or denying liability, the
Company consented to a cease and desist order and an
administrative order as to violation of certain non-fraud
provisions of the federal securities laws. The investigation has
also thus far resulted in charges being filed against five
former officers and employees of the Company. We believe that
the investigation of former officers and employees of the
Company continues; while the Company continues to fully
cooperate with any requests with respect to such investigation,
we do not know the status of such investigation.

Derivative Actions in Northern District of
California.Beginning on
February 5, 2001, Critical Path was named as a nominal
defendant in a number of derivative actions, purportedly brought
on the Companys behalf, filed in the Superior Court of the
State of California and in the U.S. District Court for the
Northern District of California. The derivative complaints
alleged that certain of the Companys former officers and
directors breached their fiduciary duties, engaged in abuses of
control, were unjustly enriched by sales of the Companys
common stock, engaged in insider trading in violation of
California law or published false financial information in
violation of California law. The Company is currently working
with plaintiffs counsel to finalize the settlement of this
matter.

Securities Class Action in Southern
District of New York.Beginning on
July 18, 2001, a number of securities class action
complaints were filed against the Company, and certain of its
former officers and directors and underwriters connected with
its initial public offering of common stock in the U.S. District
Court for the Southern District of New York. The purported class
action complaints were filed by individuals who allege that they
purchased common stock at the initial public offering of common
stock between March 26, 1999 and December 6, 2000. The
complaints allege generally that the Prospectus under which such
securities were sold contained false and misleading statements
with respect to discounts and commissions received by the
underwriters. The complaints have been consolidated into a
single action. The complaints seek an unspecified amount in
damages on behalf of persons who purchased the Companys
stock during the specified period. Similar complaints have been
filed against more than 300 other companies and additional
underwriters.

Lease Dispute.In
July 2000, PeerLogic, Inc. signed a lease for office space in
San Francisco, California. In December 2000, we acquired
PeerLogic as a wholly-owned subsidiary. After review, we
determined that local zoning laws likely prohibited a business
such as the Company or PeerLogic from occupying the leased
premises, and promptly sought a zoning determination from the
San Francisco Zoning Administrator to resolve the matter. The
Zoning Administrator determined that the Companys proposed
use of the leased premises was not permitted, but the landlord
appealed this determination and prevailed before the San
Francisco Board of Appeals. The Company requested a rehearing on
the matter, which the Board of Appeals denied. In April 2002,
the landlord filed suit in San Francisco Superior Court against
the Company alleging, among other things, breach of the lease.
In its complaint, the landlord sought unspecified compensatory
damages for back rent, attorneys fees, treble damages
under relevant statutes, and unspecified punitive damages. A
number of the plaintiffs claims of damages were struck by
the court in response to the Companys motion to strike.
The plaintiff submitted an amended complaint in September 2002
and a hearing is scheduled on the Companys motion to
strike in November 2002. In July 2002, the Company filed a
separate Petition for Writ of Administrative Mandamus with the
San Francisco Superior Court, requesting that the Board of

7



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Appeals decision be reversed and/or
remanded for rehearing by the Board, with instructions from the
Court. Litigation in this matter is ongoing.

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

Note 3  Acquisition of
Japanese Joint Venture

On June 6, 2002, the Company acquired the
remaining 60% ownership interest that it did not already own in
its Japanese joint venture, Critical Path Pacific, Inc., from
Mitsui and Co. Ltd., NTT Communications Corporation and NEC
Corporation, for $3.0 million in cash and the assumption of
$2.6 million in business restructuring and capital lease
obligations. The excess of the purchase price of
$5.6 million over the fair value of the acquired net
assets, primarily working capital and fixed assets, of
$4.6 million was recorded as goodwill. In accordance with
SFAS No. 142, this goodwill asset of approximately
$1.0 million will not be amortized; however, the Company
will test this asset for impairment on an annual basis, or more
frequently if events or circumstances indicate that the asset
might be impaired. The Company began including the financial
results of Critical Path Pacific in its own consolidated results
subsequent to the acquisition date.

Note 4  Related Party
Transactions



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

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

In December 2001, the Board approved a fully
secured loan to William McGlashan, Jr., the Companys Chief
Executive Officer, of up to $4.0 million in connection with
the purchase of a principal residence in the San Francisco Bay
Area. In May 2002, the Compensation Committee of the Board and
Mr. McGlashan agreed to amend the agreement in order to
reduce the amount of the loan commitment to $1.5 million.
As of September 30, 2002, no portion of the loan commitment
has yet been funded.

In connection with the reduction of the loan
commitment, in May 2002 Mr. McGlashan was granted an option to
purchase 1,000,000 shares of the Companys Common Stock, at
an exercise price of $1.74 per share,

8



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

which was the fair market value on the date of
grant. The option was immediately exercisable subject to the
Companys lapsing right of repurchase at a price equal to
the exercise price per share over a three year period.
Mr. McGlashan exercised his right to early exercise
purchase the shares through a promissory note and stock pledge
agreement in May 2002. As such the Company now holds a
promissory note in the amount of $1,740,000 secured by shares of
Common Stock. The promissory note will begin to accrue interest
at the adjustable quarterly reference rate of Fidelity
Investments or similar banking entity as the shares vest with
respect to that portion of the purchase price that represents
the purchase price of the vested shares.

In accordance with EITF 00-23, the early exercise
of these options is not considered a substantive exercise, for
accounting purposes, until the repurchase right lapses.
Accordingly, the total exercise price of these options has been
recognized as an asset, in Other assets, and as a liability, in
Capital lease and other obligations. These balances will be
reclassified to shareholders equity as the right of
repurchase lapses.

Termination
Agreements

In May 2002, David Hayden resigned his employment
with the Company and from the Board of Directors. In connection
with a separation agreement finalized in July 2002,
Mr. Hayden received a lump sum separation payment of
$350,000 plus applicable taxes, continuation of health and
welfare benefits until May 31, 2003, an extension to repay
the $1.95 million loan with the Company until no later than
June 30, 2005, an extension of the period within which he
may exercise his vested stock options until no later than
June 30, 2005, acceleration of a portion of his unvested
options if a change of control of the Company occurs prior to
September 30, 2003 and reimbursement for $50,000 of legal
fees incurred. In connection with the provision of these
benefits, Mr. Hayden agreed to (i) forfeit the right under
the severance provisions of his employment agreement to an
additional one year extension of the $1.95 million loan
until August 2006; (ii) pay all proceeds (net of taxes)
from the sale of any shares held by him in the Company to reduce
the principal balance of the $1.95 million loan; and
(iii) forfeit his right to receive a $2.5 million loan
from the Company to exercise certain of his stock options. All
sales of common stock of the Company by Mr. Hayden will be
made under a publicly filed trading plan. In addition,
Mr. Hayden and the Company executed a mutual release of
claims. As a result of Mr. Haydens separation, the
Company recorded aggregate one-time charges of
$2.6 million, included in operating expenses, inclusive of
$572,000 related to the separation payment and legal fee
reimbursements made to Mr. Hayden and $2.0 million in
stock-based expenses related to the extension of the exercise
period on Mr. Haydens vested stock options.

In October 2002, Pierre Van Beneden terminated
his employment as president of the Company, but continues
through January 2003 as a consultant on certain European license
software sales. In connection with a separation agreement,
Mr. Van Beneden agreed to provide consulting services to
the Company on a commission only basis and shall receive the
benefits to which he was entitled under his employment agreement
during such consulting period. Such employment agreement
benefits, which shall be payable in January 2003 upon the
completion of the consulting term, included a lump sum payment
of $337,500, representing nine months base salary, and
accelerated vesting on a portion of his option grants. As an
additional benefit under the separation agreement, Mr. Van
Beneden was granted an extension from ninety days to one year of
the period for exercise of his option grants. Mr. Van
Beneden and the Company executed a mutual release of all claims.
As a result of the execution of the separation agreement in
October 2002, the Company will include the lump sum payment in
its fourth quarter 2002 operating expenses.

Consulting
Agreements

In August 2002, the Company retained the services
of The Cohen Group, an international strategic consulting
company. The chairman and chief executive officer of The Cohen
Group is William S. Cohen, a member of the Board of
Directors of the Company. Under the agreement, The Cohen Group
received a $150,000 retainer fee as a draw against a sliding
scale of earned sales and referral commissions due the Cohen

9



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Group on transactions resulting in license
revenue for the Company. The agreement is for a one year term,
with reimbursement for specified expenses up to a cap of 5% of
the retainer and a provision for extension in the event the
retainer fee is not earned during the term.

In August 2002, the Company hired R.B. Webber
& Company, strategic management consultants, to prepare an
executive level research and forecast presentation on the
enterprise messaging market. The agreement provided for a flat
fee of $85,000 over a two month period for the services of
several consultants of R.B. Webber and Company, with
reimbursement for expenses capped at 5% of the fee. Jeffrey
Webber, a member of the Board of Directors of the Company, is a
partner of R.B. Webber and Company. Mr. Webber shall
also provide consulting services under the agreement.

In October 2002, the Company entered into a
consulting arrangement with Pierre van Beneden in
connection with a separation agreement more fully described in
the section above under Termination Agreements,
Mr. Van Beneden is entitled to commissions payable
upon the completion of certain license software sales.

Note 5 
Restructurings

In May 2002, the Board of Directors approved a
restructuring plan to further reduce the Companys expense
levels consistent with the current business climate. In
connection with the plan, a restructuring charge of
$1.5 million was recognized in the second quarter of 2002.
This charge was comprised of approximately $1.2 million in
severance and related costs associated with the elimination of
approximately 39 positions and $300,000 in facilities lease
termination costs. During the second and third quarters of 2002,
approximately $762,000 was charged against this accrual,
primarily cash payments of severance related costs. The balance
of the accrual at September 30, 2002, of approximately
$777,000 is expected to be utilized by the end of this fiscal
year.

During 2001, the Company announced a strategic
restructuring plan that involved reorganizing Critical
Paths product and service offerings around a group of core
communications solutions, a reduction in the Companys
workforce, and the consolidation of facilities and operations.
Total restructuring charges during 2001 amounted to
$18.3 million, of which $8.5 million was recognized
during the second quarter of 2001. As of December 31, 2001
a $2.2 million accrual associated with these restructuring
actions remained as a component of accounts payable. During the
first nine months of 2002, approximately $1.1 million was
charged against this accrual, primarily cash paid related to
facilities and operations consolidation restructuring
activities, leaving a remaining restructuring accrual of
$1.1 million as of September 30, 2002, which is
expected to be paid over the next 9 months.

Note 6  Intangible
Assets

At September 30, 2002, the Company was
carrying net intangible assets of $17.4 million. Of this
amount, $10.8 million is associated with acquired
intangible assets which are being amortized and the remaining
$6.6 million is associated with goodwill which is not being
amortized, in accordance with SFAS No. 142. During the
second quarter of 2002, goodwill increased by approximately
$1.0 million associated with the Companys acquisition
of its Japanese joint venture, Critical Path Pacific, Inc. See
also Note 3  Acquisition of Japanese Joint
Venture.

10



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Goodwill is detailed as follows (in thousands):

|              |  |            |       |             |  |               |     |  |  |   |       | 
|------------- |  | ---------- | ----- | ----------- |  | ------------- | --- |  |  | - | ----- | 
|              |  | January 1, |       |             |  | September 30,
|              |  | 2002       |       | Acquisition |  | 2002         
|              |  |            |       |             |  |              
|United States |  | $          | 2,386 |             |  | $             |    |  |  | $ | 2,386 | 
|Europe        |  |            | 3,245 |             |  |               |    |  |  |   | 3,245 | 
|Other         |  |            |      |             |  |               | 982 |  |  |   | 982   | 
|              |  |            |       |             |  |               |     |  |  |   |       | 
|              |  | $          | 5,631 |             |  | $             | 982 |  |  | $ | 6,613 | 
|              |  |            |       |             |  |               |     |  |  |   |       | 

Other intangible assets as of September 30,
2002 are detailed as follows (in thousands):

|                                   |  |        |        |              |  |          |         |   |  |   |        | 
|---------------------------------- |  | ------ | ------ | ------------ |  | -------- | ------- | - |  | - | ------ | 
|                                   |  | Gross  |        | Accumulated  |  | Net Book
|                                   |  | Amount |        | Amortization |  | Value   
|                                   |  |        |        |              |  |         
|Existing technology                |  | $      | 39,748 |              |  | $        | (35,134 | ) |  | $ | 4,614  | 
|Strategic relationships  warrants |  |        | 38,660 |              |  |          | (33,829 | ) |  |   | 4,831  | 
|Customer base                      |  |        | 12,493 |              |  |          | (11,285 | ) |  |   | 1,208  | 
|Patents                            |  |        | 726    |              |  |          | (635    | ) |  |   | 91     | 
|                                   |  |        |        |              |  |          |         |   |  |   |        | 
|                                   |  | $      | 91,627 |              |  | $        | (80,883 | ) |  | $ | 10,744 | 
|                                   |  |        |        |              |  |          |         |   |  |   |        | 

The aggregate amortization expense related to
goodwill which is no longer being amortized totaled
$1.1 million and zero for the third quarters of 2001 and
2002, respectively, and $3.6 million and zero for the first
nine-months of 2001 and 2002, respectively. The estimated total
amortization expense related to all intangible assets is
$43.1 million for fiscal year 2002, at which time all other
intangible assets will be fully amortized.

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

|                                                                           |  |                    |        |                   |  |               |         |               |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ------------- | ------- | ------------- |  | - | ------- | - |  | - | ------- | -
|                                                                           |  |                    |        |                  
|                                                                           |  | Three Months Ended |        | Nine Months Ended
|                                                                           |  |                    |        |                  
|                                                                           |  | September 30,      |        | September 30,     |  | September 30, |         | September 30,
|                                                                           |  | 2001               |        | 2002              |  | 2001          |         | 2002         
|                                                                           |  |                    |        |                   |  |               |         |              
|Net income (loss)                                                          |  |                    |        |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Reported net income (loss) attributable to
    common shares               |  | $                  | 86,901 |                   |  | $             | (29,612 | )             |  | $ | (64,226 | ) |  | $ | (97,657 | )
|Amortization of goodwill                                                   |  |                    | 1,060  |                   |  |               |        |               |  |   | 3,628   |   |  |   |        |  
|                                                                           |  |                    |        |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Net income (loss) attributable to common
    shares, as adjusted           |  | $                  | 87,961 |                   |  | $             | (29,612 | )             |  | $ | (60,598 | ) |  | $ | (97,657 | )
|                                                                           |  |                    |        |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Net income (loss) per share 
    basic                                    |  |                    |        |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Reported net income (loss) per share attributable
    to common shares     |  | $                  | 1.17   |                   |  | $             | (0.38   | )             |  | $ | (0.87   | ) |  | $ | (1.26   | )
|Amortization of goodwill per share                                         |  |                    | 0.01   |                   |  |               |        |               |  |   | 0.05    |   |  |   |        |  
|                                                                           |  |                    |        |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Net income (loss) per share attributable to
    common shares, as adjusted |  | $                  | 1.18   |                   |  | $             | (0.38   | )             |  | $ | (0.82   | ) |  | $ | (1.26   | )
|                                                                           |  |                    |        |                   |  |               |         |               |  |   |         |   |  |   |         |  

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                           |  |                    |      |                   |  |               |       |               |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------------- |  | ------------------ | ---- | ----------------- |  | ------------- | ----- | ------------- |  | - | ----- | - |  | - | ----- | -
|                                                                           |  |                    |      |                  
|                                                                           |  | Three Months Ended |      | Nine Months Ended
|                                                                           |  |                    |      |                  
|                                                                           |  | September 30,      |      | September 30,     |  | September 30, |       | September 30,
|                                                                           |  | 2001               |      | 2002              |  | 2001          |       | 2002         
|                                                                           |  |                    |      |                   |  |               |       |              
|Net income (loss) per share 
    diluted                                  |  |                    |      |                   |  |               |       |               |  |   |       |   |  |   |       |  
|Reported net income (loss) per share attributable
    to common shares     |  | $                  | 1.15 |                   |  | $             | (0.38 | )             |  | $ | (0.87 | ) |  | $ | (1.26 | )
|Amortization of goodwill per share                                         |  |                    | 0.01 |                   |  |               |      |               |  |   | 0.05  |   |  |   |      |  
|                                                                           |  |                    |      |                   |  |               |       |               |  |   |       |   |  |   |       |  
|Net income (loss) per share attributable to
    common shares, as adjusted |  | $                  | 1.16 |                   |  | $             | (0.38 | )             |  | $ | (0.82 | ) |  | $ | (1.26 | )
|                                                                           |  |                    |      |                   |  |               |       |               |  |   |       |   |  |   |       |  

Note 7  Other Comprehensive
Income (Loss)

The components of other comprehensive income
(loss) are as follows (in thousands):

|                                         |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|---------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                         |  |                    |        |                  
|                                         |  | Three Months Ended |        | Nine Months Ended
|                                         |  | September 30,      |        | September 30,    
|                                         |  |                    |        |                  
|                                         |  | 2001               |        | 2002              |  | 2001 |         | 2002
|                                         |  |                    |        |                   |  |      |         |     
|Net income (loss)                        |  | $                  | 86,901 |                   |  | $    | (26,012 | )    |  | $ | (64,226 | ) |  | $ | (87,590 | )
|Net unrealized investment losses         |  |                    | (558   | )                 |  |      | (144    | )    |  |   | (947    | ) |  |   | (822    | )
|Foreign currency translation adjustments |  |                    | 2,301  |                   |  |      | (440    | )    |  |   | (116    | ) |  |   | 1,288   |  
|                                         |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Other comprehensive income (loss)        |  | $                  | 88,644 |                   |  | $    | (26,596 | )    |  | $ | (65,289 | ) |  | $ | (87,124 | )
|                                         |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  

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

Note 8  Net Income (Loss) Per
Share

Net income (loss) per share is calculated as
follows:

|                                                                           |  |                                          |        |                   |  |               |         |               |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | ----------------- |  | ------------- | ------- | ------------- |  | - | ------- | - |  | - | ------- | -
|                                                                           |  |                                          |        |                  
|                                                                           |  | Three Months Ended                       |        | Nine Months Ended
|                                                                           |  |                                          |        |                  
|                                                                           |  | September 30,                            |        | September 30,     |  | September 30, |         | September 30,
|                                                                           |  | 2001                                     |        | 2002              |  | 2001          |         | 2002         
|                                                                           |  |                                          |        |                   |  |               |         |              
|                                                                           |  |                                         
|                                                                           |  | (In thousands, except per share amounts)
|Net income (loss)                                                          |  |                                          |        |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Net income (loss)                                                          |  | $                                        | 86,901 |                   |  | $             | (26,012 | )             |  | $ | (64,226 | ) |  | $ | (87,590 | )
|Accretion on redeemable convertible preferred
    shares                   |  |                                          |       |                   |  |               | (3,600  | )             |  |   |        |   |  |   | (10,067 | )
|                                                                           |  |                                          |        |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Net income (loss) attributable to common
    shares                        |  | $                                        | 86,901 |                   |  | $             | (29,612 | )             |  | $ | (64,226 | ) |  | $ | (97,657 | )
|Weighted average shares outstanding                                        |  |                                          |        |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Weighted average shares outstanding                                        |  |                                          | 75,509 |                   |  |               | 78,621  |               |  |   | 74,913  |   |  |   | 77,902  |  
|Weighted average common shares issued subject to
    repurchase agreements |  |                                          | (102   | )                 |  |               | (12     | )             |  |   | (251    | ) |  |   | (35     | )
|Shares held in escrow related to acquisitions                              |  |                                          | (915   | )                 |  |               | (344    | )             |  |   | (1,190  | ) |  |   | (344    | )
|                                                                           |  |                                          |        |                   |  |               |         |               |  |   |         |   |  |   |         |  

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                               |  |                                          |        |                   |  |               |        |               |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------ |  | ---------------------------------------- | ------ | ----------------- |  | ------------- | ------ | ------------- |  | - | ------ | - |  | - | ------ | -
|                                                                               |  |                                          |        |                  
|                                                                               |  | Three Months Ended                       |        | Nine Months Ended
|                                                                               |  |                                          |        |                  
|                                                                               |  | September 30,                            |        | September 30,     |  | September 30, |        | September 30,
|                                                                               |  | 2001                                     |        | 2002              |  | 2001          |        | 2002         
|                                                                               |  |                                          |        |                   |  |               |        |              
|                                                                               |  |                                         
|                                                                               |  | (In thousands, except per share amounts)
|Shares used in computation of net income (loss)
    per share  basic          |  |                                          | 74,492 |                   |  |               | 78,265 |               |  |   | 73,472 |   |  |   | 77,523 |  
|Effect of dilutive securities  shares
    subject to repurchase and in escrow |  |                                          | 1,017  |                   |  |               |       |               |  |   |       |   |  |   |       |  
|Effect of dilutive securities 
    employee stock options                     |  |                                          | 80     |                   |  |               |       |               |  |   |       |   |  |   |       |  
|                                                                               |  |                                          |        |                   |  |               |        |               |  |   |        |   |  |   |        |  
|Shares used in computation of net income (loss)
    per share  diluted        |  |                                          | 75,589 |                   |  |               | 78,265 |               |  |   | 73,472 |   |  |   | 77,523 |  
|Net income (loss) per share attributable to
    common shares                  |  |                                          |        |                   |  |               |        |               |  |   |        |   |  |   |        |  
|Basic                                                                          |  | $                                        | 1.17   |                   |  | $             | (0.38  | )             |  | $ | (0.87  | ) |  | $ | (1.26  | )
|                                                                               |  |                                          |        |                   |  |               |        |               |  |   |        |   |  |   |        |  
|Diluted                                                                        |  | $                                        | 1.15   |                   |  | $             | (0.38  | )             |  | $ | (0.87  | ) |  | $ | (1.26  | )
|                                                                               |  |                                          |        |                   |  |               |        |               |  |   |        |   |  |   |        |  

At September 30, 2001 and 2002,
approximately 31.7 million and 72.8 million potential
common shares, respectively, were excluded from the
determination of diluted net loss per share, as the effect of
such shares is anti-dilutive.

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CRITICAL PATH, INC.






MANAGEMENTS DISCUSSION AND ANALYSIS
OF


FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





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

This report on Form 10-Q contains
forward-looking statements within the meaning of the safe
harbor provisions of the Private Securities Litigation
Reform Act of 1995, as amended and in effect from time to time.
The words anticipate, expect,
intend, plan, believe,
seek, and estimate and similar
expressions are intended to identify forward-looking statements.
These are statements that relate to future periods and include
statements regarding our future strategic, operational and
financial plans, anticipated or projected revenues, expenses and
operational growth, markets and potential strategic partners and
customers for our products and service offerings, plans related
to sales strategies and global sales efforts, our plans to reach
profitability, our ability to retain key customers and grow
accounts in a challenging economy, the anticipated benefits of
our relationships with strategic partners, growth and results of
our competition, our ability to compete in the global
marketplace, investments in product development, use of future
earnings, the features, benefits and performance of our current
and future products and services, plans to continue to reduce
operating costs through continued expense reduction, and our
belief as to our ability to successfully emerge from the
restructuring and refocusing of our operations. These
forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. Factors that might cause future
results to differ materially from those projected in the
forward-looking statements include, but are not limited to,
difficulties of forecasting future results due to our limited
operating history, failure to meet sales and revenue objectives,
forecasts and earnings guidance, our ability to reach
profitability and history of losses, competition in the
marketplace and our ability to attract and retain customers, our
ability to successfully manage costs, turnover within and
integration of senior management, board of directors members and
other key personnel, failure to negotiate strategic technology
and distribution deals on favorable terms, our dependence on a
small number of key customers and the length of sales cycles,
our evolving business strategy and the emerging nature of the
market for our products and services, lingering doubts related
to the accounting restatements and SEC investigation of our
former executives and directors, volatility in the market for
our stock, risks associated with delisting actions by, and an
inability to maintain continued compliance with, the Nasdaq
National Market and its listing requirements, potential
difficulties associated with strategic relationships,
investments and uncollected bills, general economic conditions
in markets in which the Company does business, volatility in the
market for our stock and risks associated with our international
operations, foreign currency fluctuations, unplanned system
interruptions and capacity constraints, and software defects,
and those discussed in Managements Discussion and
Analysis of Financial Condition and Results of Operations
and Additional Factors That May Affect Future Operating
Results and elsewhere in this report. Readers are
cautioned not to place undue reliance on these forward-looking
statements. The forward-looking statements speak only as of the
date hereof. We expressly disclaim any obligation to publicly
release the results of any revisions to these forward-looking
statements to reflect events or circumstances after the date of
this filing.

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

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

Overview

Critical Path, Inc., is a global leader in
digital communications software and services. We provide
messaging and collaboration solutions from wireless, secure and
unified messaging to basic email and personal information
management, as well as identity management solutions that
simplify user profile management and strengthen information
security. Our standards-based Critical Path Communications
Platform, built to

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perform reliably at the scale of public networks,
delivers the industry-noted lowest total cost of ownership for
messaging solutions and lays a solid foundation for
next-generation communications services.


Our primary sources of revenue come from
providing a wide range of messaging and identity management
products and services. Critical Paths customers are
corporate enterprises, carriers and service providers, postal
authorities and government agencies. Critical Path was founded
in 1997 and is headquartered in San Francisco, California with
offices worldwide.

Results of Operations

In light of the rapidly evolving nature of our
business, prior acquisitions, organizational restructuring, and
limited operating history, we believe that period-to-period
comparisons of revenues and operating results, including gross
profit margin and operating expenses as a percentage of total
net revenues, are not meaningful and should not be relied upon
as indications of future performance. At September 30,
2002, we had 599 employees, in comparison with
562 employees at December 31, 2001 and
564 employees at September 30, 2001. We do not believe
that our historical growth rates for revenues, expenses or
personnel are indicative of future results.

Net
Revenues

We derive most of our revenues through the sale
of our messaging and identity management communications
solutions. These solutions include both licensed software
products and hosted messaging services. In addition, we
recognize revenues from professional services and maintenance
and support services. Software license revenues are derived from
perpetual and term licenses for our messaging, identity
management, collaborative and enterprise application integration
technologies. Hosted messaging revenues relate to fees for our
hosted messaging and collaboration services. These fees are
primarily based upon monthly contractual per unit rates for the
services involved, and are recognized as revenue on a ratable
monthly basis over the term of the contract. Professional
services revenues are derived from fees primarily related to
training, installation and configuration services and revenue is
recognized as services are performed. Maintenance and support
revenues are derived from fees related to post-contract customer
support agreements associated with software product licenses.
Maintenance and support revenues are recognized ratably over the
term of the agreement.

Software License.We
recognized $5.9 million and $27.7 million in software
license revenues during the three and nine-month periods ended
September 30, 2002, respectively, compared to
$7.7 million and $22.2 million during the same periods
in 2001. The significant decrease in third quarter 2002 software
license revenues over the prior year was due primarily to the
difficult worldwide business climate, which has resulted in
lower and delayed information technology spending across the
enterprise software market. Software license revenues for the
first nine-months of 2002 were higher than the prior year period
due to the uncertainty surrounding Critical Path during the
first two quarters of 2001, which caused a number of current and
potential customers to delay making purchase decisions. This
uncertainty was created by the restatement of certain previously
released financial results of Critical Path for the third
quarter of 2000, significant turnover within the senior
management group and the termination and resignation of much of
the leadership within our sales organization. During the second
half of 2001 and first half of 2002, we restructured our
business and management team and worked to rebuild customer
confidence in Critical Path.

During the second and third quarters of 2002, we
excluded all royalty revenue earned from Sun Microsystems,
Inc. related to the sale of their iPlanet meta-directory
products which, based upon recent reporting, could have amounted
to approximately $300,000 in each quarter. During August we
entered into a dispute with Sun Microsystems, Inc. over the
calculation of these royalties. We will not be recognizing
royalty revenue from Sun Microsystems until we come to a mutual
agreement on current and historic contractual obligations.

Hosted Messaging.We
recognized $6.5 million and $19.0 million in hosted
messaging revenues during the three and nine-month periods ended
September 30, 2002, respectively, compared to
$10.0 million and $35.6 million during the same
periods in 2001. This decrease in 2002 hosted messaging revenues
resulted in part due to the exiting or sale, as part of our 2001
restructuring initiatives, of certain non-core hosted messaging
services during the second half of 2001. These non-core services
accounted for a significant portion

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of hosted messaging revenues for the first
nine-months of 2001. In addition, during the second and third
quarters of 2002, we did experience a net loss in customers,
which further contributed to the decline in hosted messaging
revenue over the prior years periods. We excluded
approximately $300,000 in hosted messaging revenue from the
second quarter of 2002 related to WorldComs
Chapter 11 bankruptcy filing. During the third quarter of
2002, we did recognize approximately $300,000 in hosted
messaging revenue from WorldCom associated with the
formalization of their restructuring plan and payment for
post-bankruptcy services.


We are currently completing development work on a
new hosted messaging software and hardware platform which is
expected to be launched in the first half of 2003. In connection
with the new platform, in October 2002 we announced the
formation of a global managed messaging service alliance with
Hewlett-Packard Company (HP), in which Critical Path will
outsource its data center operations to HP. As part of the
alliance, Critical Path will continue to provide messaging
applications management services and product development, with
both companies marketing and selling the messaging service and
providing integration services. Until these new initiatives are
substantially in place, and with the elimination of certain
non-core hosted messaging services in the second-half of 2001,
we expect hosted messaging revenues to be lower in the fourth
quarter of 2002 in comparison to the prior years period.

Professional Services.We recognized $3.1 million and
$7.6 million in professional services revenues during the
three and nine-month periods ended September 30, 2002,
respectively, compared to $4.2 million and
$10.5 million during the same periods in 2001. The decrease
in professional services revenues in the third quarter of 2002
was due primarily to our 2001 restructuring initiatives, which
eliminated certain non-core products, reducing the professional
services revenues derived from these products. The decrease in
revenue for the first nine-months of 2002 was due primarily to
higher first quarter 2001 non-core product professional services
revenues resulting from our September 2000 acquisition of
PeerLogic, Inc.

Maintenance and Support.We recognized $3.7 million and
$10.9 million in maintenance and support revenues during
the three and nine-month periods ended September 30, 2002,
respectively, compared to $4.9 million and
$12.7 million for the same periods in 2001. The decrease in
2002 resulted primarily from the loss of maintenance and support
revenues from the elimination of certain non-core products and
services as part of our 2001 restructuring initiatives.

Critical Paths international operations
accounted for approximately 59% and 57% of net revenues for the
three and nine-month periods ended September 30, 2002, and
approximately 45% and 40% of net revenues for the three and
nine-month periods ended September 30, 2001. This
significant increase in the percentage of international revenues
related primarily to a dramatic reduction in enterprise
information technology spending during the first and second
quarters of 2001, as it particularly impacted the sale of our
license products in international markets. Additionally, the
decrease in domestic hosted messaging revenue further impacted
the percentage of international revenue.

Cost of Net
Revenues

Software License.Cost of net software license revenues
consist primarily of product media duplication, manuals and
packaging materials, personnel and facility costs, and
third-party royalties. The cost of net software license revenues
for the third quarter of 2002 was comparable to the prior
years period. The cost of net software license revenues
for the first nine months of 2002 were higher than the same
period in the prior year, consistent with the increase in
license product sales.

Hosted Messaging.Cost of net hosted messaging revenues
consist primarily of costs incurred in the delivery and support
of messaging services, including depreciation of capital
equipment used in network infrastructure, amortization of
purchased technology, Internet connection charges, accretion of
acquisition-related retention bonuses, personnel costs incurred
in operations, and other direct and allocated indirect costs.
The cost of net hosted messaging revenues were significantly
lower in the third quarter and first nine months of 2002
compared to the prior year periods primarily due to our
restructuring initiatives undertaken in the second half of 2001.
As a result of these initiatives, the costs associated with our
hosted messaging revenues were reduced through the sale or exit
of several non-core services, the termination of employees and
reduction in

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employee-related costs, the retirement of surplus
network infrastructure equipment and software, and the
consolidation of data centers.


Professional Services.Cost of net professional services
revenues consist primarily of personnel costs including custom
engineering, installation and training services for both hosted
and licensed solutions, and other direct and allocated indirect
costs. As a result of our 2001 restructuring initiatives,
personnel and certain overhead costs were reduced, resulting in
lower professional services cost of net revenues for the third
quarter and first nine months of 2002, in comparison to the same
periods in the prior year.

Maintenance and Support.Cost of net maintenance and support
revenues consists primarily of personnel costs related to the
customer support functions for both hosted and licensed
solutions, and other direct and allocated indirect costs. The
cost of net maintenance and support revenues was lower in the
second quarter and first nine months of 2002 in comparison to
the year ago period, due primarily to a decrease in staffing
levels and a reduction in employee-related costs.

Operations, customer support and professional
services staff decreased to 191 employees at
September 30, 2002 from 197 employees at September 30,
2001.

Operating
Expenses

Sales and Marketing.Sales and marketing expenses consist
primarily of compensation for sales and marketing personnel,
advertising, public relations, other promotional costs, and, to
a lesser extent, related overhead. Sales and marketing expenses
for the third quarter of 2002 were comparable to the prior
years period. Sales and marketing expenses for the first
nine months of 2002 decreased significantly over the prior
years periods due primarily to cost savings generated from
our 2001 restructuring initiatives. Sales and marketing staffing
levels, which stood at 201 employees at June 30, 2001, were
reduced to 131 employees at September 30, 2001, as a result
of the restructuring. The savings in personnel and
personnel-related costs together with the termination of certain
strategic marketing relationships related to non-core services
accounted for the reduction in sales and marketing expenses for
the first nine-months of 2002. Sales and marketing staffing
totalled 152 employees at September 30, 2002.

Research and Development.Research and development expenses
consist primarily of compensation for technical staff, payments
to outside contractors, depreciation of capital equipment
associated with research and development activities, and, to a
lesser extent, related overhead. This significant decrease in
year-to-date 2002 research and development expenses resulted
primarily from a reduction in headcount and related personnel
costs as part of our 2001 restructuring initiatives. Savings
realized from the termination of certain outside consulting
arrangements and consolidation of facilities also contributed to
the decrease in research and development expenses for the third
quarter of 2002 compared to the same period last year. Research
and development staffing totalled 167 employees at
September 30, 2002 compared to 142 employees at
September 30, 2001.

General and Administrative.General and administrative expenses
consist primarily of compensation for personnel, fees for
outside professional services, occupancy costs and, to a lesser
extent, related overhead. The significant decrease in third
quarter and year-to-date 2002 general and administrative
expenses in comparison to the same periods in the prior year was
due primarily to cost savings realized from our 2001
restructuring initiatives. Savings were realized from a decrease
in general and administrative staffing levels to
90 employees at September 30, 2002 from
94 employees at September 30, 2001, as well as savings
resulting from the reduction in facilities from 77 at
December 31, 2000 to 27 at September 30, 2002. In
addition, as a result of the restatement of certain previously
released 2000 financial results, we incurred higher fees for
outside professional services in the first half of 2001, in
particular higher legal and accounting fees related to the SEC
investigation and extended outside audit work.

Amortization
of Intangible Assets and Asset Impairment Charge

In connection with the acquisitions we completed
in 1999 and 2000, which were all accounted for using the
purchase method of accounting, we recorded goodwill and other
intangible assets, primarily for assembled

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workforce, customer base, and existing
technology. During 2000, we recorded a charge of
$1.3 billion related to the impairment of certain
long-lived assets, including intangible assets. In addition, in
connection with our second quarter 2001 restructuring
initiative, an impairment assessment of certain long-lived
assets was performed. As a result of this assessment in the
second quarter of 2001, we recorded an additional impairment
charge of $14.2 million to reduce these intangible assets
to their estimated fair values or eliminate them, as
appropriate. Based upon the types of intangible assets,
$4.2 million of this impairment charge was allocated to
cost of net revenues and $10.0 million was allocated to
operating expenses.


In connection with the adoption of FAS
No. 142, Goodwill and Other Intangible Assets, in the
beginning of 2002, approximately $5.6 million of goodwill
will no longer be subject to amortization, but instead will be
periodically tested for impairment. As a result of the second
quarter 2001 impairment charge and the adoption of FAS
No. 142, third quarter 2002 amortization expense decreased
significantly from the third quarter of 2001. Based upon the
types of identifiable intangibles acquired, third quarter 2002
amortization expense of $4.6 million was allocated to cost
of net revenues and the remaining amortization expense of
$6.2 million was allocated to operating expenses.

Acquisition-Related
Retention Bonuses

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

Restructuring
Expense

In May 2002, the Board of Directors approved a
restructuring plan to further reduce our expense levels
consistent with the then current business climate. In connection
with the plan, a restructuring charge of $1.5 million was
recognized in the second quarter of 2002. This charge was
comprised of approximately $1.2 million in severance and
related costs associated with the elimination of approximately
39 positions and $300,000 in facilities lease termination
costs.

In April 2001, we announced a strategic
restructuring plan that involved reorganizing Critical
Paths product and service offerings around a group of core
communications solutions, the divestiture of many non-core
products and services, a reduction in our workforce, and the
consolidation of facilities and operations. As a result, we
recognized restructuring charges of $8.5 million in the
second quarter of 2001 and $3.8 million in the third
quarter of 2001.

Stock-Based
Expenses

Stock-based expenses are comprised of charges
related to certain stock options and warrants granted to
employees, directors and consultants and common stock issued to
certain employees, directors and advisors in 1998 and 1999. The
decline in stock-based expenses in the third quarter and first
nine-months of 2002 in comparison to the same periods in 2001
was primarily the result of certain of these stock-based charges
related to the completion of the 1998 and 1999 grant activity
amortization.

Interest and
Other Income (Expense)

Interest and other income (expense) consists
primarily of interest earned from cash and cash equivalents, net
realized gains (losses) on foreign exchange transactions,
and any gain or loss from changes in the fair value of the
return on equity preference feature granted to the investors who
participated in the Critical Path 2001 preferred stock financing
transaction. The net other income of $1.9 million reported
for the third quarter of 2002 was primarily generated by the
recording of a $1.2 million non-cash gain associated with
the revaluation of the preferred stock preference feature
discussed above and interest income earned during the period.
The net other (expense) recognized for the first nine
months of 2002 of $803,000 was due primarily to the

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recording of a year-to-date non-cash loss of
$2.2 million associated with the revaluation of the
preferred stock preference feature, partially offset by interest
income.


Interest income amounted to $369,000 and
$1.3 million for the third quarter and first nine-months of
2002, respectively, compared to interest income of
$1.1 million and $5.0 million for the comparable
periods in 2001, respectively. Interest income was lower in 2002
compared to the same periods in the prior year due to lower cash
balances available for investing. Cash balances declined during
the twelve-month period ended September 30, 2002, due
primarily to the funding of our net losses and cash utilized in
2001 to retire a significant portion of our convertible debt
obligations.

We also recognized a net gain in the third
quarter of 2002 in the amount of $113,000 from foreign currency
transactions associated with our international operations, but a
net loss totalling $464,000 for the first nine months of 2002.
During 2001, we recognized a $1.0 million net loss and
$500,000 net gain for the comparable three and nine-month
periods, respectively.

Interest
Expense

Interest expense consists primarily of the
interest charges and amortization of related issuance costs
associated with the Convertible Subordinated Notes we issued in
March 2000, and interest on certain capital leases. Because of
the retirement of a significant portion of our convertible
subordinated notes and capital leases during 2001, interest
expense for the third quarter and first nine months of 2002
declined to $740,000 and $2.3 million, respectively, from
$3.8 million and $14.2 million for the comparable
periods in 2001.

Equity in Net
Loss of Critical Path Pacific

In June 2000, we established a joint venture,
Critical Path Pacific, Inc., with Mitsui and Co., Ltd.,
NTT Communications Corporation and NEC Corporation to
deliver advanced Internet messaging solutions to businesses in
Asia. We invested $7.5 million and held a 40% ownership
interest in the joint venture. This investment was accounted for
using the equity method

On June 6, 2002, we acquired the remaining
60% ownership interest that Critical Path did not already own in
Critical Path Pacific, Inc. for $3.0 million in cash and
the assumption of $2.6 million in business restructuring
and capital lease obligations. The excess of the purchase price
of $5.6 million over the fair value of the acquired net
assets, primarily working capital and fixed assets, of
$4.6 million was recorded as goodwill. In accordance with
SFAS No. 142, this goodwill asset of approximately
$1.0 million will not be amortized; however, we will test
this asset for impairment on an annual basis, or more frequently
if events or circumstances indicate that the asset might be
impaired. We began including the financial results of Critical
Path Pacific in our own consolidated results subsequent to the
acquisition date. As a result, the second quarter of 2002
represented the last quarter in which we will be using the
equity method to account for our Japanese entity ownership
interest.

During the third quarter and first nine months of
2002, we recorded equity in net loss of joint venture of
approximately zero and $1.4 million, respectively, compared
to a net loss of $346,000 and $1.5 million recorded in the
third quarter and first nine months of 2001.



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

During the third quarter of 2002, we recognized a
small provision for foreign income taxes as certain of our
European operations generated income taxable in certain European
jurisdictions. No current provision for U.S. federal or state
income taxes has been recorded as we have incurred net operating
losses for income tax purposes since our inception. No deferred
provision or benefit for federal or state income taxes has been
recorded as we are in a net deferred tax asset position for
which a full valuation allowance has been provided due to
uncertainty of realization. On a year-to-date basis, our tax
expense reflects an $800,000 first quarter 2002 U.S. federal
income tax benefit due to the repeal of the federal corporate
alternative minimum tax.

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| |                                    
| | -----------------------------------
| | Liquidity and Capital
    Resources

As of September 30, 2002, our cash, cash
equivalents and short-term investments totaled
$49.2 million, comprised of $35.4 million in cash and
cash equivalents and $13.8 million in short-term
investments. Our working capital amounted to approximately
$29.5 million. For the first nine months of 2002, we used
approximately $24.4 million in cash.

We used cash of $16.4 million to fund
operating activities during the first nine months of 2002
primarily due to our net loss, adjusted for non-cash charges, as
operating costs, primarily employee and employee related costs,
exceeded the related sales of our software products and
services. In addition, accrued expenses decreased by
$1.5 million due primarily to the payment of the remaining
acquisition retention bonus amounts during the second quarter of
2002. These uses of cash to fund operating activities were
partially offset by improved receivable collections of
$4.0 million.

We used cash in investing activities during the
first nine months of 2002 totaling $7.2 million. Cash was
primarily used to purchase capital equipment of approximately
$4.9 million, which included investments in additional
network infrastructure equipment and improvements to our new San
Francisco headquarters. In addition, cash was used to purchase
additional short-term investments of $4.1 million, and
issue a cash security deposit of $3.0 million in support of
a recently negotiated licensing agreement.

During the second quarter, the Company acquired
the remaining 60% ownership interest in its Japanese joint
venture, Critical Path Pacific, Inc., for $3.0 million in
cash and the assumption of $2.6 million in business
restructuring and capital lease obligations. As a result of the
acquisition, Critical Path recognized a net increase in cash, as
the cash held on the books of the joint venture exceeded the
cash portion of the purchase price by $4.5 million.

We used cash in financing activities during the
first nine months of 2002 of $865,000. Cash was principally used
to retire $3.6 million in principal on capital lease
obligations. This use of cash was partially offset by proceeds
the Company received from the repayment of notes receivable from
former officers and shareholders totaling $1.2 million, and
$1.5 million from the sale of our common stock, primarily
the result of stock option exercises.

In May 2002, the Board of Directors approved a
restructuring plan to further reduce our expense levels
consistent with the then current business climate. In connection
with the plan, a restructuring charge of $1.5 million was
recognized in the second quarter of 2002. This charge was
comprised of approximately $1.2 million in severance and
related costs associated with the elimination of approximately
39 positions and $300,000 in facilities lease termination costs.
During the second and third quarters of 2002, approximately
$762,000 was charged against this accrual, primarily cash
payments of severance related costs. The balance of the accrual
at September 30, 2002, of approximately $777,000 is
expected to be utilized by the end of this fiscal year.

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

Additionally, we have no present understandings,
commitments or agreements for any material acquisitions of, or
investments in, other complementary businesses, products or
technologies. We continually evaluate potential acquisitions of,
or investments in, other businesses, products and technologies,
and may in the future utilize our cash resources or may require
additional equity or debt financing to accomplish any
acquisitions or investments. As of the date of this Report, we
are considering several alternatives to expand our presence in
the Asian markets and potentially other international markets.
These alternatives could increase liquidity

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through the infusion of investment capital by
third-party investors or decrease our liquidity as a result of
Critical Path seeking to fund expansion into these markets. Such
activities might also cause an increase in capital expenditures
and operating expenses.


Additional Factors That May Affect Future
Operating Results

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

We cannot accurately forecast our revenues as a
result of our limited operating history, evolving business
strategy and the emerging nature of the Internet messaging
infrastructure market. Forecasting is further complicated by
rapid changes in our business due to integration of acquisitions
we completed in 1999 and 2000, our recent strategic and
operational restructuring, as well as significant fluctuations
in license revenues as a percentage of total revenues from an
insignificant percentage in 1999, to 38% in 2000, 30% in 2001
and 31% for the third quarter of 2002. Our revenues have in some
quarters and could continue to fall short of expectations if we
experience delays or cancellations of even a small number of
orders. We often offer volume-based pricing, which may affect
operating margins. A number of factors are likely to cause
fluctuations in operating results, including, but not limited to:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the demand for licensed solutions for messaging,
    directory, and other products;                                                                                                                    
|
| |  | the demand for outsourced messaging services
    generally and the use of messaging and directory infrastructure
    products and services in particular;                                              
|
| |  | our ability to attract and retain customers and
    maintain customer satisfaction;                                                                                                                    
|
| |  | our ability to attract and retain qualified
    personnel with industry expertise, particularly sales personnel;                                                                                       
|
| |  | the ability to upgrade, develop and maintain our
    systems and infrastructure and to effectively respond to the
    rapid technology change of the messaging and directory
    infrastructure market;
|
| |  | the budgeting 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; and                                                                                                                   
|
| |  | general economic and market conditions and their
    affect on our operations and that of our customers.                                                                                               

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

In addition, our operating results have been
affected and could continue to be impacted by 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 affecting operational results including the expenditure
of capital, the realization of losses, further reductions in our
workforce, facility consolidation or the elimination of revenues
along with the associated costs, any of which could harm our
financial condition and operating results.

As a result of the foregoing, we do not believe
that period-to-period comparisons of operating results are a
good indication of future performance. It is likely that
operating results in some quarters will be below market

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expectations. In this event, the price of our
common stock is likely to prove volatile and/or subject to
further declines.




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

Our ability to increase revenues will depend on
our ability to continue to successfully recruit, train and
retain experienced and effective sales and marketing personnel
and to achieve results once employed with us. Competition for
experienced and effctive personnel in certain markets is intense
and we may not be able to hire and retain personnel with
relevant experience. Moreover, our competitors frequently have
larger and more established sales forces calling upon potential
enterpise customers with more frequency. The complexity and
implementation of our messaging and directory infrastructure
products and services also 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. In
addition, certain of our competitors have longer and closer
relationships with the senior management of enterprise customers
who decide whose technologies and solutions to deploy. If we do
not successfully operate and grow our sales and marketing
activities, our business and results of operations could suffer
and the price of our common stock could continue to decline.



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

As of September 30, 2002, we had an
accumulated deficit, including other comprehensive income, of
approximately $2.2 billion. We have not achieved
profitability in any period and expect to continue to incur net
losses in accordance with generally accepted accounting
principles for the foreseeable future. However, we will continue
to spend resources on maintaining and strengthening our
business, and this may, in the near term, have a negative effect
on our operating results and our financial condition.

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

Throughout 2001 and 2002, we announced a series
of changes in our management that included the departure of many
senior executives and also made changes in our board of
directors. A majority of the board of directors and senior
executives of the Company joined us in 2001 and 2002. We have
made additional changes in recent months to our senior
management team due to a variety of factors. Because of these
changes and recent recruitment, our management team has not
worked together as a group for a significant length of

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time and may not be able to work together
effectively to successfully execute on revenue goals, implement
our strategies and manage our operations. If our management team
is unable to accomplish our business objectives, our ability to
grow our business and successfully meet operational challenges
could be severely impaired. We do not have long-term employment
agreements with any of our executive officers. It is possible
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 harm our
business and affect our ability to successfully implement our
business objectives.




| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on strategic relationships and
    the loss of any key strategic relationships could harm our
    business and negatively affect our revenues.

We depend on strategic relationships to expand
distribution channels and opportunities and to undertake joint
product development and marketing efforts. Our ability to
increase revenues depends upon aggressively marketing our
services through new and existing strategic relationships. In
the third quarter, we entered into certain partnership
agreements in our hosted messaging business with the
Hewlett-Packard Company for the development and marketing of a
complete managed messaging solution. In coming quarters we will
be investing heavily in this relationship and making changes in
our operations, including outsourcing our data operations, to
accommodate the integration of this partnership. To the extent
this integration does not proceed as anticipated or the
anticipated benefits of this partnership are not borne out, our
business and results may be harmed. In addition, if service
levels are not adequate in connection with the outsourcing of
our data centers, our customers may terminate agreements and our
business will suffer. We also depend on a broad acceptance of
our software and outsourced messaging services on the part of
potential resellers and partners and our acceptance as a
supplier of outsourced messaging solutions. We also depend on
joint marketing and product development through strategic
relationships to achieve further market acceptance and brand
recognition. Our agreements with strategic partners typically do
not restrict them from introducing competing services. These
agreements typically are for terms of one to three years, and
automatically renew for additional one-year periods unless
either party gives prior notice of its intention to terminate
the agreement. In addition, these agreements are terminable by
our partners without cause, and some agreements are terminable
by us, upon 30 - 120 days notice. Most of the
agreements also provide for the partial refund of fees paid or
other monetary penalties in the event that our services fail to
meet defined minimum performance standards. Distribution
partners may choose not to renew existing arrangements on
commercially acceptable terms, or at all. In addition to
strategic relationships, we also depend on the ability of our
customers to aggressively sell and market our services to their
end-users. If we lose any strategic relationships, fail to renew
these agreements or relationships, fail to fully exploit our
relationships, or fail to develop new strategic relationships,
our business and financial results will suffer, and could have
an adverse impact on our current and future revenues.



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

We expect that sales of our products and services
to a limited number of customers will continue to account for a
high percentage of our revenue for the foreseeable future. Our
future success depends on our ability to retain our current
customers, and to attract new customers, in our target markets.
The loss of one or several major customers, whether through
termination of agreements, acquisitions or bankruptcy, could
harm our business. Our agreements with our customers typically
have terms of one to three years often with automatic one-year
renewals and can be terminated without cause upon 30 - 120
days notice. In addition, a number of our customers,
particularly for our hosted services business and in the
technology industry, have also suffered from falling revenue,
job losses, restructuring and decreased technology spending in
the recent economic downturn. Especially in the
telecommunications industry, which represents a sizeable portion
of our customer base, the relative financial performance of our
customers will continue to impact our sales cycles and 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 could have an adverse impact on 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.

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

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

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



| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | breadth of platform features and functionality of
    our offerings and the sophistication, innovation of
    competitors;                                                                                                         
|
| |  | total cost of ownership and operation.                                                                                                                                                                                              
|
| |  | scalability, reliability and performance, and
    ease of integration into existing systems, expansion and upgrade;                                                                                                                 
|
| |  | flexibility to enable customers to manage certain
    aspects of their systems internally and leverage outsourced
    services in other cases when resources, costs and time to market
    reasons favor an outsourced offering; and

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



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

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 two to twelve months. Because of the nature of our
product and service offerings it can take many months of
customer education and product evaluation before a purchase
decision is made. In addition, many factors can influence the
decision to purchase our product and service offerings including
budgetary restraints and decreases in capital expenditures,
quarterly fluctuations in operating results of customers and
potential customers, the emerging and evolving nature of the
internet-based services and wireless services markets.
Furthermore, general global economic conditions, and 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 differ from those projected and cause
our stock price to decline.

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

We believe that existing capital resources will
enable us to maintain current and planned operations through at
least September 30, 2003. However, additional capital may
be required to continue operations and achieve profitability. In
addition, we may be required to raise additional funds due to
unforeseen circumstances and market conditions. If our capital
requirements vary materially from those currently planned, we
may require additional financing even sooner than anticipated.
Such financing may not be available in sufficient amounts or on
terms acceptable to us and may be dilutive to existing
shareholders. Additionally, we face a number of challenges in
operating our business, including but not limited to the
resources to maintain worldwide operations, continued
sluggishness in technology spending, and significant contingent
liabilities associated with litigation. In the event that
resolution of these or other operational matters involve
issuance of stock or other derivative instruments, our existing
shareholders may experience significant dilution.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pending litigation could harm relationships
    with existing or potential strategic partners and customers, and
    divert managements attention, either of which could harm
    our business.

In recent years, we have had filed a number of
lawsuits against us, including securities class action and
shareholder derivative litigation filed in February and August
2001, and certain of our former officers and directors and some
of our subsidiaries, as well as other lawsuits related to
acquisitions, employee terminations and copyright infringement.
While these lawsuits vary greatly in the materiality of
potential liability associated with them and many have been
satisfactorily settled, the uncertainty associated with
substantial unresolved lawsuits could seriously harm our
business, financial condition and reputation, whether material
individually or in the aggregate. In particular, this
uncertainty could harm our relationships with existing
customers, our ability to obtain new customers and our ability
to operate certain aspects of our business.

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



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | Failure to resolve pending securities
    claims and other material lawsuits could significantly harm our
    business.

Although the Company reached and the court
approved settlement agreements in connection with the securities
class action pending in the U.S. District Court for the Northern
District of California, a number of plaintiffs associated with
the acquisition of Peer Logic, Inc. opted out of such
settlement. The case against the Company with respect to these
plaintiffs continues in the Southern District of New York. In
addition, the Company is a defendant in a number of securities
class action lawsuits filed in the U.S. District Court for the
Southern District of New York, alleging that prospectuses under
which securities were sold contained false and misleading
statements with respect to discounts and commissions received by
underwriters. Should these lawsuits linger for a long period of
time, whether resolved in the Companys favor or not, or
further lawsuits be filed against us there can be no assurance
that fees and expenses, and any ultimate resolution associated
with such litigation, will be within the coverage limits of our
insurance and/or our ability to pay such amounts. Likewise,
there can be no assurance that the Company will be able to
conclude or settle such litigation on terms that coincide with
the coverage limits of our insurance and/or ability to pay upon
any final determination. A failure to definitively resolve
material litigation in which the Company is involved or in which
it may become involved in the future, regardless of the merits
of the respective cases, could also cast

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




| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Although concluded without monetary
    penalties to the Company, lingering effects of the recent SEC
    investigation could harm our business.

In 2001, the SEC investigated the Company and
certain of its former officers and directors related to
non-specified accounting matters, financial reports, other
public disclosures and trading activity in our stock. In
February 2002, the SEC concluded the investigation as to the
Company. Although the SEC did not impose any financial or
criminal penalties against the Company, we consented, without
admitting or denying liability, to a cease and desist order and
an administrative order for violation of certain non-fraud
provisions of the federal securities laws. In addition, since
then the SEC and the Department of Justice charged five former
employees of the Company with various violations of the
securities laws. We believe that the investigation continues
with respect to a number of other former executives and
employees of the Company and expect that such investigation may
result in further charges against former employees although we
do not know the status of such investigation. Despite the
conclusion of the investigation of the Company, lingering
concerns about the actions leading up to the restatement of
financials for the third quarter of 2000 have nevertheless cast
doubt on the future of the Company in the eyes of customers and
investors. In addition, a number of recent arrests, allegations
and investigations in connection with accounting improprieties,
insider trading and fraud at other public companies have created
investor uncertainty and scrutiny in general as to the stability
and veracity of public companies financial statements.
Such lingering doubts stemming from the Companys past
accounting restatements and such general market uncertainty
could harm our business and cause the price of our common stock
to continue to fluctuate and/or decline further.



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

In the past, our management of operational
expenses and the growth of our business have contributed to our
history of losses. In addition, both the restructuring and
expansion of our operations has in the past placed significant
strains on managerial, operational and financial resources and
affected our results. In addition, to manage any future growth
and profitability we may need to improve or replace our existing
operational, customer service and financial systems, procedures
and controls. Any failure to properly manage these systems and
procedural transitions could impair our ability to attract and
service customers, and could cause us to incur higher operating
costs and delays in the execution of our business plan. We will
also need to hire additional personnel including highly skilled
sales personnel. Our management may not be able to hire, train,
retain, motivate and manage required personnel. In addition, our
management may not be able to successfully identify, manage and
exploit existing and potential market opportunities. If we
cannot manage growth and expenses effectively, our business and
operating results could suffer. In addition, the Company
continues to evaluate its operations and cost structure in order
to right size its operations to its business and prospects. Any
failure to appropriately manage efficiencies in its operations
could cause harm to our business and results.



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

The Nasdaq Stock Market has quantitative
maintenance criteria for the continued listing of common stock
on the Nasdaq National Market. The current requirements
affecting us include (i) having net tangible assets of at
least $4 million and (ii) maintaining a minimum
closing bid price per share of $1. As of November 13, 2002
we were not in compliance with Nasdaq National Market minimum
bid listing requirements and had not been in compliance since
September 19, 2002. As of December 20, 2002, if our
common stock price remains below $1.00 and in the event we are
unable to take actions that result in per share closing bid
price exceeding and remaining above $1.00 for a period of ten
trading days, we may be subject to a delisting action of our
common stock by The Nasdaq National Market. Also effective
November 1, 2002, we need to comply with the Nasdaq
National Markets revised quantitative maintenance criteria
including a new minimum requirement of $10.0 million in
stockholders equity. The Nasdaq National Markets
Audit Committee Rules require that our audit committee be
comprised of at least three independent members.

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Although we believe that we currently comply with
this requirement and other Nasdaq National Marketplace Rules,
recent amendments to such rules may involve changes to listing
requirements and the membership of our Board committees, and
will require review and potential changes in our policies,
procedures and committee memberships to remain in compliance. As
a result, the Company is currently evaluating its compliance
with rule changes to ensure future compliance with proposed, and
amended rules. However, there can be no assurance that we will
be able to comply with the quantitative maintenance criteria or
any of the Nasdaq National Markets listing requirements or
other rules, or other markets listing requirements to the extent
our stock is listed elsewhere, in the future.


If we fail to maintain continued listing on the
Nasdaq National Market and must move to a market with less
liquidity, our financial condition could be harmed and our stock
price would likely further decline. If we are delisted, it could
have a material adverse effect on the market price of, and the
liquidity of the trading market for, our common stock.



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 third quarter of 2002, the
closing sale prices of our common stock on the Nasdaq National
Market ranged from $1.15 on August 1, 2002 to $0.56 on
September 23, 2002. The closing price of our stock on
September 30, 2002 was $0.63 per share. Our stock price may
further decline or fluctuate in response to any number of
factors and events, such as 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, and our ability to remain listed on the Nasdaq
National Market, regardless of our operating performance or
other factors.



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

Our liability insurance for actions taken by
officers and directors during the period from March 1999 to
March 2001, the period during which events related to securities
class action lawsuits against us and certain of former executive
officers are alleged to have occurred, provided only limited
liability protection. While these policies covered the
settlement amount paid in connection with the settlement of the
primary securities class action, there can be no assurance that
the policies will continue to cover other pending matters and
related expenses from that period or future periods. If these
policies do not adequately cover our expenses related to those
lawsuits and the investigation, our business and financial
condition could be seriously harmed. Our current director and
officer liability insurance, which was put in place in March
2002, and continues through March 2003, contains similar
provisions, and in the event circumstances arise requiring
coverage by such policies there can be no assurance that they
will be adequate for the liabilities and expenses potentially
incurred. To the extent liabilities, expenses, or settlements
thereof, exceed the limitations of coverage, our business and
financial condition could be materially harmed.

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

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connection with currently pending lawsuits and
has reserved for estimated future amounts to be paid in
connection with legal expenses and others costs of defense of
pending lawsuits.




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

The loss of the services of key personnel could
harm our business results. Our success also depends on our
ability to recruit, retain and motivate highly skilled sales and
marketing, operational, technical and managerial personnel.
Competition for these people is intense and we may not be able
to successfully recruit, train or retain qualified personnel. If
we fail to do so, we may be unable to develop new services or
continue to provide a high level of customer service, which
could result in the loss of customers and revenues. 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. In recent quarters we have
also initiated reductions in our work force and job eliminations
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 provide distractions affecting our
ability to deliver products and solutions in a timely fashion
and 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 harm our business and affect our ability to
successfully implement our business objectives.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | If we are not successful in implementing
    strategic plans for our operations, our business could be
    negatively impacted.

During 2001, we reorganized our product and
service offerings around a group of core products deemed most
imperative to our ability to serve the messaging and directory
infrastructure market. Implementation of the plan occurred in
the latter half of 2001 and, accordingly, products and services
determined to be non-core to our strategy were exited. As a
result, revenue from non-core products and services comprising
approximately 37% of total revenues in the first quarter of 2001
declined to approximately 3% of total revenues in the fourth
quarter of 2001 and to none in 2002. Our strategic plan also
included initiatives aimed at reducing operating costs through
headcount reduction and consolidation of approximately
two-thirds of our office space and related contracts and leases,
all in keeping with our increased focus on core messaging
products and services. During the fourth quarter of 2001 we
incurred additional charges in connection with previously
announced reductions in force and were able to finalize the
consolidation of additional facilities and related contracts and
expenses associated with those facilities. In 2002, we have
incurred a number of restructuring charges related to the
right-sizing of our business given market conditions and the
current operating environment. These efforts included additional
facilities and equipment lease terminations, continuing expense
management and headcount reductions. 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 and to make such determinations prudently could
affect our future operations. A failure to successfully execute
on such plans and to plan appropriately could negatively effect
our business and financial condition.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may face continued technical,
    operational and strategic challenges preventing us from
    successfully integrating or divesting acquired
    businesses.

Acquisitions involve risks related to the
integration and management of acquired technology, operations
and personnel. In addition, in connection with our strategic
restructuring, the Company elected to divest or discontinue many
of the acquired businesses. Both the integration and divestiture
of acquired businesses have been and will continue to be
complex, time consuming and expensive processes, which may
disrupt and distract our management from its core business. With
respect to integration, we must operate as a combined
organization utilizing common information and communication
systems, operating procedures, financial controls and human
resources practices to be successful. With respect to the
divestitures, the timing and transition of those businesses and
their customers to other entities has required and will continue
to require

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resources from our legal, finance and corporate
development teams as well as expenses associated with the
conclusion of those transactions, winding up of entities and
businesses and we may not ultimately achieve anticipated
benefits and/or cost reductions from such divestitures.


In the past, due to the significant
underperformance of some of our acquisitions relative to
expectations, we eliminated certain acquired product or service
offerings through termination, sale or other disposition. Such
decisions to eliminate or limit our offering of an acquired
product or service involved and could continue to include the
expenditure of capital, the realization of losses, further
reduction in workforce, facility consolidation, and/or the
elimination of revenues along with the associated costs, any of
which could harm our financial condition and operating results.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We currently license many third-party
    technologies and may need to license further technologies and we
    face risks in doing so that could cause our operating results to
    suffer.

We intend to continue to license certain
technologies from third parties and incorporate such
technologies into our products and services, including web
server technology, virus and anti-spam solutions, storage and
encryption technology. The market is evolving and we may need to
license additional technologies to remain competitive. We may
not be able to license these technologies on commercially
reasonable terms or at all. To the extent we cannot license
needed technologies or solutions, we may have to devote Company
resources to the development of such technologies that could
materially harm our business and operations.

In addition, we may fail to successfully
integrate any licensed technology into our services. These
third-party in-licenses may expose us to increased risks,
including risks related to the integration of new technology,
potential patent and copyright infringement issues, the
diversion of resources from the development of proprietary
technology, and an inability to generate revenues from new
technology sufficient to offset associated acquisition and
maintenance costs. In addition, an inability to obtain needed
licenses could delay product and service development until
equivalent technology can be identified, licensed and
integrated. Any delays in services or integration problems could
cause our business and operating results to suffer.



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

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



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

Few laws currently apply directly to activity on
the Internet and the messaging business, however new laws are
proposed and other laws made applicable to Internet
communications every year. In particular, the operations of the
Companys 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 and/or new regulations and application of
laws to our business could

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burden our company and those with which we do
business. Further, the adoption of additional laws and
regulations could limit the growth of our business and that of
our business partners and customers. Any decreased generalized
demand for our services or the loss of, or decrease, in business
by a key partner due to regulation or the expense of compliance
with any regulation, could either increase the costs associated
with our business or affect revenue, either of which could harm
our financial condition or operating results. Certain of our
service offerings include operations subject to the Digital
Millenium Copyright Act of 1998. The Company has expended
resources and implemented processes and controls in order to
remain in compliance with DMCA but there can be no assurance
that our efforts will be sufficient and/or new legislation and
case law will not affect the operation of certain services.


In addition, the applicability of laws and
regulations directly applicable to the businesses of our
customers, particularly customers in the fields of banking and
health care, will continue to affect us. The security of
information about our customers end-users continues to be
an area where a variety of laws and regulations with respect to
privacy and confidentiality are enacted. As our customers
implement the protections and prohibitions with respect to the
transmission of end user data, our customers will look to us to
assist them in remaining in compliance with this evolving area
of regulation. In particular the Gramm-Leach-Blilely Act
contains restrictions with respect to the use and protection of
banking records for end-users whose information may pass through
our system 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 Company faces increased regulatory
scrutiny and criminal liability for its executives associated
with various accounting and corporate governance rules
promulgated under the Sarbanes-Oxley Act of 2002. The Company is
currently reviewing all of its accounting policies and
practices, legal disclosure and corporate governance policies
under the new legislation, including those related to its
relationships with its independent accountants, enhanced
financial disclosures, internal controls, board and board
committee practices, corporate responsibility and loan
practices, and intends to fully comply with such laws.
Nevertheless, such increased scrutiny and penalties involve
risks to both the Company and its executive officers and
directors in monitoring and insuring compliance. A failure to
properly navigate the legal disclosure environment and implement
appropriate policies and procedures if needed could harm the
Companys business and prospects.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | 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. Although we have not experienced any material software
defects to date, it is possible that, despite testing, defects
may occur in the software. These defects could cause service
interruptions, which could damage our reputation or increase
service costs, cause us to lose revenue, delay market acceptance
or divert development resources, any of which could cause our
business to suffer.



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

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

Although we carry general liability and umbrella
liability insurance, our insurance may not cover claims of these
types or may not be adequate to indemnify us for all liability
that may be imposed. There is a risk that

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




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

Our customers have, in the past, experienced some
interruptions in our messaging service. We believe that these
interruptions will continue to occur from time to time. These
interruptions are due to hardware failures, unsolicited bulk
email, or spam, attacks and operating system
failures. Our business will suffer if we experience frequent or
long system interruptions that result in the unavailability or
reduced performance of systems or networks or reduce our ability
to provide email services. We expect to experience occasional
temporary capacity constraints due to sharply increased traffic,
which may cause unanticipated system disruptions, slower
response times, impaired quality and degradation in levels of
customer service. If this were to continue to happen, our
business and reputation could suffer dramatically.

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



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

We rely on a combination of trademark, copyright
and trade secret laws, contractual restrictions, such as
confidentiality agreements and licenses, and patents to
establish and protect our proprietary rights, which we view as
critical to our success. Our ability to compete and grow our
business could suffer if these rights are not adequately
protected. We seek to protect our source code for our software,
documentation and other written materials under trade secret and
copyright laws. We license our software pursuant to agreements
that impose certain restrictions on the licensees ability
to utilize the software. Despite these precautions, unauthorized
third parties may infringe or copy portions of our services or
reverse engineer or obtain and use information that we regard as
proprietary, which could harm our competitive position and
market share. We also seek to avoid disclosure of our
intellectual property by requiring employees and consultants
with access to our proprietary information to execute
confidentiality agreements. In addition, we have several patents
pending in the United States and may seek additional patents in
the future. However, the status of United States patent
protection in the software industry is not well defined and will
evolve as the U.S. Patent and Trademark Office grants additional
patents. We do not know if our patent applications or any of our
future patent applications will be issued with the scope of the
claims sought, if at all, or whether any patents we have
received or will receive will be challenged or invalidated.

Our proprietary rights may not be adequately
protected because:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | laws and contractual restrictions may not prevent
    misappropriation of our technologies or deter others from
    developing similar technologies;                                       
|
| |  | policing unauthorized use of our products and
    trademarks is difficult, expensive and time-consuming, and we
    may be unable to determine the extent of this unauthorized use;
    and
|
| |  | end user license provisions in our contracts that
    protect us against unauthorized use, copying, transfer and
    disclosure of the licensed program may be unenforceable.              

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In addition, the laws of some foreign countries
may not protect proprietary rights to the same extent as do the
laws of the United States. Our means of protecting proprietary
rights in the United States or abroad may not be adequate and
competitors may independently develop similar technology.
Additionally, although no claims of alleged patent infringement
are currently pending, we cannot be certain that our products do
not infringe issued patents that may relate to our products. In
addition, because patent applications in the United States are
not publicly disclosed until the patent is issued, applications
may have been filed which relate to our software products.



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

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



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

We assume a certain level of credit risk with our
customers in order to do business. Conditions affecting any of
our customers could cause them to become unable or unwilling to
pay us in a timely manner, or at all, for products or services
we have already provided them. For example, if the current
economic conditions continue to decline or if new or
unanticipated government regulations are enacted which affect
our customers, they may be unable to pay their bills. In the
past, we have experienced significant collection delays from
certain customers, and we cannot predict whether we will
continue to experience similar or more severe delays in the
future. In particular, some of our customers are suffering from
the general weakness in the economy and among technology
companies in particular. Although we have established reserves
that we believe are sufficient to cover losses due to delays in
or inability to pay and while we take a consistently
conservative position on the collectability of revenue with
respect to particular customers, there can be no assurance that
such reserves will be sufficient to cover our losses. If losses
due to delays or inability to pay are greater than our reserves,
it could harm our business, operating results and financial
condition.



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

We derived 57% of our revenues from international
sales in the first three quarters of 2002 and 40% of our
revenues from international sales in the first three quarters of
2001. We intend to continue to operate in international markets
and to spend significant financial and managerial resources to
do so. In particular, we have recently purchased the remaining
interests of our joint venture partners for our operations in
Japan. We plan to expend revenues and resources to grow our
operations in the Asian market. If revenues from international
operations do not exceed the expense of establishing and
maintaining these operations, our business, financial condition
and operating results will suffer. We have limited experience in
international operations and may not be able to compete or
operate effectively in international markets. We face certain
risks inherent in conducting business internationally, including:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | difficulties and costs of staffing and managing
    international operations;            
|
| |  | fluctuations in currency exchange rates and
    imposition of currency exchange controls;

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| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | 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                                                               
|
| |  | reduced protection for intellectual property
    rights in some countries.                            

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



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

During 2000 and 2001, California experienced a
serious energy crisis that could have and may in the future
disrupt our operations and increase our expenses. In the event
of an acute power shortage, that is, when power reserves for the
State of California fall below 1.5%, California has on several
occasions implemented, and may in the future continue to
implement, rolling blackouts throughout the state. If blackouts
interrupt our power supply or the power supply of any of our
customers, we, or our customers, may be temporarily unable to
operate. Any interruption in our ability to continue operations
or great increase in the cost of doing business could delay the
development of or interfere with the sales of our products.
Future interruptions could damage our reputation, harm our
ability to retain existing customers and to obtain new
customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations. Any
interruption in the ability of our customers to continue their
operations, could harm their business, and ultimately could also
harm our business if they were to terminate or fail to renew
contracts. We do not carry sufficient business interruption
insurance to compensate us for losses that may occur as a result
of blackouts, and any losses or damages we incur could harm our
business. Furthermore, the deregulation of the energy industry
instituted in 1996 by the California government and shortages in
wholesale electricity supplies have caused power prices to
increase dramatically. If wholesale prices continue to increase,
our operating expenses will likely increase, as our headquarters
and many employees are based in California.



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

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



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

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

33



---



##### Table of Contents






SUPPLEMENTAL ALTERNATIVE MEASUREMENT FINANCIAL
DATA

The following supplemental alternative
measurement financial information presents Critical Paths
condensed consolidated results of operations during the three
and nine-month periods ended September 30, 2001 and 2002,
excluding the impact of certain special charges consisting of
(i) amortization of intangible assets associated with
purchase business combinations and financing transactions,
(ii) accruals for employee retention bonuses associated
with purchase business combinations, (iii) stock-based
compensation associated with outstanding options and warrants,
(iv) one-time charges related to restructuring initiatives,
(v) write-down of investments, (vi) impairment of
long-lived assets, (vii) extraordinary gains on retirement
of convertible subordinated notes, (viii) gain
(loss) on adjustment to market of the preferred stock
instrument, and (ix) accretion on redeemable convertible
preferred shares. This supplemental presentation is for
informational purposes only, and is not intended to replace the
consolidated operating results prepared and presented in
accordance with generally accepted accounting principles.

Critical Path, Inc.

Alternative Measurement Condensed Consolidated
Statements of Operations Data

Excluding Special Charges


|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |        |        | 
|------------------------------------------- | -------------------------- | ---------------------------------------- | ------- | ----------------- | ------ | ------------- | ------- | ------------- | ------ | - | -------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                            |                            |                                          |         |                  
|                                            |                            | Three Months Ended                       |         | Nine Months Ended
|                                            |                            |                                          |         |                  
|                                            |                            | September 30,                            |         | September 30,     |        | September 30, |         | September 30,
|                                            |                            | 2001                                     |         | 2002              |        | 2001          |         | 2002         
|                                            |                            |                                          |         |                   |        |               |         |              
|                                            |                            |                                         
|                                            |                            | (In thousands, except per share amounts)
|                                            |                            |                                          |         |                   |        |              
|                                            |                            |                                          |         | (Unaudited)       |        |              
|Net revenues                                |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|                                            | Software license           |                                          | $       | 7,724             |        |               | $       | 5,929         |        |   | $        | 22,187 |         |   | $       | 27,740 |       
|                                            | Hosted messaging           |                                          |         | 10,000            |        |               |         | 6,461         |        |   |          | 35,580 |         |   |         | 19,007 |       
|                                            | Professional services      |                                          |         | 4,206             |        |               |         | 3,053         |        |   |          | 10,523 |         |   |         | 7,635  |       
|                                            | Maintenance and support    |                                          |         | 4,857             |        |               |         | 3,725         |        |   |          | 12,725 |         |   |         | 10,917 |       
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|                                            |                            | Total net revenues                       |         |                   | 26,787 |               |         |               | 19,168 |   |          |        | 81,015  |   |         |        | 65,299 | 
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|Cost of net revenues                        |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|                                            | Software license           |                                          |         | 517               |        |               |         | 563           |        |   |          | 934    |         |   |         | 1,436  |       
|                                            | Hosted messaging           |                                          |         | 13,982            |        |               |         | 7,448         |        |   |          | 49,360 |         |   |         | 22,835 |       
|                                            | Professional services      |                                          |         | 2,565             |        |               |         | 2,393         |        |   |          | 8,125  |         |   |         | 7,002  |       
|                                            | Maintenance and support    |                                          |         | 2,837             |        |               |         | 2,222         |        |   |          | 7,837  |         |   |         | 6,549  |       
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|                                            |                            | Total cost of net revenues               |         |                   | 19,901 |               |         |               | 12,626 |   |          |        | 66,256  |   |         |        | 37,822 | 
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|Gross profit                                |                            |                                          | 6,886   |                   |        |               | 6,542   |               |        |   | 14,759   |        |         |   | 27,477  |       
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|Operating expenses                          |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|                                            | Sales and marketing        |                                          |         | 11,018            |        |               |         | 10,945        |        |   |          | 45,424 |         |   |         | 33,262 |       
|                                            | Research and development   |                                          |         | 7,322             |        |               |         | 5,154         |        |   |          | 25,589 |         |   |         | 15,329 |       
|                                            | General and administrative |                                          |         | 9,447             |        |               |         | 5,362         |        |   |          | 34,485 |         |   |         | 18,336 |       
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|                                            |                            | Total operating expenses                 |         |                   | 27,787 |               |         |               | 21,461 |   |          |        | 105,498 |   |         |        | 66,927 | 
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|Loss from operations                        |                            |                                          | (20,901 | )                 |        |               | (14,919 | )             |        |   | (90,739  | )      |         |   | (39,450 | )     
|Interest and other income (expense), net    |                            |                                          | 178     |                   |        |               | 767     |               |        |   | 5,498    |        |         |   | 1,461   |       
|Interest expense                            |                            |                                          | (3,829  | )                 |        |               | (671    | )             |        |   | (14,191  | )      |         |   | (1,906  | )     
|Equity in net loss of joint venture         |                            |                                          | (346    | )                 |        |               |        |               |        |   | (1,519   | )      |         |   | (1,408  | )     
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|Loss before income taxes                    |                            |                                          | (24,898 | )                 |        |               | (14,823 | )             |        |   | (100,951 | )      |         |   | (41,303 | )     
|Provision for income taxes                  |                            |                                          | (2,180  | )                 |        |               | (234    | )             |        |   | (3,673   | )      |         |   | (255    | )     
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|Net loss                                    |                            | $                                        | (27,078 | )                 |        | $             | (15,057 | )             |        | $ | (104,624 | )      |         | $ | (41,558 | )     
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|Net loss per share  basic and diluted      |                            | $                                        | (0.36   | )                 |        | $             | (0.19   | )             |        | $ | (1.42    | )      |         | $ | (0.54   | )     
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       
|Weighted average shares  basic and diluted |                            |                                          | 74,492  |                   |        |               | 78,265  |               |        |   | 73,472   |        |         |   | 77,523  |       
|EBITDA(1)                                   |                            | $                                        | (10,319 | )                 |        | $             | (8,198  | )             |        | $ | (57,645  | )      |         | $ | (17,547 | )     
|                                            |                            |                                          |         |                   |        |               |         |               |        |   |          |        |         |   |         |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings before interest, taxes, depreciation and
    amortization, equity in net loss of joint venture and one-time
    charges identified in the following table. EBITDA is calculated
    by excluding from loss from operations depreciation expense of
    approximately $10.6 million and $33.1 million for the
    three and nine-month periods ended September 30, 2001, and
    depreciation expense of $6.7 million and $21.9 million
    for the three and nine-month periods ended September 30,
    2002.

34



---



##### Table of Contents



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

|                                                         |                                                                        |                    |         |                   |   |               |         |               |   |   |          |         |   |   |         |         |  
|-------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------ | ------- | ----------------- | - | ------------- | ------- | ------------- | - | - | -------- | ------- | - | - | ------- | ------- | -
|                                                         |                                                                        |                    |         |                  
|                                                         |                                                                        | Three Months Ended |         | Nine Months Ended
|                                                         |                                                                        |                    |         |                  
|                                                         |                                                                        | September 30,      |         | September 30,     |   | September 30, |         | September 30,
|                                                         |                                                                        | 2001               |         | 2002              |   | 2001          |         | 2002         
|                                                         |                                                                        |                    |         |                   |   |               |         |              
|                                                         |                                                                        |                    |         |                   |   |              
|                                                         |                                                                        |                    |         | (Unaudited)       |   |              
|Supplemental alternative measurement net loss            |                                                                        | $                  | (27,078 | )                 |   | $             | (15,057 | )             |   | $ | (104,624 | )       |   | $ | (41,558 | )      
|                                                         | Amounts excluded from alternative measurement net
    loss             |                    |         |                   |   |               |         |               |   |   |          |         |   |   |         |         |  
|                                                         | Amortization of purchased technology                                   |                    |         | (4,970            | ) |               |         | (4,631        | ) |   |          | (16,314 | ) |   |         | (13,892 | )
|                                                         | Amortization of intangible assets                                      |                    |         | (7,318            | ) |               |         | (6,209        | ) |   |          | (25,229 | ) |   |         | (18,567 | )
|                                                         | Acquisition-related retention bonuses in
    Operating expenses        |                    |         | (92               | ) |               |         |              |   |   |          | (1,055  | ) |   |         | (11     | )
|                                                         | Restructuring expense                                                  |                    |         | (3,779            | ) |               |         |              |   |   |          | (12,260 | ) |   |         | (1,539  | )
|                                                         | Impairment of long-lived assets                                        |                    |         |                   |   |               |         |              |   |   |          | (14,198 | ) |   |         |        |  
|                                                         | Stock-based expense in cost of revenue                                 |                    |         | (631              | ) |               |         | (255          | ) |   |          | (3,403  | ) |   |         | (1,090  | )
|                                                         | Stock-based expense in operating expenses                              |                    |         | (6,453            | ) |               |         | (951          | ) |   |          | (27,461 | ) |   |         | (8,319  | )
|                                                         | Amortization of debt issuance costs in
    non-operating expense       |                    |         |                  |   |               |         | (69           | ) |   |          | (20     | ) |   |         | (350    | )
|                                                         | Loss on investments in non-operating expense                           |                    |         |                  |   |               |         |              |   |   |          | (702    | ) |   |         | (104    | )
|                                                         | Gain on retirement of convertible subordinated
    notes               |                    |         | 137,222           |   |               |         |              |   |   |          | 141,040 |   |   |         |        |  
|                                                         | Preferred stock instrument marked to market                            |                    |         |                  |   |               |         | 1,160         |   |   |          |        |   |   |         | (2,160  | )
|                                                         |                                                                        |                    |         |                   |   |               |         |               |   |   |          |         |   |   |         |        
|                                                         | Subtotal of amounts excluded from alternative
    measurement net loss |                    |         | 113,979           |   |               |         | (10,955       | ) |   |          | 40,398  |   |   |         | (46,032 | )
|                                                         |                                                                        |                    |         |                   |   |               |         |               |   |   |          |         |   |   |         |        
|GAAP net income (loss)                                   |                                                                        |                    | 86,901  |                   |   |               | (26,012 | )             |   |   | (64,226  | )       |   |   | (87,590 | )      
|                                                         | Accretion on redeemable convertible preferred
    shares               |                    |         |                  |   |               |         | (3,600        | ) |   |          |        |   |   |         | (10,067 | )
|                                                         |                                                                        |                    |         |                   |   |               |         |               |   |   |          |         |   |   |         |        
|GAAP net income (loss) attributable to
    common shares |                                                                        | $                  | 86,901  |                   |   | $             | (29,612 | )             |   | $ | (64,226  | )       |   | $ | (97,657 | )      
|                                                         |                                                                        |                    |         |                   |   |               |         |               |   |   |          |         |   |   |         |        

35



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##### Table of Contents






QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK




Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

As of September 30, 2002, our investment
portfolio consisted of available-for-sale securities, excluding
those classified as cash equivalents, of $15.5 million.
These securities consist of $1.7 million of strategic
equity investments in corporate partners, certain of which are
publicly traded and marketable and certain of which are
privately held and $13.8 million of high grade, low risk
government securities and corporate bonds. These equity
securities are subject to price risk. Critical Paths
long-term obligations consist of our $38.4 million of face
value 5.75% Convertible Subordinated Notes due April 2005, and
certain fixed rate capital leases. We do not plan to reduce or
eliminate our market exposure on these securities.

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

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




Item 4.Controls
and Procedures

(a) Evaluation of Controls and
Procedures. Based on their evaluation, as of a date within
90 days of the filing of this Form 10-Q, the
Companys Chief Executive Officer and Chief Financial
Officer have concluded the Companys disclosure controls
and procedures (as defined in Rules 13a-14 and 15d-14 under
the Securities Exchange Act of 1934) are effective.

(b) Changes in Internal Controls.
There were no significant changes in the Companys internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

36



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##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders

of Critical Path, Inc.


We have reviewed the accompanying condensed
consolidated balance sheet of Critical Path, Inc. and its
subsidiaries as of September 30, 2002 and the related
condensed consolidated statements of operations for the three
and nine-month periods ended September 30, 2002 and the
condensed consolidated statements of cash flows for the
nine-month periods ended September 30, 2002 and 2001. These
financial statements are the responsibility of the
Companys management.

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

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

We previously audited in accordance with auditing
standards generally accepted in the United States of America,
the consolidated balance sheet as of December 31, 2001, and
the related consolidated statements of operations, of
shareholders equity, and of cash flows for the year then
ended (not presented herein), and in our report dated
February 5, 2002 we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2001, is fairly stated in
all material respects in relation to the consolidated balance
sheet from which it has been derived.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, CA

November 5, 2002


37



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##### Table of Contents






PART 2  OTHER INFORMATION




Item 1.     Legal
Proceedings

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

Securities Action in Southern District of New
York.On April 30, 2002, MBCP
PeerLogic LLC and other named plaintiffs filed suit in the U.S.
District Court for the Southern District of New York against
Critical Path and certain of its former officers. In June 2002,
the plaintiff shareholders opted out of a shareholder litigation
settlement that was approved by the U.S. District Court for the
Northern District of California. The complaint alleged breach of
contract, unjust enrichment, common law fraud and violations of
federal securities laws and seeks compensatory and punitive
damages in an unnamed amount but in excess of $200 million.
Litigation in this matter is ongoing. The Company filed a motion
to have the case transferred to the Northern District of
California and is awaiting the courts review of such
motion.

Securities and Exchange Commission
Investigation.In 2001, the Securities
and Exchange Commission (the SEC) investigated the
Company and certain former officers, employees and directors
with respect to non-specified accounting matters, financial
reports, other public disclosures and trading activity in the
Companys securities. The SEC concluded its investigation
of the Company in January 2002 with no imposition of fines or
penalties and, without admitting or denying liability, the
Company consented to a cease and desist order and an
administrative order as to violation of certain non-fraud
provisions of the federal securities laws. The investigation has
also thus far resulted in charges being filed against five
former officers and employees of the Company. We believe that
the investigation of former officers and employees of the
Company continues; while the Company continues to fully
cooperate with any requests with respect to such investigation,
we do not know the status of such investigation.

Derivative Actions in Northern District of
California.Beginning on
February 5, 2001, Critical Path was named as a nominal
defendant in a number of derivative actions, purportedly brought
on the Companys behalf, filed in the Superior Court of the
State of California and in the U.S. District Court for the
Northern District of California. The derivative complaints
alleged that certain of the Companys former officers and
directors breached their fiduciary duties, engaged in abuses of
control, were unjustly enriched by sales of the Companys
common stock, engaged in insider trading in violation of
California law or published false financial information in
violation of California law. The Company is currently working
with plaintiffs counsel to finalize the settlement of this
matter.

Securities Class Action in Southern
District of New York.Beginning on
July 18, 2001, a number of securities class action
complaints were filed against the Company, and certain of its
former officers and directors and underwriters connected with
its initial public offering of common stock in the U.S. District
Court for the Southern District of New York. The purported class
action complaints were filed by individuals who allege that they
purchased common stock at the initial public offering of common
stock between March 26, 1999 and December 6, 2000. The
complaints allege generally that the Prospectus under which such
securities were sold contained false and misleading statements
with respect to discounts and commissions received by the
underwriters. The complaints have been consolidated into a
single action. The complaints seek an unspecified amount in
damages on behalf of persons who purchased the Companys
stock during the specified period. Similar complaints have been
filed against more than 300 other companies and additional
underwriters.

Lease Dispute.In
July 2000, PeerLogic, Inc. signed a lease for office space in
San Francisco, California. In December 2000, we acquired
PeerLogic as a wholly-owned subsidiary. After review, we
determined that local zoning laws likely prohibited a business
such as the Company or PeerLogic from occupying the leased
premises, and promptly sought a zoning determination from the
San Francisco Zoning Administrator to resolve the matter. The
Zoning Administrator determined that the Companys proposed
use of the leased premises was not permitted, but the landlord
appealed this determination and prevailed before the San

38



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##### Table of Contents



Francisco Board of Appeals. The Company requested
a rehearing on the matter, which the Board of Appeals denied. In
April 2002, the landlord filed suit in San Francisco Superior
Court against the Company alleging, among other things, breach
of the lease. In its complaint, the landlord sought unspecified
compensatory damages for back rent, attorneys fees, treble
damages under relevant statutes, and unspecified punitive
damages. A number of the plaintiffs claims of damages were
struck by the court in response to the Companys motion to
strike. The plaintiff submitted an amended complaint in
September 2002 and a hearing is scheduled on the Companys
motion to strike in November 2002. In July 2002, the Company
filed a separate Petition for Writ of Administrative Mandamus
with the San Francisco Superior Court, requesting that the Board
of Appeals decision be reversed and/or remanded for
rehearing by the Board, with instructions from the Court.
Litigation in this matter is ongoing.


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




Item 6.     Exhibits
and Report on Form 8-K

(a) Exhibits

|     |  |                                                                                                                           
|---- |  | --------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Consulting agreement dated as of August 12,
    2002 by and between Registrant and R.B. Webber & Company,
    Inc.        
|10.2 |  | Letter agreement for consulting services dated as
    of August 27, 2002 by and between Registrant and The Cohen
    Group
|10.3 |  | Separation Agreement and Release dated as of
    October 16, 2002 by and between Registrant and Pierre Van
    Beneden    
|15.1 |  | Letter of PricewaterhouseCoopers LLP on Unaudited
    Interim Financial Information                                       
|99.1 |  | Certification of Chief Executive Officer of the
    Registrant                                                            
|99.2 |  | Certification of Chief Financial Officer of the
    Registrant                                                            

(b) Report on Form 8-K

None

39



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##### Table of Contents






SIGNATURE

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



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



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

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

Date: November 14, 2002

40



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##### Table of Contents






CERTIFICATIONS

I, William E. McGlashan, Jr., certify that:



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this quarterly report on Form 10-Q of Critical Path, Inc.                                                                                                                                                                                                                                                                         
|
| | 2.     Based on my
    knowledge, this quarterly report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this quarterly
    report.
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this quarterly report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this quarterly report.                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                             



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date.                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls.                                                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this quarterly report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002



| |                              
| | -----------------------------
| | /s/ WILLIAM E. MCGLASHAN, JR.
| |                              
| | William E. McGlashan, Jr.    
| | Chief Executive Officer      

41



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##### Table of Contents



I, Laureen DeBuono, certify that:



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this quarterly report on Form 10-Q of Critical Path, Inc.                                                                                                                                                                                                                                                                         
|
| | 2.     Based on my
    knowledge, this quarterly report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this quarterly
    report.
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this quarterly report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this quarterly report.                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                             



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date.                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls.                                                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this quarterly report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002



| |                        
| | -----------------------
| | /C/     LAUREEN DEBUONO
| |                        
| | Laureen DeBuono        
| | Chief Financial Officer

42



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##### Table of Contents






INDEX TO EXHIBITS

|        |      |                     |  |                                                                                                                           
|------- | ---- | ------------------- |  | --------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                    
|Number  |      | Exhibit Description
|        |      |                    
|        | 10.1 |                     |  | Consulting agreement dated as of August 12,
    2002 by and between Registrant and R.B. Webber & Company,
    Inc.        
|        | 10.2 |                     |  | Letter agreement for consulting services dated as
    of August 27, 2002 by and between Registrant and The Cohen
    Group
|        | 10.3 |                     |  | Separation Agreement and Release dated as of
    October 16, 2002 by and between Registrant and Pierre Van
    Beneden    
|        | 15.1 |                     |  | Letter of PricewaterhouseCoopers LLP on Unaudited
    Interim Financial Information                                       
|        | 99.1 |                     |  | Certification of Chief Executive Officer of the
    Registrant                                                            
|        | 99.2 |                     |  | Certification of Chief Financial Officer of the
    Registrant                                                            



---



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

43