##### 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, 2003                                       
| 
|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


415-541-2500


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

Indicate by check mark whether Registrant is an
accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes þ          No o

As of October 31, 2003, the Company had
outstanding 20,570,284 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 (Unaudited)                             
|                                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                | Item 4. Controls and Procedures                                                              
|PART 2 -- OTHER INFORMATION                    
|                                                | Item 1. Legal Proceedings                                                                    
|                                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                      
|INDEX TO EXHIBITS                              
|Exhibit 10.1                                   
|Exhibit 31.1                                   
|Exhibit 31.2                                   
|Exhibit 32.1                                   
|Exhibit 32.2                                   



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##### Table of Contents



CRITICAL PATH, INC.

INDEX

|        |  |                                                                                           |  |      |    | 
|------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|        |  |                                                                                           |  | Page
|        |  |                                                                                           |  |     
|PART I 
|       
|Item 1. |  | Condensed Consolidated Financial Statements
    (Unaudited)                               |  |      | 2  | 
|        |  | 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 |  |      | 16 | 
|Item 3. |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 42 | 
|Item 4. |  | Controls and Procedures                                                                   |  |      | 42 | 
|PART II
|Item 1. |  | Legal Proceedings                                                                         |  |      | 44 | 
|Item 6. |  | Exhibits and Reports on Form 8-K                                                          |  |      | 46 | 

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,
|                                                                                      |                                                      | 2002                                                                                    |        | 2003         
|                                                                                      |                                                      |                                                                                         |        |              
|                                                                                      |                                                      |                                                                                        
|                                                                                      |                                                      | (Unaudited)                                                                            
|                                                                                      |                                                      | (In thousands, except per                                                              
|                                                                                      |                                                      | share amounts)                                                                         
|ASSETS                                                                               
|Current assets                                                                        |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                      | Cash and cash equivalents                            |                                                                                         | $      | 33,498        |         |   | $      | 18,247     |        
|                                                                                      | Short-term marketable securities                     |                                                                                         |        | 5,583         |         |   |        |           |        
|                                                                                      | Accounts receivable, net                             |                                                                                         |        | 22,818        |         |   |        | 16,382     |        
|                                                                                      | Other current assets                                 |                                                                                         |        | 4,030         |         |   |        | 5,744      |        
|                                                                                      |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                      |                                                      | Total current assets                                                                    |        |               | 65,929  |   |        |            | 40,373  |  
|Long-term marketable securities                                                       |                                                      |                                                                                         | 3,990  |               |         |   |       |           
|Equity investments                                                                    |                                                      |                                                                                         | 357    |               |         |   |       |           
|Property and equipment, net                                                           |                                                      |                                                                                         | 18,142 |               |         |   | 16,080 |           
|Goodwill                                                                              |                                                      |                                                                                         | 6,613  |               |         |   | 6,613  |           
|Restricted cash                                                                       |                                                      |                                                                                         | 2,729  |               |         |   |       |           
|Other assets                                                                          |                                                      |                                                                                         | 6,246  |               |         |   | 5,450  |           
|                                                                                      |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                      |                                                      | Total assets                                                                            |        | $             | 104,006 |   |        | $          | 68,516  |  
|                                                                                      |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                     
|LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
    STOCK AND
    SHAREHOLDERS DEFICIT
|Current liabilities                                                                   |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                      | Accounts payable                                     |                                                                                         | $      | 28,093        |         |   | $      | 23,955     |        
|                                                                                      | Accrued liabilities                                  |                                                                                         |        | 3,764         |         |   |        | 3,174      |        
|                                                                                      | Deferred revenue                                     |                                                                                         |        | 10,788        |         |   |        | 8,147      |        
|                                                                                      | Line of credit facility                              |                                                                                         |        |              |         |   |        | 4,900      |        
|                                                                                      | Capital lease and other obligations, current         |                                                                                         |        | 3,323         |         |   |        | 2,823      |        
|                                                                                      |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                      |                                                      | Total current liabilities                                                               |        |               | 45,968  |   |        |            | 42,999  |  
|Convertible subordinated notes payable                                                |                                                      |                                                                                         | 38,360 |               |         |   | 38,360 |           
|Capital lease and other obligations, long-term                                        |                                                      |                                                                                         | 1,332  |               |         |   | 433    |           
|                                                                                      |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                      |                                                      | Total liabilities                                                                       |        |               | 85,660  |   |        |            | 81,792  |  
|                                                                                      |                                                      |                                                                                         |        |               |         |   |        |           
|Commitments and contingencies                                                         |                                                      |                                                                                         |        |               |         |   |        |           
|Mandatorily redeemable preferred stock                                                |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                      | Shares authorized: 5,000                             |                                                                                         |        |               |         |   |        |            |        
|                                                                                      | Shares issued and outstanding: 4,000                 |                                                                                         |        |               |         |   |        |            |        
|                                                                                      | Liquidation value at September 30, 2003:
    $63,217 |                                                                                         |        | 26,900        |         |   |        | 47,909     |        
|                                                                                      |                                                      |                                                                                         |        |               |         |   |        |           
|Shareholders deficit                                                                 |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                      | Common stock and paid-in-capital, $0.001 par value   |                                                                                         |        |               |         |   |        |            |        
|                                                                                      | Shares authorized: 125,000                           |                                                                                         |        |               |         |   |        |            |        
|                                                                                      | Shares issued and outstanding: 20,032 and 20,570     |                                                                                         |        | 2,165,917     |         |   |        | 2,158,277  |        
|                                                                                      | Common stock warrants                                |                                                                                         |        | 5,947         |         |   |        | 5,947      |        
|                                                                                      | Notes receivable from shareholders                   |                                                                                         |        |              |         |   |        | (725       | )      
|                                                                                      | Unearned compensation                                |                                                                                         |        | (59           | )       |   |        |           |        
|                                                                                      | Accumulated deficit                                  |                                                                                         |        | (2,179,316    | )       |   |        | (2,226,232 | )      
|                                                                                      | Accumulated other comprehensive income (loss)        |                                                                                         |        | (1,043        | )       |   |        | 1,548      |        
|                                                                                      |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                      |                                                      | Total shareholders deficit                                                             |        |               | (8,554  | ) |        |            | (61,185 | )
|                                                                                      |                                                      |                                                                                         |        |               |         |   |        |           
|                                                                                      |                                                      | Total liabilities, mandatorily redeemable
    preferred stock and shareholders deficit |        | $             | 104,006 |   |        | $          | 68,516  |  
|                                                                                      |                                                      |                                                                                         |        |               |         |   |        |           

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,
|                                                                         |                                                      | 2002                                     |         | 2003              |        | 2002          |         | 2003         
|                                                                         |                                                      |                                          |         |                   |        |               |         |              
|                                                                         |                                                      |                                         
|                                                                         |                                                      | (Unaudited)                             
|                                                                         |                                                      | (In thousands, except per share amounts)
|Net revenues                                                             |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|                                                                         | Software license                                     |                                          | $       | 5,929             |        |               | $       | 4,264         |        |   | $       | 27,740 |        |   | $       | 14,903 |       
|                                                                         | Hosted messaging                                     |                                          |         | 6,461             |        |               |         | 4,583         |        |   |         | 19,007 |        |   |         | 14,825 |       
|                                                                         | Professional services                                |                                          |         | 3,053             |        |               |         | 2,574         |        |   |         | 7,635  |        |   |         | 8,949  |       
|                                                                         | Maintenance and support                              |                                          |         | 3,725             |        |               |         | 4,744         |        |   |         | 10,917 |        |   |         | 13,658 |       
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|                                                                         |                                                      | Total net revenues                       |         |                   | 19,168 |               |         |               | 16,165 |   |         |        | 65,299 |   |         |        | 52,335 | 
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|Cost of net revenues                                                     |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|                                                                         | Software license                                     |                                          |         | 563               |        |               |         | 541           |        |   |         | 1,436  |        |   |         | 3,060  |       
|                                                                         | Hosted messaging                                     |                                          |         | 7,448             |        |               |         | 6,196         |        |   |         | 22,835 |        |   |         | 19,562 |       
|                                                                         | Professional services                                |                                          |         | 2,393             |        |               |         | 2,734         |        |   |         | 7,002  |        |   |         | 9,094  |       
|                                                                         | Maintenance and support                              |                                          |         | 2,222             |        |               |         | 1,263         |        |   |         | 6,549  |        |   |         | 4,579  |       
|                                                                         | Amortization of purchased technology                 |                                          |         | 4,631             |        |               |         |              |        |   |         | 13,892 |        |   |         |       |       
|                                                                         | Stock-based expense  Hosted messaging               |                                          |         | 113               |        |               |         |              |        |   |         | 530    |        |   |         | 8      |       
|                                                                         | Stock-based expense  Professional
    services      |                                          |         | 50                |        |               |         |              |        |   |         | 196    |        |   |         | 3      |       
|                                                                         | Stock-based expense  Maintenance and
    support    |                                          |         | 92                |        |               |         |              |        |   |         | 364    |        |   |         | 6      |       
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|                                                                         |                                                      | Total cost of net revenues               |         |                   | 17,512 |               |         |               | 10,734 |   |         |        | 52,804 |   |         |        | 36,312 | 
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|Gross profit                                                             |                                                      |                                          | 1,656   |                   |        |               | 5,431   |               |        |   | 12,495  |        |        |   | 16,023  |       
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|Operating expenses                                                       |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|                                                                         | Sales and marketing                                  |                                          |         | 10,945            |        |               |         | 7,150         |        |   |         | 33,262 |        |   |         | 24,390 |       
|                                                                         | Research and development                             |                                          |         | 5,154             |        |               |         | 4,608         |        |   |         | 15,329 |        |   |         | 14,044 |       
|                                                                         | General and administrative                           |                                          |         | 5,362             |        |               |         | 3,228         |        |   |         | 18,336 |        |   |         | 9,774  |       
|                                                                         | Amortization of intangible assets                    |                                          |         | 6,209             |        |               |         |              |        |   |         | 18,578 |        |   |         |       |       
|                                                                         | Stock-based expense  Sales and
    marketing        |                                          |         | 452               |        |               |         |              |        |   |         | 3,637  |        |   |         | 18     |       
|                                                                         | Stock-based expense  Research and
    development   |                                          |         | 287               |        |               |         |              |        |   |         | 1,062  |        |   |         | 15     |       
|                                                                         | Stock-based expense  General and
    administrative |                                          |         | 212               |        |               |         |              |        |   |         | 3,620  |        |   |         | 9      |       
|                                                                         | Restructuring and other expenses                     |                                          |         |                  |        |               |         | 953           |        |   |         | 1,539  |        |   |         | 5,034  |       
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|                                                                         |                                                      | Total operating expenses                 |         |                   | 28,621 |               |         |               | 15,939 |   |         |        | 95,363 |   |         |        | 53,284 | 
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|Loss from operations                                                     |                                                      |                                          | (26,965 | )                 |        |               | (10,508 | )             |        |   | (82,868 | )      |        |   | (37,261 | )     
|Interest and other income (expense), net                                 |                                                      |                                          | 1,927   |                   |        |               | (3,944  | )             |        |   | (803    | )      |        |   | (6,845  | )     
|Interest expense                                                         |                                                      |                                          | (740    | )                 |        |               | (852    | )             |        |   | (2,256  | )      |        |   | (2,404  | )     
|Gain on investments, net                                                 |                                                      |                                          |        |                   |        |               |        |               |        |   |        |        |        |   | 349     |       
|Equity in net loss of joint venture                                      |                                                      |                                          |        |                   |        |               |        |               |        |   | (1,408  | )      |        |   |        |       
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|Loss before provision for income taxes                                   |                                                      |                                          | (25,778 | )                 |        |               | (15,304 | )             |        |   | (87,335 | )      |        |   | (46,161 | )     
|Provision for income taxes                                               |                                                      |                                          | (234    | )                 |        |               | (273    | )             |        |   | (255    | )      |        |   | (754    | )     
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|Net loss                                                                 |                                                      |                                          | (26,012 | )                 |        |               | (15,577 | )             |        |   | (87,590 | )      |        |   | (46,915 | )     
|Accretion on mandatorily redeemable preferred
    stock                  |                                                      |                                          | (3,600  | )                 |        |               | (3,025  | )             |        |   | (10,067 | )      |        |   | (9,529  | )     
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|Net loss attributable to common shares                                   |                                                      | $                                        | (29,612 | )                 |        | $             | (18,602 | )             |        | $ | (97,657 | )      |        | $ | (56,444 | )     
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|Net loss per share attributable to common
    shares  basic and diluted |                                                      | $                                        | (1.51   | )                 |        | $             | (0.92   | )             |        | $ | (5.04   | )      |        | $ | (2.84   | )     
|                                                                         |                                                      |                                          |         |                   |        |               |         |               |        |   |         |        |        |   |         |       
|Weighted average shares  basic and
    diluted                          |                                                      |                                          | 19,566  |                   |        |               | 20,126  |               |        |   | 19,381  |        |        |   | 19,889  |       

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,
|                                                          |                                                              | 2002                |                                                         | 2003         
|                                                          |                                                              |                     |                                                         |              
|                                                          |                                                              |                    
|                                                          |                                                              | (Unaudited)        
|                                                          |                                                              | (In thousands)     
|Cash flows from operating activities:                     |                                                              |                     |                                                         |               |        |         |         |        
|                                                          | Net loss                                                     |                     | $                                                       | (87,590       | )      |         | $       | (46,915 | )     
|                                                          | Provision for (recovery of) doubtful accounts                |                     |                                                         | 829           |        |         |         | (136    | )     
|                                                          | Depreciation and amortization                                |                     |                                                         | 22,365        |        |         |         | 13,045  |       
|                                                          | Amortization of intangible assets                            |                     |                                                         | 32,459        |        |         |         |        |       
|                                                          | Amortization of stock-based costs and expenses               |                     |                                                         | 9,409         |        |         |         | 59      |       
|                                                          | Equity in net loss of joint venture                          |                     |                                                         | 1,408         |        |         |         |        |       
|                                                          | Change in fair value of preferred stock instrument           |                     |                                                         | 2,160         |        |         |         | 11,480  |       
|                                                          | Gain on the sale of investments, net                         |                     |                                                         |              |        |         |         | (349    | )     
|                                                          | Gain on release of funds held in escrow                      |                     |                                                         |              |        |         |         | (3,750  | )     
|                                                          | Restructuring charges                                        |                     |                                                         | 1,022         |        |         |         | 530     |       
|                                                          | Changes in assets and liabilities:                           |                     |                                                         |               |        |         |         |         |       
|                                                          |                                                              | Accounts receivable |                                                         |               | 4,009  |         |         |         | 8,055  |        
|                                                          |                                                              | Other assets        |                                                         |               | 409    |         |         |         | (1,466 | )      
|                                                          |                                                              | Accounts payable    |                                                         |               | (142   | )       |         |         | (5,297 | )      
|                                                          |                                                              | Accrued liabilities |                                                         |               | (1,584 | )       |         |         | (1,336 | )      
|                                                          |                                                              | Deferred revenue    |                                                         |               | (1,144 | )       |         |         | (3,134 | )      
|                                                          |                                                              |                     |                                                         |               |        |         |         |        
|                                                          |                                                              |                     | Net cash used in operating activities                   |               |        | (16,390 | )       |         |        | (29,214 | )
|                                                          |                                                              |                     |                                                         |               |        |         |         |        
|Cash flows from investing activities:                     |                                                              |                     |                                                         |               |        |         |         |        
|                                                          | Repayment of notes receivable from officers                  |                     |                                                         | 371           |        |         |         | 132     |       
|                                                          | Property and equipment purchases                             |                     |                                                         | (4,942        | )      |         |         | (10,549 | )     
|                                                          | Payments for acquisitions, net of cash acquired              |                     |                                                         | 4,512         |        |         |         |        |       
|                                                          | Proceeds from sale of investments                            |                     |                                                         |              |        |         |         | 2,173   |       
|                                                          | Proceeds from release of funds held in escrow                |                     |                                                         |              |        |         |         | 3,750   |       
|                                                          | Proceeds from sale of marketable securities                  |                     |                                                         |              |        |         |         | 9,573   |       
|                                                          | Purchase of marketable securities                            |                     |                                                         | (4,071        | )      |         |         |        |       
|                                                          | Changes in restricted cash                                   |                     |                                                         | (3,041        | )      |         |         | 2,729   |       
|                                                          |                                                              |                     |                                                         |               |        |         |         |        
|                                                          |                                                              |                     | Net cash provided by (used in) investing
    activities |               |        | (7,171  | )       |         |        | 7,808   |  
|                                                          |                                                              |                     |                                                         |               |        |         |         |        
|Cash flows from financing activities:                     |                                                              |                     |                                                         |               |        |         |         |        
|                                                          | Proceeds from issuance of common stock, net                  |                     |                                                         | 1,529         |        |         |         | 985     |       
|                                                          | Proceeds from repayments of shareholder notes
    receivable |                     |                                                         | 1,222         |        |         |         |        |       
|                                                          | Proceeds from line of credit facility                        |                     |                                                         |              |        |         |         | 4,900   |       
|                                                          | Principal payments on note and lease obligations             |                     |                                                         | (3,616        | )      |         |         | (644    | )     
|                                                          |                                                              |                     |                                                         |               |        |         |         |        
|                                                          |                                                              |                     | Net cash provided by (used in) financing
    activities |               |        | (865    | )       |         |        | 5,241   |  
|                                                          |                                                              |                     |                                                         |               |        |         |         |        
|Net change in cash and cash equivalents                   |                                                              |                     | (24,426                                                 | )             |        |         | (16,165 | )      
|Effect of exchange rates on cash and cash
    equivalents |                                                              |                     | 402                                                     |               |        |         | 914     |        
|Cash and cash equivalents at beginning of period          |                                                              |                     | 59,463                                                  |               |        |         | 33,498  |        
|                                                          |                                                              |                     |                                                         |               |        |         |         |        
|Cash and cash equivalents at end of period                |                                                              | $                   | 35,439                                                  |               |        | $       | 18,247  |        
|                                                          |                                                              |                     |                                                         |               |        |         |         |        

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

4



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##### Table of Contents



CRITICAL PATH, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


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



| |            
| | -----------
| | The Company

Critical Path, Inc. was incorporated in
California on February 19, 1997. Critical Path, along with
its subsidiaries (collectively referred to herein as the
Company), provides digital communications software
and services that enable enterprises, government agencies,
wireless carriers, and service providers to rapidly deploy
highly scalable solutions for messaging and identity management.
Critical Paths messaging solutions  which are
available both as licensed software or hosted
services  provide integrated access to a broad range
of communication and collaboration applications from wireless
devices, Web browsers, desktop clients, and voice systems. On
August 1, 2003, the Company effected a one-for-four reverse
stock split which reduced its number of shares of Common Stock
outstanding from 81,595,042 to 20,398,076 as of that date (See
also Note 9  Reverse Stock Split). The share and
per share amounts presented in these condensed consolidated
financial statements have been retroactively restated to give
effect to the reverse stock split of the Companys
authorized and outstanding common stock and of all shares of
Common Stock subject to stock options and warrants.



| |          
| | ---------
| | Liquidity

The Companys revenues generated from the
sale of its products and services may not increase to a level
that exceeds its expenses or could fluctuate significantly as a
result of changes in customer demand or acceptance of future
products. Although the Company expects to continue to review its
operating expenses, if it is not successful in achieving a cost
reduction or generating sufficient revenues, the Companys
cash flow from operations will continue to be negatively
impacted.

As of September 30, 2003, the Companys
cash and cash equivalents totaled $18.2 million, of which
$7.4 million is expected to support its outstanding
obligations to Silicon Valley Bank and $6.5 million is
located in accounts outside of the United States, which may not
be readily available to the Companys domestic operations.
Accordingly, the Companys readily available cash resources
in the United States as of September 30, 2003 were
$4.3 million. As a result of its cash position, it will be
essential for the Company to complete a financing or other
strategic transaction in the fourth quarter in order to continue
to operate. The Company is currently in negotiations to raise
additional capital; however, there is a significant risk that it
will be unable to complete a financing transaction on a timely
basis.

Since inception, the Company has incurred
aggregate consolidated net losses of approximately
$2.2 billion, which includes $1.3 billion related to
the impairment of long-lived assets, $444.5 million related
to non-cash charges associated with the Companys ten
acquisitions and $172.1 million related to non-cash
stock-based compensation expenses. During 1999 and 2000, the
Company raised $544.0 million in net proceeds through its
initial public offering, secondary public offering and the
issuance of $300 million of face value of 5 3/4%
Convertible Subordinated Notes. In 2001, the Company used
$48.7 million to retire $197 million of face value of
its 5 3/4% Convertible Subordinated Notes and completed a
financing transaction that resulted in net cash proceeds of
approximately $27 million and the retirement of
approximately $65 million of face value of its 5 3/4%
Convertible Subordinated Notes.



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

The 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

5



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

entities where the Company does not have the
ability to exercise significant influence over financial and
operating matters.

The unaudited condensed consolidated financial
statements (Financial Statements) of the Company
furnished herein reflect all adjustments that are, in the
opinion of management, necessary to present fairly the financial
position and results of operations for each interim period
presented. All adjustments are normal recurring adjustments. The
Financial Statements should be read in conjunction with the
audited consolidated financial statements and notes thereto,
together with managements discussion and analysis of
financial condition and results of operations, presented in the
Companys Annual Report on Form 10-K/A for the fiscal
year ended December 31, 2002. The results of operations for
the interim periods presented herein are not necessarily
indicative of the results to be expected for the entire year.



| |                    
| | -------------------
| | Segment Information

The Company does not currently manage its
business in a manner that requires it to report financial
results on a segment basis. The Company currently operates in
one segment: digital communications software and services and
management uses one measure of profitability. Revenue
information on a product and service basis has been disclosed in
the Companys statement of operations.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees and its
related interpretations and complies with the disclosure
provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based
Compensation. Under APB No. 25, compensation expense for
fixed options is based on the difference, if any, on the date of
the grant, between the fair value of the Companys stock
and the exercise price of the option. The Company accounts for
equity instruments issued to non-employees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task
Force (EITF) Issue No. 96-18. The shares
underlying warrants or options, which are unvested, are
remeasured at each reporting date until a measurement date
occurs, at which time the fair value of the warrant is fixed.
The related charge is amortized over the estimated term of the
relationship. In the event such remeasurement results in
increases or decreases from the initial fair value, which could
be substantial, these increases or decreases will be recognized
immediately, if the fair value of the shares underlying the
milestone has been previously recognized, or over the remaining
term, if not. Currently, all related amortization has been
recognized as expense over the term of the estimated benefit
period.

In December 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148,
Accounting for Stock-Based Compensation, Transition and
Disclosure. SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS
No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format, in addition to the disclosure of the
pro forma effect in interim financial statements.

6



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Had compensation cost been recognized based on
the fair value at the date of grant for options granted, the pro
forma amounts of the Companys net loss and net loss per
share during the three and nine months ended September 30,
2002 and 2003 would have been as follows:

|                                                                                     |                                                                                                                                               |                                          |         |                   |   |               |         |               |   |   |          |         |   |   |         |        |  
|------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------- | ----------------- | - | ------------- | ------- | ------------- | - | - | -------- | ------- | - | - | ------- | ------ | -
|                                                                                     |                                                                                                                                               |                                          |         |                  
|                                                                                     |                                                                                                                                               | Three Months Ended                       |         | Nine Months Ended
|                                                                                     |                                                                                                                                               |                                          |         |                  
|                                                                                     |                                                                                                                                               | September 30,                            |         | September 30,     |   | September 30, |         | September 30,
|                                                                                     |                                                                                                                                               | 2002                                     |         | 2003              |   | 2002          |         | 2003         
|                                                                                     |                                                                                                                                               |                                          |         |                   |   |               |         |              
|                                                                                     |                                                                                                                                               |                                         
|                                                                                     |                                                                                                                                               | (Unaudited)                             
|                                                                                     |                                                                                                                                               | (In thousands, except per share amounts)
|Net loss attributable to common
    shares  as reported                             |                                                                                                                                               | $                                        | (29,612 | )                 |   | $             | (18,602 | )             |   | $ | (97,657  | )       |   | $ | (56,444 | )     
|Add:                                                                                 |                                                                                                                                               |                                          |         |                   |   |               |         |               |   |   |          |         |   |   |         |       
|                                                                                     | Stock-based Employee Compensation expense
    included in reported net loss attributable to common shares, net
    of related tax effects     |                                          |         | 1,206             |   |               |         |              |   |   |          | 9,409   |   |   |         | 59     |  
|Deduct:                                                                              |                                                                                                                                               |                                          |         |                   |   |               |         |               |   |   |          |         |   |   |         |       
|                                                                                     | Total stock-based Employee Compensation expense
    determined under a fair value based method for all grants, net
    of related tax effects |                                          |         | (14,183           | ) |               |         | (4,366        | ) |   |          | (23,475 | ) |   |         | (9,505 | )
|                                                                                     |                                                                                                                                               |                                          |         |                   |   |               |         |               |   |   |          |         |   |   |         |       
|Net loss attributable to common
    shares  pro forma                               |                                                                                                                                               | $                                        | (42,589 | )                 |   | $             | (22,968 | )             |   | $ | (111,723 | )       |   | $ | (65,890 | )     
|                                                                                     |                                                                                                                                               |                                          |         |                   |   |               |         |               |   |   |          |         |   |   |         |       
|Basic and diluted net loss per share attributable
    to common shares  as reported |                                                                                                                                               | $                                        | (1.51   | )                 |   | $             | (0.92   | )             |   | $ | (5.04    | )       |   | $ | (2.84   | )     
|Basic and diluted net loss per share attributable
    to common shares  pro forma   |                                                                                                                                               | $                                        | (2.18   | )                 |   | $             | (1.14   | )             |   | $ | (5.76    | )       |   | $ | (3.31   | )     

The Company calculated the fair value of each
option grant on the date of grant during the three and nine
months ended September 30, 2002 and 2003 using the
Black-Scholes option pricing model as prescribed by SFAS
No. 123 and the following assumptions:

|                          |  |                    |       |                   |  |               |       |               |  |  |       |   |  |  |               |  
|------------------------- |  | ------------------ | ----- | ----------------- |  | ------------- | ----- | ------------- |  |  | ----- | - |  |  | ------------- | -
|                          |  |                    |       |                  
|                          |  | Three Months Ended |       | Nine Months Ended
|                          |  |                    |       |                  
|                          |  | September 30,      |       | September 30,     |  | September 30, |       | September 30,
|                          |  | 2002               |       | 2003              |  | 2002          |       | 2003         
|                          |  |                    |       |                   |  |               |       |              
|Risk-free interest rate   |  |                    | 2.6   | %                 |  |               | 1.7   | %             |  |  | 2.6   | % |  |  | 1.7%  3.0    | %
|Expected lives (in years) |  |                    | 4.0   |                   |  |               | 4.0   |               |  |  | 4.0   |   |  |  | 4.0           |  
|Dividend yield            |  |                    | 0.0   | %                 |  |               | 0.0   | %             |  |  | 0.0   | % |  |  | 0.0           | %
|Expected volatility       |  |                    | 111.0 | %                 |  |               | 141.1 | %             |  |  | 111.0 | % |  |  | 97.8%  141.1 | %



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 addresses certain financial instruments that, under
previous guidance, could be accounted for as equity, but now
must be classified as liabilities in statements of financial
position. These financial instruments include:
1) mandatorily redeemable financial instruments,
2) obligations to repurchase the issuers equity
shares by transferring assets, and 3) obligations to

7



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

issue a variable number of shares. SFAS
No. 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise
effective at the beginning of the first interim period beginning
after June 15, 2003. The Company adopted SFAS No. 150
in the third quarter of 2003 and such adoption did not have a
material effect on the Companys financial position and
results of operations.

In May 2003, the EITF reached a consensus on EITF
Issue No. 03-05, Applicability of AICPA Statement of
Position 97-2, Software Revenue Recognition, to
Non-Software Deliverables in Arrangement Containing
More-Than-Incidental Software. EITF No. 03-05 addresses the
applicability of Statement of Position No. 97-2 regarding
software and non-software deliverables in a multiple element
arrangement, giving consideration to whether the deliverables
are essential to the functionality of one another. EITF Issue
No. 03-05 is effective for interim periods beginning after
August 13, 2003. The Company is currently assessing the
impact of the adoption of EITF No. 03-05 on its financial
position and results of operations.

In January 2003, the FASB issued FASB
Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51. FIN No. 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN No. 46 is effective immediately for
all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN
No. 46 must be applied for the first interim or annual
period ending after December 15, 2003. At this time, the
Company does not believe it is reasonably possible that the
Company will consolidate or disclose information about variable
interest entities. However, the Company will continue to assess
the impact of FIN No. 46 on its consolidated financial
statements.

In November 2002, the EITF reached a consensus on
EITF No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF No. 00-21 addresses certain aspects of
the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue-generating activities. EITF
No. 00-21 is effective for interim periods beginning after
June 15, 2003. The Company adopted EITF No. 00-21 in
the third quarter of 2003 and such adoption did not have a
material effect on the Companys financial position and
results of operations.

In November 2002, the FASB issued FIN
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN No. 45 requires that a
liability be recorded at fair value in the guarantors
balance sheet upon issuance of a guarantee. In addition, FIN
No. 45 requires disclosures about the guarantees that an
entity has issued, including a reconciliation of changes in the
entitys product warranty liabilities. The initial
recognition and initial measurement provisions of FIN
No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year-end. The Company adopted FIN
No. 45 in the first quarter of 2003. The recognition and
initial measurement provisions of FIN No. 45 did not have a
material effect on its financial position and results of
operations. The disclosure requirements of FIN No. 45 are
contained in Note 7  Commitments and
Contingencies.

In July 2002, the FASB issued 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 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 adopted SFAS No. 146 in
the first quarter of 2003 and incurred $6.3 million in
restructuring charges during the nine months ended
September 30, 2003.

8



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 2  Strategic Restructuring and
Employee Severance

|                                                            |       |               |     |             |  |               |      |         |   |          |     |               |  |   |      |      |   |   |      |      |   |   |     |     | 
|----------------------------------------------------------- | ----- | ------------- | --- | ----------- |  | ------------- | ---- | ------- | - | -------- | --- | ------------- |  | - | ---- | ---- | - | - | ---- | ---- | - | - | --- | --- | 
|                                                            |       | Liability at  |     |             |  |               |      |         |   |          |     | Liability at 
|                                                            |       | December 31,  |     |             |  | Restructuring |      | Noncash |   | Cash     |     | September 30,
|                                                            |       | 2002          |     | Adjustments |  | Charges       |      | Charges |   | Payments |     | 2003         
|                                                            |       |               |     |             |  |               |      |         |   |          |     |              
|                                                            |       |              
|                                                            |       | (In millions)
|Workforce reduction                                         |       | $             | 1.2 |             |  | $             | (0.6 | )       |   | $        | 5.5 |               |  | $ | (0.1 | )    |   | $ | (5.9 | )    |   | $ | 0.1 |    
|Facility and operations consolidation and other
    charges |       |               | 1.1 |             |  |               | (0.3 | )       |   |          | 0.5 |               |  |   | (0.3 | )    |   |   | (0.5 | )    |   |   | 0.5 |    
|Non-core product and service sales and
    divestitures     |       |               | 0.3 |             |  |               | (0.3 | )       |   |          | 0.3 |               |  |   |     |      |   |   | (0.3 | )    |   |   |    |    
|                                                            |       |               |     |             |  |               |      |         |   |          |     |               |  |   |      |      |   |   |      |      |   |   |     |    
|                                                            | Total |               | $   | 2.6         |  |               | $    | (1.2    | ) |          | $   | 6.3           |  |   | $    | (0.4 | ) |   | $    | (6.7 | ) |   | $   | 0.6 | 
|                                                            |       |               |     |             |  |               |      |         |   |          |     |               |  |   |      |      |   |   |      |      |   |   |     |    

In May 2002, the Board of Directors approved a
restructuring plan to further reduce the Companys 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. The balance of the 2002 restructuring accrual
at September 30, 2003 was approximately $0.3 million
and is expected to be utilized by the end of 2004.

In January 2003, the Company announced a
restructuring initiative designed to further reduce its expense
level in an effort to achieve operating profitability assuming
no or moderate revenue growth. The plan includes the
consolidation of some office locations and a global workforce
reduction of approximately 175 positions, or approximately
30% of the workforce. The headcount reduction is partially
offset by outsourcing approximately 75 positions to lower
cost service providers. The Company incurred aggregate charges
of approximately $8.0 million resulting from the cost
reduction plan, inclusive of $7.0 million in cash and
$1.0 million in non-cash expenses. Included in this plan
were approximately $1.7 million in charges incurred in the
fourth quarter of 2002, comprised of approximately
$0.7 million in severance and related costs and
$1.0 million in facilities lease termination costs. During
the first, second, and third quarters of 2003, the Company
incurred approximately $4.4 million, $0.9 million, and
$1.0 million, respectively, in restructuring charges under
the plan, predominantly related to severance and associated
employee costs. The Company made payments of $3.6 million,
$2.0 million, and $1.1 million during the first,
second, and third quarters of 2003, respectively, related to the
restructuring initiative.

Additionally, the Company completed two other
restructuring initiatives during 2001 and 2002, with associated
expenses of $19.8 million. During the first quarter of
2003, the Company reversed approximately $1.2 million in
restructuring expenses, which were accrued during 2001 and 2002,
as the Company does not anticipate these amounts will be paid in
the future. At September 30, 2003, the restructuring
accrual relating to these initiatives was approximately
$0.3 million and is expected to be utilized by the end of
2004.

The Company will continue to review its cost
structure as it relates to facility and workforce costs and
expect to incur additional restructuring expenses.

Note 3  Gain on
Investments

During the second quarter of 2003, the Company
executed sales of certain of its public and private investments.
These sales resulted in a net gain of $349,000, which was
comprised of $2.2 million in aggregate cash proceeds, the
recognition of $1.5 million in unrealized losses and the
elimination of $354,000 in assets held as equity investments.
All associated cash proceeds were received during the second
quarter of 2003.

9



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 4  Release of The docSpace
Company Escrow Funds

In June 2003, the Company entered into an
agreement with the former shareholders of The docSpace Company,
Inc. to release approximately $3.8 million of approximately
$4.7 million in remaining funds held in escrow related to
the 2000 acquisition by Critical Path, Inc. of The docSpace
Company. The funds were remitted to the Company in June 2003 and
the Company recognized a gain of $3.8 million in Other
Income during the second quarter.

The escrow account was initially established in
February 2000 with $5.0 million to be used to reimburse the
former shareholders of The docSpace Company for certain
qualifying expenses related to the establishment, maintenance
and dissolution of the various holding companies established in
connection with the structuring of The docSpace Company
acquisition. The escrow fund is scheduled to terminate in
February 2005, unless all related holding companies are
dissolved prior to such date, at which time all remaining funds
held in escrow will be remitted to Critical Path, Inc. The
remaining funds held in escrow are expected to be sufficient to
cover all foreseeable costs over the remaining term of the
escrow agreement based on analysis performed by both the Company
and the docSpace shareholders; however, in the event such funds
are not sufficient Critical Path will be responsible for the
reimbursement of any qualifying expenses.

Note 5  Goodwill and Other
Intangible Assets

At December 31, 2002 and September 30,
2003, the Company was carrying goodwill of $6.6 million
that ceased being amortized from January 1, 2002, in
accordance with SFAS No. 142. Amortization expense relating
to the other acquired assets was $10.8 million and
$32.5 million for the three and nine months ended
September 30, 2002, respectively. The Companys other
acquired intangible assets were fully amortized at the end of
2002.

Note 6  Notes Receivable from
Shareholders

In May 2002 and in connection with the reduction
of a previous loan commitment, William McGlashan, Jr., the
Companys Chief Executive Officer, 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, 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 accrues 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 representing the
purchase price of the vested shares. As of
September 30, 2003, $12,000 in interest had accrued.

In accordance with EITF Issue No. 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
was initially recognized as an asset, in Other assets, and as a
liability, in Capital lease and other obligations. These
balances have been reclassified to shareholders deficit,
in Notes receivable from shareholders, Common Stock and Paid in
Capital, as the right of repurchase lapses. One third lapsed in
May 2003, and one thirty sixth will lapse monthly thereafter. As
of September 30, 2003, $725,000 has been reclassified into
Shareholders Deficit.

Note 7  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

10



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

operations. Moreover, the results of complex
legal proceedings are difficult to predict. Other than as
described below, the Company is not a party to any other
material legal proceedings.

Securities Action in Northern District of
California.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 the Company and certain of its former officers. The
plaintiff shareholders had 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.
The case has been transferred to the U.S. District Court
for the Northern District of California. Litigation in this
matter is ongoing.

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. A settlement of this action has
been reached, which involves no monetary payment, or recovery,
by the Company, and was preliminarily approved by the Court. A
hearing on whether the settlement will be given final approval
by the Court was held on October 15, 2003. The Courts
decision is still under submission.

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
(In re Initial Public Offering Sec. Litig.). The
purported class action complaints were filed by individuals who
allege that they purchased common stock at the initial and
secondary public offerings between March 29, 1999 and
December 6, 2000. The complaints allege generally that the
Prospectus under which such securities were sold contained false
and misleading statements with respect to discounts and excess
commissions received by the underwriters as well as allegations
of laddering whereby underwriters required their
customers to purchase additional shares in the aftermarket in
exchange for an allocation of IPO shares. The complaints seek an
unspecified amount in damages on behalf of persons who purchased
the Companys stock during the specified period. Similar
complaints have been filed against 55 underwriters and more
than 300 other companies and other individuals. The over
1,000 complaints have been consolidated into a single action.
The Company has reached an agreement in principle with the
plaintiffs to resolve the cases. The proposed settlement
involves no monetary payment by the Company and no admission of
liability. However it is subject to approval by the Court.

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. The Company believes that the
investigation of its former officers and employees may continue.
While the Company continues to fully cooperate with any requests
with respect to such investigation, the Company does not know
the status of such investigation.

Lease Dispute.In
July 2000, PeerLogic, Inc. signed a lease for office space in
San Francisco, California. In December 2000, Critical Path
acquired PeerLogic as a wholly owned subsidiary. After review,
the

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Company 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. In July
2002, the Company filed a Petition for Writ of Mandamus with the
San Francisco Superior Court, seeking reversal of the San
Francisco Board of Appeals decision. In June 2003, the
Court granted the Companys petition and subsequently
entered a judgment and writ remanding the matter to the San
Francisco Board of Appeals and directing the Board of Appeals to
make a new determination consistent with its judgment. The
landlord subsequently appealed the Superior Courts ruling.
Litigation in this matter is ongoing.

In April 2002, the landlord filed suit in San
Francisco Superior Court against the Company alleging, among
other things, breach of the lease and tort claims related to the
lease transaction. In its complaint, the landlord sought
unspecified damages for back rent, attorneys fees, treble
damages under certain statutes, and unspecified punitive
damages. Between April 2002 and July 2003, the Company succeeded
through several motions filed with the Court in having a number
of the landlords claims dismissed and some of its requests
for damages stricken, including treble damages. The landlord has
chosen not to further amend its complaint. In August 2003, the
Company filed its answer to the second amended complaint and a
cross-complaint against the landlord, under which the Company
seeks compensatory damages and unspecified punitive damages for
the landlords failure to disclose the zoning restrictions
on the leased premises before the lease was signed. 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 now completed SEC investigation could harm relationships
with existing customers and our ability to obtain new customers
and partners. 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.

Change of Control Severance
Agreements.The Company has entered
into change of control severance agreements with certain of its
key employees. These agreements provide that so long as the
employee signs and does not revoke a standard release of claims
with the Company, the employee is entitled to certain severance
payments if the employee is involuntarily terminated (as defined
in the agreement) within twenty-four months following a change
of control (as defined in the agreement) of the Company or
within three months on or before a change of control. Assuming
the conditions under the agreements that trigger payment
obligations are met, the aggregate payment under these
agreements is currently estimated to be between
$3.5 million and $5.0 million.

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

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Under California law, in connection with the
Companys charter documents and indemnification agreements
the Company entered into with its executive officers and
directors, the Company must indemnify its current and former
officers and directors to the fullest extent permitted by law.
The indemnification covers any expenses and liabilities
reasonably incurred in connection with the investigation,
defense, settlement or appeal of legal proceedings. The Company
has made payments in connection with the indemnification of
officers and directors in connection with currently pending
lawsuits and has reserved for any applicable amounts required in
connection with legal expenses and others costs of defense of
pending lawsuits.

Note 8  Comprehensive
Loss

The components of comprehensive loss are as
follows:

|                                       |                                          |                          |         |                   |         |               |         |               |         |   |         |       |         |   |         |       |         |  
|-------------------------------------- | ---------------------------------------- | ------------------------ | ------- | ----------------- | ------- | ------------- | ------- | ------------- | ------- | - | ------- | ----- | ------- | - | ------- | ----- | ------- | -
|                                       |                                          |                          |         |                  
|                                       |                                          | Three Months Ended       |         | Nine Months Ended
|                                       |                                          |                          |         |                  
|                                       |                                          | September 30,            |         | September 30,     |         | September 30, |         | September 30,
|                                       |                                          | 2002                     |         | 2003              |         | 2002          |         | 2003         
|                                       |                                          |                          |         |                   |         |               |         |              
|                                       |                                          |                         
|                                       |                                          | (Unaudited)             
|                                       |                                          | (In thousands)          
|Net loss attributable to common shares |                                          | $                        | (29,612 | )                 |         | $             | (18,602 | )             |         | $ | (97,657 | )     |         | $ | (56,444 | )    
|                                       | Unrealized investment losses             |                          |         | (144              | )       |               |         |              |         |   |         | (822  | )       |   |         | 1,468 |        
|                                       | Foreign currency translation adjustments |                          |         | (440              | )       |               |         | 283           |         |   |         | 1,288 |         |   |         | 1,123 |        
|                                       |                                          |                          |         |                   |         |               |         |               |         |   |         |       |         |   |         |      
|                                       |                                          | Total comprehensive Loss |         | $                 | (30,196 | )             |         | $             | (18,319 | ) |         | $     | (97,191 | ) |         | $     | (53,853 | )
|                                       |                                          |                          |         |                   |         |               |         |               |         |   |         |       |         |   |         |      

There were no tax effects allocated to any
components of other comprehensive loss during the three and nine
months ended September 30, 2002 or 2003.

Note 9  Reverse Stock
Split

On July 24, 2003, the Company announced that
its Board of Directors had voted to execute a one-for-four
reverse stock split. Shareholders granted the board authority to
do so at the Companys annual meeting held on June 25,
2003. To effect the reverse stock split, the Company filed an
amendment to its Articles of Incorporation on August 1,
2003. The Company began trading under the new symbol,
CPTHD on Monday, August 4, 2003. After 20
trading days, the symbol reverted back to CPTH. As
of August 1, 2003, the total number of shares of Common
Stock outstanding was 81,595,042 shares and as of immediately
following the proposed one-for-four reverse split, Critical Path
had 20,398,076 shares of Common Stock outstanding. The share and
per share amounts presented in these condensed consolidated
financial statements have been retroactively restated to give
effect to a one-for-four reverse stock split of the
Companys authorized and outstanding common stock and for
all shares of Common Stock subject to stock options and warrants.

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 10  Net Loss Per
Share

Net loss per share is calculated as follows:

|                                                                       |  |                                          |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | ---------------------------------------- | ------- | ----------------- |  | ------------- | ------- | ------------- |  | - | ------- | - |  | - | ------- | -
|                                                                       |  |                                          |         |                  
|                                                                       |  | Three Months Ended                       |         | Nine Months Ended
|                                                                       |  |                                          |         |                  
|                                                                       |  | September 30,                            |         | September 30,     |  | September 30, |         | September 30,
|                                                                       |  | 2002                                     |         | 2003              |  | 2002          |         | 2003         
|                                                                       |  |                                          |         |                   |  |               |         |              
|                                                                       |  |                                         
|                                                                       |  | (Unaudited)                             
|                                                                       |  | (In thousands, except per share amounts)
|Net loss                                                               |  |                                          |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Net loss attributable to common shares                                 |  | $                                        | (29,612 | )                 |  | $             | (18,602 | )             |  | $ | (97,657 | ) |  | $ | (56,444 | )
|                                                                       |  |                                          |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Weighted average shares outstanding                                    |  |                                          |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Weighted average shares outstanding                                    |  |                                          | 19,922  |                   |  |               | 20,212  |               |  |   | 19,760  |   |  |   | 19,975  |  
|Weighted average shares subject to Repurchase
    Agreements           |  |                                          | (12     | )                 |  |               |        |               |  |   | (35     | ) |  |   |        |  
|Weighted average shares held in escrow related to
    acquisitions     |  |                                          | (344    | )                 |  |               | (86     | )             |  |   | (344    | ) |  |   | (86     | )
|                                                                       |  |                                          |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Shares used in computation of basic and diluted
    net loss per share |  |                                          | 19,566  |                   |  |               | 20,126  |               |  |   | 19,381  |   |  |   | 19,889  |  
|                                                                       |  |                                          |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                                   |  |                                          |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Net loss per share attributable to common shares                       |  | $                                        | (1.51   | )                 |  | $             | (0.92   | )             |  | $ | (5.04   | ) |  | $ | (2.84   | )
|                                                                       |  |                                          |         |                   |  |               |         |               |  |   |         |   |  |   |         |  

As of September 30, 2002 and 2003, there
were 18.2 million and 29.9 million potential common
shares, respectively, that were excluded from the determination
of diluted net loss per share, as the effect of such shares on a
weighted average basis is anti-dilutive.

Note 11  Credit Facility

In September 2002, the Company entered into a
$15.0 million one-year line of credit with Silicon Valley
Bank, to be utilized for working capital and general corporate
operations. The credit facility was amended on March 25,
2003 and again on July 18, 2003, as a result of
non-compliance with the financial covenants of the facility. The
Company regained compliance with the covenants in the credit
facility upon execution of the line of credit agreement on
July 18, 2003, remained in compliance at September 30,
2003 and it is currently scheduled to mature on January 30,
2004. The credit facility is secured by certain of the
Companys assets and borrowings under the current agreement
bear a variable interest rate of Prime plus 2.0%, which has
ranged from 5.25% to 6.25%, and is subject to certain covenants.
Interest is paid each month with principal due at maturity.
Commitment fees related to the credit facility included an
initial commitment fee of 0.50%, or $75,000, and additional
commitment fees of $35,000 for each of the two amendments. The
facility carries an additional fee based on unused credit of
0.45% payable at the end of each quarterly period in arrears and
an early termination fee of 1.0% of the total credit facility
through maturity. During the first quarter of 2003, the Company
drew $4.9 million against the line of credit, which
remained outstanding at September 30, 2003; additionally,
during the second quarter the Company reduced letters of credit
held under the credit facility from $5.5 million at
March 31, 2003 to $2.5 million at September 30,
2003. All associated interest and fees are included as a
component of interest expense.

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CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 12  Preferred Stock
Financing

The carrying value of the Series D Preferred
Stock at December 31, 2002 and September 30, 2003 was
determined as follows:

|                                                                                      |                               |                |        |               |   |   |        |         |  
|------------------------------------------------------------------------------------- | ----------------------------- | -------------- | ------ | ------------- | - | - | ------ | ------- | -
|                                                                                      |                               | December 31,   |        | September 30,
|                                                                                      |                               | 2002           |        | 2003         
|                                                                                      |                               |                |        |              
|                                                                                      |                               |               
|                                                                                      |                               | (Unaudited)   
|                                                                                      |                               | (In thousands)
|Series D Preferred Stock                                                              |                               | $              | 55,000 |               |   | $ | 55,000 |        
|Less: Issuance costs                                                                  |                               |                | (3,075 | )             |   |   | (3,075 | )      
|                                                                                      |                               |                |        |               |   |   |        |        
|Series D Preferred Stock, net of issuance
    costs                                   |                               |                | 51,925 |               |   |   | 51,925 |        
|Less amounts allocated to:                                                            |                               |                |        |               |   |   |        |        
|                                                                                      | Common stock warrants         |                |        | (5,250        | ) |   |        | (5,250  | )
|                                                                                      | Beneficial conversion feature |                |        | (41,475       | ) |   |        | (41,475 | )
|Add cumulative change in liquidation preference                                       |                               |                | 7,440  |               |   |   | 18,920 |        
|Add accumulated accretion                                                             |                               |                | 14,260 |               |   |   | 23,789 |        
|                                                                                      |                               |                |        |               |   |   |        |        
|Carrying value of Series D Preferred Stock
    and embedded change-in-control feature |                               | $              | 26,900 |               |   | $ | 47,909 |        
|                                                                                      |                               |                |        |               |   |   |        |        

In connection with the financing transaction,
which closed in December 2001, the Series D Preferred Stock
was deemed to have an embedded derivative instrument. In
accordance with the provisions of SFAS No. 133, Accounting
for Derivative Instruments, the Company is required to adjust
the carrying value of the instrument to its fair value at each
balance sheet date and recognize any change since the prior
balance sheet date as a component of Interest and Other Income
(Expense). At September 30, 2002 and 2003, the estimated
fair value of the liquidation preference was $7.4 million
and $24.1 million, respectively, resulting in a net charge
(credit) during the three and nine months ended
September 30, 2003 of $4.9 million and
$11.5 million, respectively, and $(1.2) million and
$2.2 million during the same periods in 2002.

During the three and nine months ended
September 30, 2003, the accretion on redeemable convertible
preferred shares totaled $3.0 million and
$9.5 million, respectively, comprised of accrued dividends
of $1.5 million and $3.7 million, respectively, and
accretion of the beneficial conversion feature of
$1.5 million and $5.8 million, respectively. During
the three and nine months ended September 30, 2002, the
accretion on redeemable convertible preferred shares totaled
$3.6 million and $10.1 million, respectively,
comprised of accrued dividends of $1.1 million and
$3.3 million, respectively, and accretion of the beneficial
conversion feature of $2.5 million and $6.8 million,
respectively.

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CRITICAL PATH, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF

FINANCIAL CONDITION AND RESULTS OF
OPERATIONS







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

This report on Form 10-Q contains
forward-looking statements within the meaning of the safe
harbor provisions of the Private Securities Litigation
Reform Act of 1995, as amended and in effect from time to time.
The words anticipates, expects,
intends, plans, believes,
seek, and estimate and similar
expressions are intended to identify forward-looking statements.
These are statements that relate to future periods and include
statements regarding our ability to operate in the future, our
ability to obtain funding, our future strategic, operational and
financial plans, anticipated or projected revenues, expenses and
operational growth, markets and potential customers for our
products and services, plans related to sales strategies and
global sales efforts, the anticipated benefits of our
relationships with strategic partners, growth of our
competition, our ability to compete, investments in product
development, the adequacy of our current facilities and our
ability to obtain additional space, our litigation strategy, use
of future earnings, the feature, benefits and performance of our
current and future products and services, plans to reduce
operating costs through continued expense reduction, anticipated
effects of restructuring and retirement of debt, and our belief
as to our ability to successfully emerge from the restructuring
and refocusing of our operations. These forward-looking
statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected.
Factors that might cause future results to differ materially
from those projected in the forward-looking statements include,
but are not limited to, difficulties of forecasting future
results due to our limited operating history, failure to obtain
additional financing on favorable terms or at all, failure to
meet sales and revenue forecasts, evolving business strategy and
the emerging nature of the market for our products and services,
finalization of pending litigation and the settlement of the
continuing SEC investigation against former executives and
directors, turnover within and integration of senior management,
board of directors members and other key personnel, difficulties
in our strategic plans to exit certain products and services
offerings, failure to expand our sales and marketing activities,
potential difficulties associated with strategic relationships,
investments and uncollected bills, general economic conditions
in markets in which the Company does business, risks associated
with our international operations, foreign currency
fluctuations, unplanned system interruptions and capacity
constraints, software defects, and failure to expand our sales
and marketing activities, risks associated with an inability to
maintain continued compliance with the Nasdaq National Market
listing requirements, and those discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Additional
Factors That May Affect Future Operating Results and
elsewhere in this report. Readers are cautioned not to place
undue reliance on these forward-looking statements. The
forward-looking statements speak only as of the date hereof. We
expressly disclaim any obligation to publicly release the
results of any revisions to these forward-looking statements to
reflect events or circumstances after the date of this
filing.

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

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

Overview

Critical Path, Inc. was incorporated in
California on February 19, 1997. Critical Path, along with
its subsidiaries (collectively referred to herein as the
Company), provides digital communications software
and services that enable enterprises, government agencies,
wireless carriers, and service providers to rapidly deploy
highly scalable solutions for messaging and identity management.
Built upon an open, extensible software platform, these
solutions help organizations expand the range of digital
communications services they provide,

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while reducing overall costs. Critical
Paths messaging solutions  which are available
both as licensed software or hosted services  provide
integrated access to a broad range of communication and
collaboration applications from wireless devices, Web browsers,
desktop clients, and voice systems.


On July 24, 2003, we announced that our
Board of Directors had voted to execute a one-for-four reverse
stock split. Shareholders granted the board authority to do so
at the Critical Path annual meeting held on June 25, 2003.
To effect the reverse stock split, we filed an amendment to our
Articles of Incorporation on August 1, 2003. We began
trading under the new symbol, CPTHD on Monday,
August 4, 2003. After 20 trading days, the symbol reverted
back to CPTH. As of August 1, 2003, the total
number of shares of Common Stock outstanding was 81,595,042
shares and as of immediately following the proposed one-for-four
reverse split, Critical Path had 20,398,076 shares of Common
Stock outstanding. The share and per share amounts presented in
these condensed consolidated financial statements have been
retroactively restated to give effect to a one-for-four reverse
stock split of Critical Paths authorized and outstanding
common stock and for all shares of Common Stock subject to stock
options and warrants.

Recent Events

Robert Allen Shipp, the Companys President,
has resigned as President of Critical Path, Inc. effective
November 11, 2003. The Companys Chief Executive
Officer, William E. McGlashan, Jr., and the Companys Chief
Operating Officer and Chief Financial Officer, Paul H. Bartlett,
will assume the duties formerly performed by Mr. Shipp.

Critical Accounting Policies

There have been no material changes to our
critical accounting policies and estimates as disclosed in our
report on Form 10-K/A for the year ended December 31,
2002.

Results of Operations

In view of the rapidly evolving nature of our
business, prior acquisitions, organizational restructuring, and
limited operating history, we believe that period over period
comparisons of revenues and operating results, including gross
profit margin and operating expenses as a percentage of total
net revenues, are not meaningful and should not be relied upon
as indications of future performance. At September 30,
2003, we had 419 employees as compared to 577 employees at
December 31, 2002 and 599 employees at September 30,
2002. We do not believe that our historical fluctuations in
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 $4.3 million and $14.9 million in software
license revenues during the three and nine months ended
September 30, 2003, respectively, as compared to
$5.9 million and $27.7 million during the three and
nine months ended September 30, 2002, respectively,
resulting in period over period decreases of $1.6 million
and $12.8 million. These decreases in software license
revenues were primarily attributable to fewer customer purchases
resulting from unfavorable worldwide macroeconomic conditions and

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an uncertain political climate that resulted in
delayed customer information technology spending, predominantly
in the northern and central European and domestic markets.


Hosted Messaging.We
recognized $4.6 million and $14.8 million in hosted
messaging revenues during the three and nine months ended
September 30, 2003, respectively, as compared to
$6.5 million and $19.0 million during the same periods
in 2002, resulting in period over period decreases of
$1.9 million and $4.2 million. These decreases in
hosted messaging revenues were primarily due to the loss of
customers and reduced volume.

Professional Services.We recognized $2.6 million and
$8.9 million in professional services revenues during the
three and nine months ended September 30, 2003, respectively, as
compared to $3.1 million and $7.6 million during the
three and nine months ended September 30, 2002,
respectively, resulting in a quarter to date decrease of
$479,000 and a year to date increase of $1.3 million. The year
to date increase in professional services revenues was primarily
attributable to improved utilization rates and additional
projects associated with software license sales. The quarter to
date decrease in professional services revenues was primarily
due to resources dedicated to a large hosted customer
implementation and seasonality in Europe.

Maintenance and Support.We recognized $4.7 million and
$13.7 million in maintenance and support revenues during
the three and nine months ended September 30, 2003,
respectively, as compared to $3.7 million and
$10.9 million during the same periods in 2002, resulting in
period over period increases of $1.0 million and
$2.8 million. These increases in maintenance and support
revenues were primarily due to favorable renewal rates and
additional license sales with associated maintenance and support
during 2002 and 2003.

Critical Paths international operations
accounted for approximately 55% and 57% of net revenues during
the three and nine months ended September 30, 2003,
respectively, as compared to 59% and 57% during the same periods
in 2002.



| |                     
| | --------------------
| | Cost of Net Revenues

Software License.Cost of net software license revenues
consists primarily of product media duplication, manuals and
packaging materials, personnel and facility costs, and
third-party royalties. The cost of net software license revenues
was $541,000 and $3.1 million during the three and nine
months ended September 30, 2003, respectively, as compared
to $563,000 and $1.4 million during the three and nine
months ended September 30, 2002, respectively, resulting in
a quarter to date decrease of $22,000 and a year to date
increase of $1.7 million. The year to date increase in
software license costs was primarily attributable to an increase
in third party costs associated with a major European license
transaction, which required us to purchase third party
technology to integrate with our offering. Software license
costs returned to normal levels in the third quarter and they
should remain relatively constant in the fourth quarter.

Hosted Messaging.Cost of net hosted messaging revenues
consists primarily of costs incurred in the delivery and support
of messaging services, including depreciation of hardware,
software and related services in connection with our network
infrastructure, amortization of purchased technology, Internet
connection charges, personnel costs incurred in operations, and
other direct and allocated indirect costs. The cost of net
hosted messaging revenues was $6.2 million and
$19.6 million during the three and nine months ended
September 30, 2003, respectively, as compared to
$7.4 million and $22.8 million during the same periods
in 2002, resulting in period over period decreases of
$1.2 million and $3.2 million. These decreases in
hosted messaging costs during the three and nine months ended
September 30, 2003 were primarily due to the retirement of
surplus network infrastructure hardware and software, affecting
a reduction in depreciation expense, and cost savings generated
through our 2002 and 2003 restructuring initiatives, including
the termination of employees and associated reduction in related
personnel costs of $124,000 and $920,000, respectively, and the
cancellation of certain outside consulting arrangements
accounting for $380,000 and $512,000, respectively. Depreciation
expenses included in hosted messaging costs totaled
$1.9 million and $6.8 million during the three and
nine months ended September 30, 2003, respectively, as compared
to $3.9 million and $12.3 million during the three and
nine months ended September 30, 2002, respectively. These
decreases were partially offset by an increase in service fees
associated with the management of our data

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center operations of $1.3 million and
$3.7 million during the three and nine months ended
September 30, 2003, respectively. We expect hosted
messaging costs to increase slightly in the fourth quarter.


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. The cost of net professional services revenues was
$2.7 million and $9.1 million during the three and
nine months ended September 30, 2003, respectively, as compared
to $2.4 million and $7.0 million during the three and
nine months ended September 30, 2002, respectively,
resulting in period over period increases of $341,000 and
$2.1 million. These increases in professional services
costs during the three and nine months ended September 30,
2003 were primarily attributable to incremental consulting and
personnel costs associated with a major European deal. We expect
professional services costs to increase slightly in the fourth
quarter.

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
$1.3 million and $4.6 million during the three and
nine months ended September 30, 2003, respectively, as
compared to $2.2 million and $6.5 million during the
same periods in 2002, resulting in period over period decreases
of $959,000 and $1.9 million. These decreases in
maintenance and support costs during the three and nine months
ended September 30, 2003 were primarily due to cost savings
generated through our 2002 and 2003 restructuring initiatives,
including the termination of employees and associated reduction
in related personnel costs of $481,000 and $830,000,
respectively, and the consolidation of facilities of $529,000
and $1.1 million, respectively. We expect maintenance and
support costs to increase slightly in the fourth quarter.

Operations, customer support, and professional
services staff decreased to 121 employees at
September 30, 2003 from 190 employees at
September 30, 2002.



| |                   
| | ------------------
| | Operating Expenses

Sales and Marketing.Sales and marketing expenses consist
primarily of compensation for sales and marketing personnel,
and, to a lesser extent, advertising, public relations, other
promotional costs, and related overhead. Sales and marketing
expenses were $7.2 million and $24.4 million during
the three and nine months ended September 30, 2003,
respectively, as compared to $10.9 and $33.3 million during
the three and nine months ended September 30, 2002,
respectively, resulting in period over period decreases of
$3.7 million and $8.9 million. These decreases in
sales and marketing expenses during the three and nine months
ended September 30, 2003 were primarily attributable to
cost savings generated through our 2002 and 2003 restructuring
initiatives, including the reduction of employees, from 152 at
September 30, 2002 to 103 at September 30, 2003,
affecting a reduction in related personnel expenses of
$2.3 million and $4.4 million, respectively, the
consolidation of facilities of $1.1 million and
$2.3 million, respectively, the reduction in certain
marketing program costs of $307,000 and $1.9 million,
respectively, and the reduction in outside expenses of $97,000
and $268,000, respectively. We expect sales and marketing
expenses to increase slightly in the fourth quarter.

Research and Development.Research and development expenses
consist primarily of compensation for technical staff, payments
to outside contractors, depreciation of capital equipment
associated with research and development activities, and, to a
lesser extent, related overhead. Research and development
expenses were $4.6 million and $14.0 million during
the three and nine months ended September 30, 2003,
respectively, as compared to $5.2 million and
$15.3 million during the same periods in 2002, resulting in
period over period decreases of $546,000 and $1.3 million.
These decreases in research and development expenses during the
three and nine months ended September 30, 2003 were
primarily due to cost savings generated through our 2002 and
2003 restructuring initiatives, including the reduction of
employees, from 167 at September 30, 2002 to 128 at
September 30, 2003, affecting a reduction in related
personnel expenses of $627,000 and $1.0 million,
respectively, and the consolidation of facilities of $410,000
and $861,000, respectively. We expect research and development
expenses to increase slightly in the fourth quarter.

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General and Administrative.General and administrative expenses
consist primarily of compensation for personnel, fees for
outside professional services, occupancy costs and, to a lesser
extent, related overhead. General and administrative expenses
were $3.2 million and $9.8 million during the three
and nine months ended September 30, 2003, respectively, as
compared to $5.4 million and $18.3 million during the three
and nine months ended September 30, 2002, respectively,
resulting in period over period decreases of $2.2 million
and $8.5 million. These significant decreases in general
and administrative expenses during the three and nine months
ended September 30, 2003 were primarily attributable to
cost savings generated through our 2002 and 2003 restructuring
initiatives, including the reduction of employees, from 90 at
September 30, 2002 to 67 at September 30, 2003,
affecting a reduction in related personnel costs of $947,000 and
$2.6 million, respectively, the reduction of outside legal
and litigation fees of $306,000 and $1.6 million,
respectively, the cancellation of certain outside consulting
arrangements of $456,000 and $1.6 million, respectively,
and the reduction of bad debt expense of $232,000 and
$1.2 million, respectively. We expect general and
administrative expenses to remain relatively flat in the fourth
quarter.



| |                                         
| | ----------------------------------------
| | Goodwill and Other Intangible
    Assets

In connection with the adoption of SFAS
No. 142, in January 2002, we reclassified certain
intangible assets and related amortization associated with
assembled workforce to goodwill and ceased any future
amortization of goodwill.

In connection with our acquisitions completed in
1999 and 2000, all of which were accounted for using the
purchase method of accounting, we recorded goodwill and other
intangible assets, primarily for assembled workforce, customer
base and existing technology. Additionally, we have recorded
intangible assets related to certain warrants issued to
strategic partners. In connection with the adoption of SFAS
No. 142, discussed above, we have reclassified certain
intangible assets and related amortization associated with
assembled workforce out of intangible assets and into goodwill.
Based on the types of identifiable intangible assets acquired,
amortization expenses of $4.6 million and $13.9 million
were allocated to the cost of net revenues during the three and
nine months ended September 30, 2002, respectively, and
amortization expenses of $6.2 million and
$18.6 million were allocated to operating expenses during
the three and nine months ended September 30, 2002,
respectively. The amortization of all intangible assets was
completed by the end of 2002.



| |                     
| | --------------------
| | Stock-Based Expenses

Stock-based expenses are comprised of stock-based
charges related to stock options and warrants granted to
employees and consultants. Stock-based expenses were zero and
$59,000 during the three and nine months ended
September 30, 2003, respectively, as compared to
$1.2 million and $9.4 million during the three and
nine months ended September 30, 2002, respectively. Based
on the functions of the employees and consultants participating
in the related option grants, zero and $17,000 was allocated to
cost of net revenues and zero and $42,000 was allocated to
operating expenses during the three and nine months ended
September 30, 2003, respectively. During the three and nine
months ended September 30, 2002, $255,000 and
$1.1 million was allocated to cost of net revenues and
$951,000 and $8.3 million was allocated to operating
expenses, respectively. The significant period over period
decline in stock-based expenses was due primarily to a reduction
in the unearned compensation balances related to grants as a
result of headcount reductions and the completion of
amortization of nearly all unearned compensation as of the end
of 2002.

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| |                                     
| | ------------------------------------
| | Restructuring and Other
    Expenses

|                                                            |  |               |     |             |  |               |      |         |  |          |     |               |  |   |      |   |  |   |      |   |  |   |     | 
|----------------------------------------------------------- |  | ------------- | --- | ----------- |  | ------------- | ---- | ------- |  | -------- | --- | ------------- |  | - | ---- | - |  | - | ---- | - |  | - | --- | 
|                                                            |  | Liability at  |     |             |  |               |      |         |  |          |     | Liability at 
|                                                            |  | December 31,  |     |             |  | Restructuring |      | Noncash |  | Cash     |     | September 30,
|                                                            |  | 2002          |     | Adjustments |  | Charges       |      | Charges |  | Payments |     | 2003         
|                                                            |  |               |     |             |  |               |      |         |  |          |     |              
|                                                            |  |              
|                                                            |  | (In millions)
|Workforce reduction                                         |  | $             | 1.2 |             |  | $             | (0.6 | )       |  | $        | 5.5 |               |  | $ | (0.1 | ) |  | $ | (5.9 | ) |  | $ | 0.1 | 
|Facility and operations consolidation and other
    charges |  |               | 1.1 |             |  |               | (0.3 | )       |  |          | 0.5 |               |  |   | (0.3 | ) |  |   | (0.5 | ) |  |   | 0.5 | 
|Non-core product and service sales and
    divestitures     |  |               | 0.3 |             |  |               | (0.3 | )       |  |          | 0.3 |               |  |   |     |   |  |   | (0.3 | ) |  |   |    | 
|                                                            |  |               |     |             |  |               |      |         |  |          |     |               |  |   |      |   |  |   |      |   |  |   |     | 
|Total                                                       |  | $             | 2.6 |             |  | $             | (1.2 | )       |  | $        | 6.3 |               |  | $ | (0.4 | ) |  | $ | (6.7 | ) |  | $ | 0.6 | 
|                                                            |  |               |     |             |  |               |      |         |  |          |     |               |  |   |      |   |  |   |      |   |  |   |     | 

In May 2002, the Board of Directors approved a
restructuring plan to further reduce our 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. The balance of the 2002 restructuring accrual at
September 30, 2003 was approximately $0.3 million and
is expected to be utilized by the end of 2004.

In January 2003, we announced a restructuring
initiative designed to further reduce our expense level in an
effort to achieve operating profitability assuming no or
moderate revenue growth. The plan includes the consolidation of
some office locations and a global workforce reduction of
approximately 175 positions, or approximately 30% of the
workforce. The headcount reduction is partially offset by
outsourcing approximately 75 positions to lower cost
service providers. We incurred an aggregate charge of
$8.0 million resulting from the cost reduction plan,
inclusive of $7.0 million in cash and $1.0 million in
non-cash expenses. Included in this plan were approximately
$1.7 million in charges incurred in the fourth quarter of
2002, comprised of approximately $0.7 million in severance
and related costs and $1.0 million in facilities lease
termination costs. During the first, second, and third quarters
of 2003, we incurred approximately $4.4 million,
$0.9 million, and $1.0 million, respectively, in
restructuring charges under the plan, predominantly related to
severance and associated employee costs. We made payments of
$3.6 million, $2.0 million, and $1.1 million
during the first, second, and third quarters of 2003,
respectively, related to the restructuring initiative.

Additionally, we completed two restructuring
initiatives during 2001 and 2002, with associated expenses of
$19.8 million. During the first quarter of 2003, we
reversed approximately $1.2 million in restructuring
expenses, which were accrued during 2001 and 2002, as we do not
anticipate these amounts will be paid in the future. At
September 30, 2003, the balance of the 2003 restructuring
accrual was approximately $0.3 million and is expected to
be utilized by the end of 2004.

We will continue to review our cost structure as
it relates to facility and workforce costs and expect to incur
additional restructuring expenses.



| |                                             
| | --------------------------------------------
| | Interest and Other Income (Expense),
    Net

Interest and other income (expense), net consists
primarily of interest earnings on cash and cash equivalents as
well as net gains (losses) on foreign exchange transactions and
changes in the fair value of the liquidation preference on the
Series D Preferred Stock. Interest income was $105,000 and
$306,000 during the three and nine months ended
September 30, 2003, respectively, as compared to $369,000
and $1.3 million during the three and nine months ended
September 30, 2002, respectively, resulting in period over
period decreases of $264,000 and $970,000. These decreases were
due to lower cash balances available for investing and the
elimination of short-term investments from cash and cash
equivalents. Cash balances declined during the nine months ended
September 30, 2003 due primarily to the funding of our
operating activities. We recognized net losses from foreign
currency transactions associated with our international
operations of $243,000 and $284,000 during the three and nine
months ended September 30, 2003, respectively, as

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compared to a net gain of $113,000 during the
three months ended September 30, 2002 and a net loss of
$469,000 during the nine months ended September 30, 2002.
Based on the current international markets, we expect that
fluctuations in foreign currencies could have a significant
impact on our operating results during the remainder of 2003. In
addition, we recognized a gain of $3.8 million in June 2003
related to the early release of funds held in escrow (see also
Release of The docSpace Company Escrow Funds).


In connection with the financing transaction
closed in December 2001, the Series D Preferred Stock was
deemed to have an embedded derivative instrument. In accordance
with the provisions of SFAS No. 133, Accounting for
Derivative Instruments, we are required to adjust the carrying
value of the instrument to its fair value at each balance sheet
date and recognize any change since the prior balance sheet date
as a component of Interest and Other Income (Expense). At
September 30, 2002 and 2003, the estimated fair value of
the liquidation preference was $7.4 million and
$24.1 million, respectively. This resulted in a net charge
to other expense during the three and nine months ended
September 30, 2003 of $4.9 million and
$11.5 million, respectively, as compared to
$1.2 million and $4.5 million during the same periods
in 2002.



| |                    
| | -------------------
| | Gain on Investments

During the second quarter of 2003, we executed
sales of certain of our public and private investments. These
sales resulted in a net gain of $349,000, which was comprised of
$2.2 million in aggregate cash proceeds, the recognition of
$1.5 million in unrealized losses and the elimination of
$354,000 in assets held as equity investments. All associated
cash proceeds were received during the second quarter.



| |                                                 
| | ------------------------------------------------
| | Release of The docSpace Company Escrow
    Funds

In June 2003, we entered an agreement with the
former shareholders of The docSpace Company, Inc. to release
approximately $3.8 million of approximately
$4.7 million in remaining funds held in escrow related to
our 2000 acquisition of The docSpace Company. The funds were
remitted to us in June 2003 and we recognized a gain of
$3.8 million in Other Income during the second quarter.

The escrow account was initially established in
February 2000 with $5.0 million to be used to reimburse the
former shareholders of The docSpace Company for certain
qualifying expenses related to the establishment, maintenance
and dissolution of the various holding companies established in
connection with the structuring of The docSpace Company
acquisition. The escrow fund is scheduled to terminate in
February 2005, unless all related holding companies are
dissolved prior to such date, at which time all remaining funds
held in escrow will be remitted to us. The remaining funds held
in escrow are expected to be sufficient to cover all foreseeable
costs over the remaining term of the escrow agreement; however,
in the event such funds are not sufficient we will be
responsible for the reimbursement of any qualifying expenses.



| |                     
| | --------------------
| | Depreciation Expense

Depreciation expense primarily relates to the
expensing, over the estimated useful lives, of hardware,
software and related services in connection with our network
infrastructure for our hosted messaging services, leasehold
improvements and equipment used in our general operations.
Depreciation expense totaled $3.9 million and
$13.1 million during the three and nine months ended
September 30, 2003, respectively, as compared to
$6.7 million and $21.9 million during the three and
nine months ended September 30, 2002, respectively,
resulting in period over period decreases of $2.9 million
and $8.8 million. These decreases were primarily due to the
write-down of and complete depreciation of equipment related to
our hosted messaging operations, partially offset by capital
expenditures related to our network infrastructure. Included in
these amounts was depreciation expense related to cost of net
hosted messaging revenues, which totaled $1.9 million and
$6.8 million during the three and nine months ended
September 30, 2003, respectively, as compared to
$3.9 million and $12.3 million during the same periods
in 2002. The remaining depreciation expense related to capital
expenditures incurred for general operations of our business and
has been allocated to cost of net revenues and operating
expense, as appropriate.

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| |                 
| | ----------------
| | Interest Expense

Interest expense consists primarily of the
interest and amortization of issuance costs related to our
5 3/4% Convertible Subordinated Notes issued in March 2000,
interest and fees on our line of credit facility with Silicon
Valley Bank, and interest on certain capital leases. During the
three and nine months ended September 30, 2003, we
incurred approximately $852,000 and $2.4 million,
respectively, in interest expense, of which $556,000 and
$1.6 million related to our Convertible Subordinated Notes,
$145,000 and $331,000 related to our line of credit facility,
$69,000 and $206,000 related to amortization of debt issuance
costs, and $13,000 and $89,000 related to capital leases and
other long-term obligations, respectively. During the three and
nine months ended September 30, 2002, we incurred
approximately $740,000 and $2.3 million, respectively, in
interest expense, of which $556,000 and $1.7 million
related to our Convertible Subordinated Notes, $69,000 and
$206,000 related to the amortization of debt issuance costs, and
$29,000 and $84,000 related to capital leases and other
long-term obligations, respectively. There were no charges in
the first nine months of 2002 related to our line of credit
facility with Silicon Valley Bank, as it was not established
until September 2002. Interest expense was relatively flat
period over period.



| |                                                
| | -----------------------------------------------
| | Equity in Net Loss of Critical Path
    Pacific

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

On June 6, 2002, we acquired the remaining
60% ownership interest 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 used the equity method
to account for our ownership interest in Critical Path Pacific.

We recorded no equity in net loss of joint
venture during the three and nine months ended
September 30, 2003 as compared to zero and
$1.4 million during the three and nine months ended
September 30, 2002, respectively.



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

We recognized a provision for income taxes of
$273,000 and $754,000 during the three and nine months ended
September 30, 2003, respectively, as compared to $234,000
and $255,000 during the three and nine months ended
September 30, 2002, respectively, as certain of our
European operations generated income taxable in certain European
jurisdictions. The provision for income taxes during the nine
months ended September 30, 2002 was partially offset by an
$800,000 U.S. federal income tax benefit due to the repeal of
the federal corporate alternative minimum tax recorded in the
first quarter of 2002. No current provision or benefit for U.S.
federal or state income taxes has been recorded as we have
incurred net operating losses for income tax purposes since our
inception. No deferred provision or benefit for federal or state
income taxes has been recorded as we are in a net deferred tax
asset position for which a full valuation allowance has been
provided due to uncertainty of realization.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Accretion on Redeemable Convertible
    Preferred Shares and Valuation of Liquidation
    Preference

In connection with the financing transaction
completed during December 2001, we received net cash proceeds of
approximately $27 million and retired approximately
$65 million in face value of our outstanding convertible
subordinated notes in exchange for shares of our Series D
Cumulative Redeemable Convertible Participating Preferred Stock.
The preferred stock includes an automatic redemption on
November 8, 2006

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and cumulative dividends at a rate of 8% per
year, compounded on a semi-annual basis. At issuance, the
Series D Preferred Stock was deemed to have an embedded
beneficial conversion feature which was limited to the net
proceeds allocable to preferred stock of approximately
$42 million. The value of the beneficial conversion
feature, at issuance, was initially recorded as a reduction of
the carrying amount of the Series D Preferred Stock and
will accrete over the term of the Series D Preferred Stock.
During the three and nine months ended September 30, 2003,
the accretion on redeemable convertible preferred shares totaled
$3.0 million and $9.5 million, respectively, comprised
of accrued dividends of $1.5 million and $3.7 million,
respectively, and accretion of the beneficial conversion feature
of $1.5 million and $5.8 million, respectively. During
the three and nine months ended September 30, 2002, the
accretion on redeemable convertible preferred shares totaled
$3.6 million and $10.1 million, respectively,
comprised of accrued dividends of $1.1 million and
$3.3 million, respectively, and accretion of the beneficial
conversion feature of $2.5 million and $6.8 million,
respectively.




| |                
| | ---------------
| | Credit Facility

In September 2002, we entered into a
$15.0 million one-year line of credit with Silicon Valley
Bank, to be utilized for working capital and general corporate
operations. The credit facility was amended on March 25,
2003 and again on July 18, 2003, as a result of
non-compliance with the financial covenants of the facility. We
regained compliance with the credit facility upon execution of
the loan agreement executed on July 18, 2003 and it is
currently scheduled to mature on January 30, 2004. The
credit facility is secured by certain of our assets and
borrowings bear variable interest, which has ranged from 5.25%
to 6.25%, and is subject to certain covenants. Interest is paid
each month with principal due at maturity. Commitment fees
related to the credit facility included an initial commitment
fee of 0.50%, or $75,000, and additional commitment fees of
$35,000 for each of the two amendments. The facility carries an
additional fee based on unused credit of 0.45% payable at the
end of each quarterly period in arrears and an early termination
fee of 1.0% of the total credit facility through maturity.
During the first quarter of 2003, we drew $4.9 million
against the line of credit, which remained outstanding at
September 30, 2003; additionally, during the second quarter
we reduced letters of credit held under the credit facility from
$5.5 million at March 31, 2003 to $2.5 million at
September 30, 2003. All associated interest and fees are
included as a component of interest expense.

Liquidity and Capital Resources



| |                          
| | -------------------------
| | First Nine Months of 2003

As of September 30, 2003, our cash and cash
equivalents totaled $18.2 million and our working capital
amounted to negative $2.6 million. During the first nine
months of 2003, cash and cash equivalents decreased by
approximately $15.3 million.

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

As of September 30, 2003, $7.4 million
of our $18.2 million in cash and cash equivalents is
expected to support our outstanding obligations to Silicon
Valley Bank and approximately $6.5 million is located in
accounts outside of the United States, which may not be readily
available for our domestic operations. Accordingly, our readily
available cash resources in the United States as of
September 30, 2003 were approximately $4.3 million. As
a result of our cash position, it will be essential for Critical
Path to complete a financing or other strategic transaction in
the fourth quarter in order to continue to operate. Critical
Path is currently in negotiations to raise additional capital;
however, there is a significant risk that we will be unable to
complete a financing transaction on a timely basis.

We used net cash of $29.2 million to fund
operating activities during the first nine months of 2003,
primarily due to our net loss, adjusted for non-cash charges, as
operating costs, primarily employee and employee related costs,
exceeded the related revenues from the sale of our software
products and services.

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During the first nine months of 2003, we paid
$1.1 million in interest payments related to the
Convertible Subordinated Notes and $6.7 million in
restructuring payments. In addition, we used cash of
$2.3 million to make certain software and hardware support
and maintenance renewal payments and $2.1 million to pay
insurance premiums for fiscal year 2003.


We received net cash of $7.8 million from
investing activities during the first nine months of 2003,
primarily through the sale of marketable securities of
$9.6 million and unrestricting $2.7 million in
previously restricted cash. In addition, we received
$3.8 million from the early release of funds held in escrow
(see also Release of The docSpace Company Escrow Funds section
of the Management Discussion and Analysis) and $2.2 million
from the sale of certain of our public and private investments
during the second quarter of 2003. These cash inflows from
investing activities were partially offset by $10.5 million
in property and equipment purchases, primarily for hardware,
software and related services related to our network
infrastructure.

We received net cash of $5.2 million from
financing activities during the first nine months of 2003,
primarily through $4.9 million in borrowings against our
line of credit with Silicon Valley Bank. As discussed earlier in
Note 7 of Notes to Condensed Consolidated Financial
Statements and in the Managements Discussion and Analysis
section we entered into a $15.0 million one-year line of
credit with Silicon Valley Bank, which is scheduled to mature on
January 30, 2004. In addition, we raised $985,000 in
proceeds from the issuance of common stock. These cash inflows
from financing activities were partially offset by approximately
$644,000 in principal payments on note and capital lease
obligations.

Our primary sources of capital have come from
debt and equity financings that we have completed over the past
five years. Revenues generated from the sale of our products and
services may not increase to a level that exceeds our expenses
or could fluctuate significantly as a result of changes in
customer demand or acceptance of future products. Since
inception, we have incurred aggregate consolidated net losses of
approximately $2.2 billion, which includes
$1.3 billion related to the impairment of long-lived
assets, $444.5 million related to non-cash charges
associated with ten acquisitions and $172.1 million related
to non-cash stock-based compensation expenses.

We receive cash from the exercise of stock
options and the sale of stock under our Employee Stock Purchase
Plan and employee stock option plans. While we expect to
continue to receive these proceeds in future periods, the timing
and amount of such proceeds is difficult to predict and is
contingent on a number of factors including the price of our
common stock, the number of employees participating in the
employee stock option plans, our Employee Stock Purchase Plan
and general market conditions.

Our primary source of operating cash flow is the
collection of accounts receivable from our customers and the
timing of payments to our vendors and service providers. We
measure the effectiveness of our collections efforts by an
analysis of the average number of days our accounts receivable
are outstanding. Collections of accounts receivable and related
days outstanding will fluctuate in future periods due to the
timing, amount of our future revenues, payment terms on customer
contracts and the effectiveness of our collection efforts.

Our operating cash flows will be impacted in the
future based on the timing of payments to our vendors for
accounts payable. We endeavor to pay our vendors and service
providers in accordance with the invoice terms and conditions.
The timing of cash payments in future periods may be impacted by
the nature of accounts payable arrangements. We may face
restrictions on our ability to use cash that we currently hold
outside of the United States for purposes other than the
operation of each of our respective foreign subsidiaries that
hold the cash. For example, our ability to use cash held in our
German subsidiary for any reason other than the operation of
this subsidiary may result in certain tax liabilities and may be
subject to local laws that could prevent the transfer of cash
from Germany to any other foreign or domestic account. At
September 30, 2003, approximately $6.5 million was
held outside of the United States. Additionally, we are exposed
to foreign currency exchange rate risk inherent in our sales
commitments, anticipated sales, contracts with vendors, and
working capital, as a significant portion of our worldwide
operations have a functional currency other than the United
States Dollar. 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.

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A number of non-cash items have been charged to
expense and increased our net loss in the nine months ended
September 30, 2003. These items include depreciation and
amortization of property and equipment and intangible assets,
amortization of unearned stock-based compensation and other
stock-based compensation charges and provisions for doubtful
accounts. To the extent these non-cash items increase or
decrease in amount and increase or decrease our future operating
results, there will be no corresponding impact on our cash flows.

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



| |                          
| | -------------------------
| | First Nine Months of 2002

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. During the first nine months of 2002, we
used approximately $24.4 million in cash and cash
equivalents.

We used net 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 revenues from the sale of our software
products and services. In addition, accrued expenses decreased
by $1.6 million due primarily to the payment of acquisition
retention bonus amounts during the second quarter of 2002. These
cash outflows for operating activities were partially offset by
improved receivable collections of $4.0 million.

We used net cash of $7.2 million in
investing activities during the first nine months of 2002, of
which $4.1 million was used to purchase additional
short-term investments, $3.0 million was used to issue a
cash security deposit to support a negotiated licensing
agreement, and $4.9 million was used to purchase additional
network infrastructure equipment and to fund a portion of the
tenant improvements in our San Francisco office. During the
second quarter of 2002, we acquired the remaining 60% ownership
interest in our 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, we actually
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 net cash of $865,000 in financing
activities during the first nine months of 2002, primarily
to retire $3.6 million in principal on capital lease
obligations. This cash outflow from financing activities was
partially offset by proceeds from the repayment of notes
receivable by former officers and shareholders of
$1.2 million and the sale of our common stock of
$1.5 million.

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##### Table of Contents



Contractual Obligations

The Contractual Obligations and Commitments Table
below sets forth our significant obligations and commitments as
of September 30, 2003.

|                              |                                                           |                                    |   |          |        |      |   |       |       |      |   |        |        |  |   |        |        |  |   |       |       |  |   |        |        | 
|----------------------------- | --------------------------------------------------------- | ---------------------------------- | - | -------- | ------ | ---- | - | ----- | ----- | ---- | - | ------ | ------ |  | - | ------ | ------ |  | - | ----- | ----- |  | - | ------ | ------ | 
|                              |                                                           |                                   
|                              |                                                           | Fiscal Year                       
|                              |                                                           |                                   
|                              |                                                           |                                    |   | 2007 and
|                              |                                                           | Total                              |   | 2003     |        | 2004 |   | 2005  |       | 2006 |   | Beyond
|                              |                                                           |                                    |   |          |        |      |   |       |       |      |   |       
|                              |                                                           |                                   
|                              |                                                           | (Unaudited)                       
|                              |                                                           | (In thousands)                    
|Contractual Cash Obligations: |                                                           |                                    |   |          |        |      |   |       |       |      |   |        |        |  |   |        |        |  |   |       |       |  |   |       
|                              | Convertible subordinated notes, including
    interest(1) |                                    | $ | 42,772   |        |      | $ | 1,103 |       |      | $ | 2,206  |        |  | $ | 39,463 |        |  | $ |      |       |  | $ |       |       
|                              | Line of credit facility(2)                                |                                    |   | 4,900    |        |      |   |      |       |      |   | 4,900  |        |  |   |       |        |  |   |      |       |  |   |       |       
|                              | Operating lease obligations                               |                                    |   | 34,210   |        |      |   | 1,409 |       |      |   | 5,217  |        |  |   | 4,858  |        |  |   | 4,103 |       |  |   | 18,623 |       
|                              | Capital lease obligations                                 |                                    |   | 2,063    |        |      |   | 1,705 |       |      |   | 358    |        |  |   |       |        |  |   |      |       |  |   |       |       
|                              | Other purchase obligations(3)                             |                                    |   | 10,188   |        |      |   | 3,570 |       |      |   | 5,844  |        |  |   | 477    |        |  |   | 182   |       |  |   | 115    |       
|                              |                                                           |                                    |   |          |        |      |   |       |       |      |   |        |        |  |   |        |        |  |   |       |       |  |   |       
|                              |                                                           | Total Contractual Cash Obligations |   | $        | 94,133 |      |   | $     | 7,787 |      |   | $      | 18,525 |  |   | $      | 44,798 |  |   | $     | 4,285 |  |   | $      | 18,738 | 
|                              |                                                           |                                    |   |          |        |      |   |       |       |      |   |        |        |  |   |        |        |  |   |       |       |  |   |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the Critical Path 5 3/4%
    Convertible Subordinated Notes due April 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(2) | Represents the line of credit facility with
    Silicon Valley Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(3) | Represents certain contractual obligations
    related to licensed software, maintenance contracts, management
    of data center operations and network infrastructure storage
    costs. Including approximately, $2.4 million and
    $5.2 million in cash obligations to Hewlett Packard related
    to our managed services agreement during 2003 and 2004,
    respectively. However, we expect our actual service fees due to
    Hewlett Packard under the managed services agreement to total
    between $6.4 million and $9.2 million per annum.

Recent Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 addresses certain financial instruments that, under
previous guidance, could be accounted for as equity, but now
must be classified as liabilities in statements of financial
position. These financial instruments include:
1) mandatorily redeemable financial instruments,
2) obligations to repurchase the issuers equity
shares by transferring assets, and 3) obligations to issue
a variable number of shares. SFAS No. 150 is effective for
all financial instruments entered into or modified after
May 31, 2003, and otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. We
adopted SFAS No. 150 in the third quarter of 2003 and such
adoption did not have a material effect on our financial
position and results of operations.

In May 2003, the EITF reached a consensus on EITF
No. 03-05, Applicability of AICPA Statement of
Position 97-2, Software Revenue Recognition, to
Non-Software Deliverables in Arrangement Containing
More-Than-Incidental Software. EITF No. 03-05 addresses the
applicability of Statement of Position No. 97-2 regarding
software and non-software deliverables in a multiple element
arrangement, giving consideration to whether the deliverables
are essential to the functionality of one another. EITF
No. 03-05 is effective for interim periods beginning after
August 13, 2003. We are currently assessing the impact of
the adoption of EITF No. 03-05 on our financial positions
and results of operations.

In January 2003, the FASB issued FASB
Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51. FIN No. 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN No. 46 is effective immediately for
all new variable interest entities created or acquired after
January 31, 2003. For variable

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interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be
applied for the first interim or annual period ending after
December 15, 2003. At this time, we do not believe it is
reasonably possible that we will consolidate or disclose
information about variable interest entities. However, we will
continue to assess the impact of FIN No. 46 on our
consolidated financial statements.


In November 2002, the EITF reached a consensus on
EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under
which the vendor will perform multiple revenue-generating
activities. EITF Issue No. 00-21 is effective for interim
periods beginning after June 15, 2003. We adopted EITF
Issue No. 00-21 in the third quarter of 2003 and such
adoption did not have a material effect on our financial
position and results of operations.

In November 2002, the FASB issued FIN
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN No. 45 requires that a
liability be recorded at fair value in the guarantors
balance sheet upon issuance of a guarantee. In addition, FIN
No. 45 requires disclosures about the guarantees that an
entity has issued, including a reconciliation of changes in the
entitys product warranty liabilities. The initial
recognition and initial measurement provisions of FIN
No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year-end. We adopted FIN No. 45
in the first quarter of 2003, and the disclosure requirements
and the recognition and initial measurement provisions of FIN
No. 45 did not have a material effect on our financial
position and results of operations.

In July 2002, the FASB issued 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 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. We adopted SFAS No. 146 in the
first quarter of 2003 and incurred $6.3 million in
restructuring charges during the nine months ended
September 30, 2003.

Additional Factors That May Affect Future
Operating Results



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

We believe that existing capital resources will
not be sufficient to maintain current and planned operations.
Accordingly, it is essential for us to complete a financing or
other strategic transaction in the fourth quarter in order to
continue to operate. Such a financing would be dilutive to
existing shareholders. If we are unable to complete a financing
or other strategic transaction on a timely basis, we will not be
able to continue to operate beyond the fourth quarter without
the protection of applicable bankruptcy laws. Even if we are
able to obtain additional financing in the near term, we may be
required to raise additional funds in the future, particularly
if we are unable to generate positive cash flow as a result of
our operations. Such financing may not be available in
sufficient amounts or on terms acceptable to us and will be
dilutive to existing shareholders. Additionally, we face a
number of challenges in operating our business, including but
not limited to our ability to overcome viability concerns of our
prospective customers given our current capital needs, the
amount of resources necessary 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.



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

As of September 30, 2003, we had an
accumulated deficit, including other comprehensive income, of
approximately $2.2 billion. We have not achieved
profitability in any period and may continue to incur net

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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 further
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 may incur significant non-cash charges
related to 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 also may never obtain sufficient revenues to
exceed our cost structure and achieve profitability. If we do
achieve profitability, we may not be able to sustain or increase
profitability in the future. This may also, in turn, cause the
price of our common stock to demonstrate volatility and/or
continue to decline.



| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 restructurings, as well as significant fluctuations
in license revenues as a percentage of total revenues from 38%
in 2000 to 30% in 2001, 40% in 2002 and 28% in the nine months
ended September 30, 2003. Our revenues in some past
quarters fell and could continue to fall short of expectations
if we experience delays or cancellations of even a small number
of orders. We often offer volume-based pricing, which may affect
operating margins. A number of factors are likely to cause
fluctuations in operating results, including, but not limited to:



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the demand for licensed solutions for messaging,
    and identity management products;                                                                                                                           
|
| |  | the demand for outsourced messaging services
    generally and the use of messaging and identity management
    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 identity management
    infrastructure market;
|
| |  | the budgeting and payment cycles of our customers
    and potential customers;                                                                                                                                   
|
| |  | the amount and timing of operating costs and
    capital expenditures relating to expansion of business and
    infrastructure;                                                                                  
|
| |  | our ability to quickly handle and alleviate
    technical difficulties or system outages;                                                                                                                        
|
| |  | the announcement or introduction of new or
    enhanced services by competitors;                                                                                                                                 
|
| |  | general economic and market conditions and their
    affect on our operations and the operations of our customers; and                                                                                           
|
| |  | the effect of war on terrorism and any related
    conflicts or similar events worldwide.                                                                                                                        

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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
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
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 effective personnel in certain markets is
intense and we may not be able to hire and retain personnel with
relevant experience. The complexity and implementation of our
messaging and identity management infrastructure products and
services require highly trained sales and marketing personnel to
educate prospective customers regarding the use and benefits of
our services. Current and prospective customers, in turn, must
be able to educate their end-users. Any delays or difficulties
encountered in our staffing and training efforts would impair
our ability to attract new customers and enhance our
relationships with existing customers, and ultimately, grow
revenues. This would also adversely impact the timing and extent
of our revenues from quarter to quarter and overall or could
jeopardize sales altogether. Because we have experienced
turnover in our sales force and have fewer resources than many
of our competitors, our sales and marketing organizations may
not be able to compete successfully against the sales and
marketing organizations of our competitors. Moreover, our
competitors frequently have larger and more established sales
forces calling upon potential enterprise customers with more
frequency. In addition, certain of our competitors have longer
and closer relationships with the senior management of
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.



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

In December 2001, we issued 4,000,000 shares
of Series D Cumulative Convertible Redeemable Preferred
Stock (Series D Preferred Stock), and warrants
to purchase up to an additional 625,000 shares of common stock,
in a private placement to a group of investors. The shares of
Series D Preferred Stock accrue and cumulate dividends at
8% per year, and are convertible into common stock at the option
of the holder. The conversion rate at which a share of
Series D Preferred Stock is convertible into common stock
is approximately 3.274 shares of common stock for one share
of Series D Preferred Stock. This conversion rate is
subject to adjustment based on the accretion of dividends and
other anti-dilution adjustments. As of September 30, 2003,
the outstanding shares of Series D Preferred Stock were
convertible into approximately 15.1 million shares of
common stock. To the extent the Series D Preferred Stock is
converted into common stock, a very significant number of
additional shares of common stock may be sold into the market,
which could decrease the price of our common stock.

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

In the event of a liquidation, dissolution or
winding up of Critical Path, the holders of Series D
Preferred Stock would be entitled to receive $13.75 per
share of Series D Preferred Stock plus all accrued
cumulative dividends on such share before any proceeds from the
liquidation, dissolution or winding up is paid to holders of our
common stock. As of September 30, 2003, the shares of
Series D Preferred Stock have an aggregate initial
liquidation preference of approximately $63.2 million,
which increases on a daily basis at an annual rate of 8%,
compounded on a semi-annual basis. The shares of Series D
Preferred Stock have a maximum aggregate initial liquidation
preference of approximately $81.4 million. If we are
acquired before December 2006, the holders of Series D
Preferred Stock will be entitled to receive an initial
preference payment equal to approximately $81.4 million,
regardless of the amount of dividends accrued at the time of the
acquisition. After this initial preferential payment to holders
of Series D Preferred Stock, the Series D holders
would also be entitled to participate with holders of common
stock in the distribution of any remaining liquidation proceeds
as if the Series D Preferred Stock had been converted into
common stock immediately before the liquidation event; provided,
however, that the above-described initial liquidation preference
would not be payable to holders of Series D Preferred Stock
if the total amount payable per share of Series D Preferred
Stock (on an as-converted to common stock basis) would equal or
exceed four times the sum of the initial purchase price of, plus
the dividends accrued and compounded to date on, the
Series D Preferred Stock. Consequently, the sale of all or
substantially all of the shares of Critical Path may result in
substantially all of the proceeds of such transaction being
distributed to the holders of our Series D Preferred Stock.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2002 and 2003, 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 current board of directors and
senior executives of the Company joined us in 2002 and 2003 and
we may continue to make additional changes to our senior
management team. Because of these changes our management team
has not worked together as a group for a significant length of
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 also 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 of 2002, 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
continue to invest heavily in this relationship and make changes
in our operations, including completion of the outsourcing of
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 have also invested
heavily and continue to invest in this model of hosted services
operations. To the extent this strategic decision and the
business relationships surrounding its execution do not prove
profitable and productive, our business and results of
operations could be harmed. We also depend on a broad acceptance
of

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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 a period of 30 to 120 days notice. Most of our
hosted customer 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 certain notice
periods that vary among our agreements and range from a period
of thirty to 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. 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 our ability to attract new business.
Worldwide technology spending has also decreased in recent
quarters across all industries. 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.



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | 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 Sun
Microsystems iPlanet and OpenWave Systems, Inc.,
Mirapoint, Inc., Oracle Corporation, Microsoft Corporation and
IBM Corporations Lotus Division. For secure delivery
services, our competitors include Tumbleweed Communications
Corp. for product-based solutions and SlamDunk Networks for
service-based solutions, as well as Atabok Inc. and Zixit
Corporation. In the enterprise/ eBusiness directory category, we
compete primarily with iPlanet, Microsoft Corporation and Novell
Corporation, and our competitors in the meta-directory market
are iPlanet, Microsoft, Novell and Siemens Corporation. Our
competitors for corporate customers seeking outsourced hosted
messaging solutions are email service providers, such as
CommTouch, Easylink Services Corporation (formerly Mail.com),
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 identity management
infrastructure solutions include:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | breadth of platform features and functionality of
    our offerings and the sophistication and innovation of
    competitors;

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| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | total cost of ownership and operation;                                                                                                                                                                                          
|
| |  | scalability, reliability, performance, and ease
    of expansion and upgrade;                                                                                                                                                   
|
| |  | ease of integration to customers existing
    system; and                                                                                                                                                                      
|
| |  | 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.

We believe competition will continue to be fierce
and further increase as current competitors aggressively pursue
customers, 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.



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

The messaging and identity management
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 develop or
introduce and improve the performance, features and reliability
of our services, particularly in response to competitive
offerings. Our success depends, in part, on our ability to
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 sales cycle is lengthy, and our results
    could be harmed by delays or cancellations in
    orders.

Because we sell complex and sophisticated
technology, our sales cycle, in particular with respect to our
software solutions, can be long and unpredictable, often taking
between four to eighteen 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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| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
settled or withdrawn, some cases continue and 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 and the fees associated with reaching such settlement,
the size of any such payments and fees, 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 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 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 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

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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, including the restructurings of our operations, and
the growth of our business have placed significant strains on
managerial, operational and financial resources and contributed
to our history of losses. 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. If we cannot manage growth and expenses
effectively, our business and operating results could suffer.



| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 $1.00. On December 23, 2002,
the Nasdaq Stock Market Inc. issued a letter to the Company that
it was not in compliance with the minimum closing bid price
requirement and, therefore, faced delisting proceedings. Since
that time, we have worked with the Nasdaq Stock Market in an
effort to maintain our listing on the Nasdaq National Market. On
July 24, 2003, the Nasdaq Stock Market notified us that we
had regained compliance with the requirements for continued
listing. Nevertheless, there can be no assurance that we will be
able to comply with the quantitative or 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 2003, the
closing sale prices of our common stock, adjusted for the
one-for-four reverse stock split, on the Nasdaq National Market
ranged from $3.18 on August 5, 2003 to $2.50 on
August 11, 2003. The closing price of our common stock on
September 30, 2003 was $2.47 per share, and on
October 31, 2003 it was $2.98 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

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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
2003, and continues through March 2004, 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 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.

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| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | 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 and the nine months ended
September 30, 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 and first quarter of
2003, we 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. In 2003, the Company
consolidated some office locations and performed a global
workforce reduction of approximately 175 positions, or
approximately 30% of the workforce. 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 affect
our business and financial condition.



| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may experience a decrease in market
    demand due to the slowed economy in the United States, which has
    been further stymied by the concerns of terrorism, war and
    social and political instability.

Economic growth has slowed significantly, and
some analysts believe the United States economy is experiencing
a recession. In addition, the terrorist attacks in the United
States and turmoil and war in the Middle East have increased the
uncertainty in the United States economy and may further add to
the decline in the United States business environment. The war
on terrorism, along with the effects of the terrorist attack and
other similar events, and the war in Iraq, could contribute
further to the slowdown of the already slumping market demand
for goods and services, including digital communications
software and services. If the economy continues to decline as a
result of the recent economic, political and social turmoil, or
if there are further terrorist attacks in the United States or
elsewhere, or as a result of the war in the Middle East and
elsewhere, we may experience decreases in the demand for our
products and services, which may harm our operating results.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. 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 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. In addition to the added costs of the divestitures,
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
expectation, 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

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include the expenditure of capital, the
realization of losses, further reduction in workforce, facility
consolidation, and 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 and billing and customer tracking
solutions. The market is evolving and we may need to license
additional technologies to remain competitive. We may not be
able to license these technologies on commercially reasonable
terms or at all. To the extent we cannot license needed
technologies or solutions, we may have to devote our resources
to the development of such technologies, which could materially
harm our business and operations.

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



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | 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 or new regulations and application of laws
to our business could burden our company and those with which we
do business. Any decreased generalized demand for our services
or the loss of, or decrease, in business by a key partner due to
regulation or the expense of compliance with any regulation,
could either increase the costs associated with our business or
affect revenue, either of which could harm our financial
condition or operating results. Certain of our service offerings
include operations subject to the Digital Millennium Copyright
Act of 1998 and the European Unions recent privacy
directives. The Company has expended resources and implemented
processes and controls in order to remain in compliance with
DMCA and the EU privacy directives, but there can be no
assurance that our efforts will be sufficient or that 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.

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Finally, the Company faces increased regulatory
scrutiny and potential 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
and enforce appropriate policies and procedures, if needed,
could harm the Companys business and prospects.



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

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

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



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



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 hosted messaging service. We believe that
these interruptions will continue to occur from time to time.
These interruptions may be due to hardware failures, unsolicited
bulk email, or spam, attacks and operating system
failures or other causes beyond our control. 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 unanticipated sharply increased traffic,
which may cause unanticipated system disruptions, slower
response times, impaired quality and degradation in levels of
customer service. If this were to continue to happen, our
business and reputation could suffer dramatically.

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We have entered into hosted 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.



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



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

We rely on a combination of trademark, copyright
and trade secret laws, contractual restrictions, such as
confidentiality agreements and licenses, and patents to
establish and protect our proprietary rights, which we view as
critical to our success. Our ability to compete and grow our
business could suffer if these rights are not adequately
protected. Despite the precautionary measures we take,
unauthorized third parties may infringe or copy portions of our
services or reverse engineer or obtain and use information that
we regard as proprietary, which could harm our competitive
position and market share. In addition, we have several patents
pending in the United States and may seek additional patents in
the future. However, the status of United States patent
protection in the software industry is not well defined and will
evolve as the U.S. Patent and Trademark Office grants additional
patents. We do not know if our patent applications or any of our
future patent applications will be issued with the scope of the
claims sought, if at all, or whether any patents we have
received or will receive will be challenged or invalidated.

Our proprietary rights may not be adequately
protected because:



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

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

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



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

We derived 57% of our revenues from international
sales in the first nine months of 2003 and 57% of our revenues
from international sales in the first nine months of 2002. We
intend to continue to operate in international markets and to
spend significant financial and managerial resources to do so.
In particular in 2002 we purchased the remaining interests of
our joint venture partners for our operations in Japan. We hope
to expend revenues and plan to increase 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;             
|
| |  | 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, or
    increase in the cost of, 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, 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 partners or California customers, may be temporarily
unable to operate. Any interruption in our ability to continue
operations or significant 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

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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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK




Item 3.     Quantitative
and Qualitative Disclosures About Market 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 may, from time to time, consider
opportunities 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,
contracts with vendors and the assets and liabilities of these
operations. Fluctuations in exchange rates may harm our results
of operations and could also result in exchange losses. We
recognized net losses from foreign currency transactions
associated with our international operations of $243,000 and
$284,000 during the three and nine months ended
September 30, 2003, as compared to a net gain of $113,000
during the three months ended September 30, 2002 and a net
loss of $469,000 during the nine months ended September 30,
2002. 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.

CONTROLS AND PROCEDURES




Item 4.     Controls
and Procedures

(a) Evaluation of disclosure controls and
procedures. We maintain disclosure controls and
procedures, as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act), that are designed to ensure that information
required to be disclosed by us in reports that we file or

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submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that
disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and
procedures are met. Additionally, in designing disclosure
controls and procedures, our management necessarily was required
to apply its judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures. The
design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.


Based on their evaluation as of the end of the
period covered by this Quarterly Report on Form 10-Q, our
Chief Executive Officer and Chief Financial Officer have
concluded that, subject to the limitations noted above, our
disclosure controls and procedures were effective to ensure that
material information relating to us, including our consolidated
subsidiaries, is made known to them by others within those
entities, particularly during the period in which this Quarterly
Report on Form 10-Q was being prepared.

(b) Changes in internal control over
financial reporting. There was no change in our internal
control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) identified in
connection with the evaluation described in Item 4(a) above
that occurred during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

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PART 2  OTHER
INFORMATION




Item 1.     Legal
Proceedings

We are 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 Northern District of
California.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 us, and certain of our former officers. The plaintiff
shareholders had 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. The case has been transferred to the
U.S. District Court for the Northern District of
California. Litigation in this matter is ongoing.

Derivative Actions in Northern District of
California.Beginning on
February 5, 2001, we were named as a nominal defendant in a
number of derivative actions, purportedly brought on our behalf,
filed in the Superior Court of the State of California and in
the U.S. District Court for the Northern District of California.
The derivative complaints alleged that certain of our former
officers and directors breached their fiduciary duties, engaged
in abuses of control, were unjustly enriched by sales of our
common stock, engaged in insider trading in violation of
California law or published false financial information in
violation of California law. A settlement of this action has
been reached, which involves no monetary payment, or recovery,
by us, and was preliminarily approved by the Court. A hearing on
whether the settlement will be given final approval by the Court
was held on October 15, 2003. The Courts decision is
still under submission.

Securities Class Action in Southern
District of New York.Beginning on
July 18, 2001, a number of securities class action
complaints were filed against us, and certain of our former
officers and directors and underwriters connected with our
initial public offering of common stock in the
U.S. District Court for the Southern District of New York
(In re Initial Public Offering Sec. Litig.). The
purported class action complaints were filed by individuals who
allege that they purchased common stock at the initial and
secondary public offerings between March 29, 1999 and
December 6, 2000. The complaints allege generally that the
Prospectus under which such securities were sold contained false
and misleading statements with respect to discounts and excess
commissions received by the underwriters as well as allegations
of laddering whereby underwriters required their
customers to purchase additional shares in the aftermarket in
exchange for an allocation of IPO shares. The complaints seek an
unspecified amount in damages on behalf of persons who purchased
our stock during the specified period. Similar complaints have
been filed against 55 underwriters and more than 300 other
companies and other individuals. The over 1,000 complaints
have been consolidated into a single action. We have reached an
agreement in principle with the plaintiffs to resolve the cases.
The proposed settlement involves no monetary payment by us and
no admission of liability. However it is subject to approval by
the Court.

Securities and Exchange Commission
Investigation.In 2001, the Securities
and Exchange Commission (the SEC) investigated us
and certain former officers, employees and directors with
respect to non-specified accounting matters, financial reports,
other public disclosures and trading activity in our securities.
The SEC concluded its investigation of us in January 2002 with
no imposition of fines or penalties and, without admitting or
denying liability, we 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. We believe that the investigation
of our former officers and employees may continue; and while we
continue to fully cooperate with any requests with respect to
such investigation, we do not know the status of such
investigation.

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

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local zoning laws likely prohibited a business
such as us 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 our proposed use of the leased
premises was not permitted, but the landlord appealed this
determination and prevailed before the San Francisco Board of
Appeals. In July 2002, we filed a Petition for Writ of Mandamus
with the San Francisco Superior Court, seeking reversal of the
San Francisco Board of Appeals decision. In June 2003, the
Court granted our petition and subsequently entered a judgment
and writ remanding the matter to the San Francisco Board of
Appeals and directing the Board of Appeals to make a new
determination consistent with its judgment. The landlord
subsequently appealed the Superior Courts ruling.
Litigation in this matter is ongoing.


In April 2002, the landlord filed suit in San
Francisco Superior Court against us alleging, among other
things, breach of the lease and tort claims related to the lease
transaction. In its complaint, the landlord sought unspecified
damages for back rent, attorneys fees, treble damages
under certain statutes, and unspecified punitive damages.
Between April 2002 and July 2003, we succeeded through several
motions filed with the Court in having a number of the
landlords claims dismissed and some of its requests for
damages stricken, including treble damages. The landlord has
chosen not to further amend its complaint. In August 2003, we
filed our answer to the second amended complaint and a
cross-complaint against the landlord, under which we seek
compensatory damages and unspecified punitive damages for the
landlords failure to disclose the zoning restrictions on
the leased premises before the lease was signed. Litigation in
this matter is ongoing.

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

Change of Control Severance
Agreements.We have entered into
change of control severance agreements with certain of our key
employees. These agreements provide that so long as the employee
signs and does not revoke a standard release of claims with
Critical Path, the employee is entitled to certain severance
payments if the employee is involuntarily terminated (as defined
in the agreement) within twenty-four months following a change
of control (as defined in the agreement) of Critical Path or
within three months on or before a change of control. Assuming
the conditions under the agreements that trigger payment
obligations are met, the aggregate payment under these
agreements is currently estimated to be between
$3.5 million and $5.0 million.

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

Under California law, in connection with our
charter documents and indemnification agreements we entered into
with our executive officers and directors, we must indemnify our
current and former officers and directors to the fullest extent
permitted by law. The indemnification covers any expenses and
liabilities reasonably incurred in connection with the
investigation, defense, settlement or appeal of legal
proceedings. We have made payments in connection with the
indemnification of officers and directors in connection with
currently pending lawsuits and have reserved for any applicable
amounts required in connection with legal expenses and others
costs of defense of pending lawsuits.

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Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

|      |  |                                                                                                                                               
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|10.1# |  | Amendment to Employment Agreement and Release of
    Claims dated as of August 16, 2003 by and between the
    Registrant and Robert A. Shipp.
|31.1  |  | Rule 13a-14(a) Certification of Chief
    Executive Officer.                                                                                  
|31.2  |  | Rule 13a-14(a) Certification of Chief
    Financial Officer.                                                                                  
|32.1  |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act.*                                              
|32.2  |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act.*                                              



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The material contained in Exhibits 32.1
    and 32.2 is not deemed filed with the
    U.S. Securities and Exchange Commission and is not
    incorporated by reference into any filing of Critical Path, Inc.
    under the Securities Act of 1933, as amended, or the Securities
    Exchange Act of 1934, as amended, whether made before or after
    the date hereof and irrespective of any general incorporation
    language contained in such filing.



|  |                                                                       
|- | ----------------------------------------------------------------------
|# | Indicates management contract or compensatory
    plan or arrangement.

(b) Reports on Form 8-K

On July 24, 2003, we filed a Form 8-K
under Item 5 disclosing the receipt of notice from The
Nasdaq National Market that we regained compliance with the
requirements for continued listing on the Nasdaq National Market
and announcing our intention to effect a one-for-four reverse
stock split.

On July 24, 2003, we filed a Form 8-K
furnishing under Item 12 our press release announcing our
financial results for the quarter ended June 30, 2003. The
information contained in this Form 8-K shall not be deemed
filed with the SEC as a result of its reference
herein.

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SIGNATURE

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



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



| |     |                     
| | --- | --------------------
| | By: | /s/ PAUL H. BARTLETT

| |                                            
| | -------------------------------------------
| |                                            
| | Paul H. Bartlett                           
| | Chief Operating Officer and                
| | Chief Financial Officer                    
| | (Duly Authorized Officer and               
| | Principal Financial and Accounting Officer)

Date: November 12, 2003

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INDEX TO EXHIBITS

|        |       |                     |  |                                                                                                                                               
|------- | ----- | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                    
|Number  |       | Exhibit Description
|        |       |                    
|        | 10.1# |                     |  | Amendment to Employment Agreement and Release of
    Claims dated as of August 16, 2003 by and between the
    Registrant and Robert A. Shipp.
|        | 31.1  |                     |  | Rule 13a-14(a) Certification of Chief
    Executive Officer.                                                                                  
|        | 31.2  |                     |  | Rule 13a-14(a) Certification of Chief
    Financial Officer.                                                                                  
|        | 32.1  |                     |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act.*                                              
|        | 32.2  |                     |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act.*                                              



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The material contained in Exhibits 32.1 and 32.2
    is not deemed filed with the U.S. Securities and
    Exchange Commission and is not incorporated by reference into
    any filing of Critical Path, Inc. under the Securities Act of
    1933, as amended, or the Securities Exchange Act of 1934, as
    amended, whether made before or after the date hereof and
    irrespective of any general incorporation language contained in
    such filing.



|  |                                                                       
|- | ----------------------------------------------------------------------
|# | Indicates management contract or compensatory
    plan or arrangement.