##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q



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|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
| 
|  |  | For the quarterly period ended March 31,
    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 April 30, 2003, the Company had
outstanding 80,401,342 shares of common stock, $0.001 par value
per share.



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TABLE OF CONTENTS



|                            |                                                                                               |  |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|INDEX                      
|PART I                     
|                            | Item 1. 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                                                                    
|SIGNATURE                  
|INDEX TO EXHIBITS          
|Exhibit 3(ii)              
|Exhibit 10.1               
|Exhibit 99.1               
|Exhibit 99.2               



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##### Table of Contents



CRITICAL PATH, INC.






INDEX


|        |  |                                                                                           |  |      |    | 
|------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|        |  |                                                                                           |  | Page
|        |  |                                                                                           |  |     
|PART I 
|Item 1. |  | Condensed Consolidated Financial Statements
    (Unaudited)                               |  |      | 1  | 
|        |  | Condensed Consolidated Balance Sheets                                                     |  |      | 1  | 
|        |  | Condensed Consolidated Statements of Operations                                           |  |      | 2  | 
|        |  | Condensed Consolidated Statements of Cash Flows                                           |  |      | 3  | 
|        |  | Notes to Condensed Consolidated Financial
    Statements                                  |  |      | 4  | 
|Item 2. |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 13 | 
|Item 3. |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 36 | 
|Item 4. |  | Controls and Procedures                                                                   |  |      | 36 | 
|PART II
|Item 1. |  | Legal Proceedings                                                                         |  |      | 37 | 
|Item 6. |  | Exhibits and Reports on Form 8-K                                                          |  |      | 38 | 

i



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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,                                       |                                                                                         | March 31, 
|                                                                                       |                                              | 2002                                               |                                                                                         | 2003      
|                                                                                       |                                              |                                                    |                                                                                         |           
|                                                                                       |                                              |                                                   
|                                                                                       |                                              | (Unaudited)                                       
|                                                                                       |                                              | (In thousands, except per                         
|                                                                                       |                                              | share amounts)                                    
|ASSETS                                                                                
|Current assets                                                                         |                                              |                                                    |                                                                                         |            |           |         |        |           
|                                                                                       | Cash and cash equivalents                    |                                                    | $                                                                                       | 33,498     |           |         | $      | 31,409     |          
|                                                                                       | Short-term marketable securities             |                                                    |                                                                                         | 5,583      |           |         |        |           |          
|                                                                                       | Accounts receivable, net                     |                                                    |                                                                                         | 22,818     |           |         |        | 19,839     |          
|                                                                                       | Other current assets                         |                                                    |                                                                                         | 4,030      |           |         |        | 6,839      |          
|                                                                                       |                                              |                                                    |                                                                                         |            |           |         |        |           
|                                                                                       |                                              |                                                    | Total current assets                                                                    |            |           | 65,929  |        |            |           | 58,087  |  
|Long-term marketable securities                                                        |                                              |                                                    | 3,990                                                                                   |            |           |         |       |           
|Equity investments                                                                     |                                              |                                                    | 357                                                                                     |            |           |         | 354    |           
|Property and equipment, net                                                            |                                              |                                                    | 18,142                                                                                  |            |           |         | 18,092 |           
|Goodwill                                                                               |                                              |                                                    | 6,613                                                                                   |            |           |         | 6,613  |           
|Restricted cash                                                                        |                                              |                                                    | 2,729                                                                                   |            |           |         |       |           
|Other assets                                                                           |                                              |                                                    | 6,246                                                                                   |            |           |         | 6,749  |           
|                                                                                       |                                              |                                                    |                                                                                         |            |           |         |        |           
|                                                                                       |                                              |                                                    | Total assets                                                                            |            | $         | 104,006 |        |            | $         | 89,895  |  
|                                                                                       |                                              |                                                    |                                                                                         |            |           |         |        |           
|LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
    STOCK AND
     SHAREHOLDERS DEFICIT
|Current liabilities                                                                    |                                              |                                                    |                                                                                         |            |           |         |        |           
|                                                                                       | Accounts payable                             |                                                    | $                                                                                       | 28,093     |           |         | $      | 26,797     |          
|                                                                                       | Accrued liabilities                          |                                                    |                                                                                         | 3,764      |           |         |        | 3,860      |          
|                                                                                       | Deferred revenue                             |                                                    |                                                                                         | 10,788     |           |         |        | 9,496      |          
|                                                                                       | Line of credit facility                      |                                                    |                                                                                         |           |           |         |        | 4,900      |          
|                                                                                       | Capital lease and other obligations, current |                                                    |                                                                                         | 3,323      |           |         |        | 3,288      |          
|                                                                                       |                                              |                                                    |                                                                                         |            |           |         |        |           
|                                                                                       |                                              |                                                    | Total current liabilities                                                               |            |           | 45,968  |        |            |           | 48,341  |  
|Convertible subordinated notes payable                                                 |                                              |                                                    | 38,360                                                                                  |            |           |         | 38,360 |           
|Capital lease and other obligations, long-term                                         |                                              |                                                    | 1,332                                                                                   |            |           |         | 1,060  |           
|                                                                                       |                                              |                                                    |                                                                                         |            |           |         |        |           
|                                                                                       |                                              |                                                    | Total liabilities                                                                       |            |           | 85,660  |        |            |           | 87,761  |  
|                                                                                       |                                              |                                                    |                                                                                         |            |           |         |        |           
|Commitments and contingencies                                                          |                                              |                                                    |                                                                                         |            |           |         |        |           
|Mandatorily redeemable preferred stock                                                 |                                              |                                                    |                                                                                         |            |           |         |        |           
|                                                                                       |                                              | Shares authorized: 5,000                           |                                                                                         |            |           |         |        |            |           |        
|                                                                                       |                                              | Shares issued and outstanding: 4,000               |                                                                                         |            |           |         |        |            |           |        
|                                                                                       |                                              | Liquidation value at March 31, 2003: $60,799       |                                                                                         |            | 26,900    |         |        |            | 36,765    |        
|                                                                                       |                                              |                                                    |                                                                                         |            |           |         |        |           
|Shareholders deficit                                                                  |                                              |                                                    |                                                                                         |            |           |         |        |           
|                                                                                       |                                              | Common stock and paid-in-capital, $0.001 par value |                                                                                         |            |           |         |        |            |           |        
|                                                                                       |                                              | Shares authorized: 500,000                         |                                                                                         |            |           |         |        |            |           |        
|                                                                                       |                                              | Shares issued and outstanding: 80,130 and 80,148   |                                                                                         |            | 2,165,917 |         |        |            | 2,162,398 |        
|                                                                                       | Common stock warrants                        |                                                    |                                                                                         | 5,947      |           |         |        | 5,947      |          
|                                                                                       | Unearned compensation                        |                                                    |                                                                                         | (59        | )         |         |        |           |          
|                                                                                       | Accumulated deficit                          |                                                    |                                                                                         | (2,179,316 | )         |         |        | (2,202,518 | )        
|                                                                                       | Accumulated other comprehensive loss         |                                                    |                                                                                         | (1,043     | )         |         |        | (458       | )        
|                                                                                       |                                              |                                                    |                                                                                         |            |           |         |        |           
|                                                                                       |                                              |                                                    | Total shareholders deficit                                                             |            |           | (8,554  | )      |            |           | (34,631 | )
|                                                                                       |                                              |                                                    |                                                                                         |            |           |         |        |           
|                                                                                       |                                              |                                                    | Total liabilities, mandatorily redeemable
    preferred stock and shareholders deficit |            | $         | 104,006 |        |            | $         | 89,895  |  
|                                                                                       |                                              |                                                    |                                                                                         |            |           |         |        |           

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

1



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##### Table of Contents



CRITICAL PATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                         |                                                      |                            |         |           |        |   |         |       |        | 
|------------------------------------------------------------------------ | ---------------------------------------------------- | -------------------------- | ------- | --------- | ------ | - | ------- | ----- | ------ | 
|                                                                         |                                                      |                           
|                                                                         |                                                      | Three Months Ended        
|                                                                         |                                                      |                           
|                                                                         |                                                      | March 31,                  |         | March 31,
|                                                                         |                                                      | 2002                       |         | 2003     
|                                                                         |                                                      |                            |         |          
|                                                                         |                                                      |                           
|                                                                         |                                                      | (Unaudited)               
|                                                                         |                                                      | (In thousands, except     
|                                                                         |                                                      | per share amounts)        
|Net revenues                                                             |                                                      |                            |         |           |        |   |         |      
|                                                                         | Software license                                     |                            | $       | 10,911    |        |   | $       | 5,047 |       
|                                                                         | Hosted messaging                                     |                            |         | 6,964     |        |   |         | 5,386 |       
|                                                                         | Professional services                                |                            |         | 1,937     |        |   |         | 3,220 |       
|                                                                         | Maintenance and support                              |                            |         | 3,877     |        |   |         | 4,381 |       
|                                                                         |                                                      |                            |         |           |        |   |         |      
|                                                                         |                                                      | Total net revenues         |         |           | 23,689 |   |         |       | 18,034 | 
|                                                                         |                                                      |                            |         |           |        |   |         |      
|Cost of net revenues                                                     |                                                      |                            |         |           |        |   |         |      
|                                                                         | Software license                                     |                            |         | 287       |        |   |         | 1,797 |       
|                                                                         | Hosted messaging                                     |                            |         | 7,817     |        |   |         | 6,263 |       
|                                                                         | Professional services                                |                            |         | 2,443     |        |   |         | 3,450 |       
|                                                                         | Maintenance and support                              |                            |         | 2,103     |        |   |         | 1,929 |       
|                                                                         | Amortization of purchased technology                 |                            |         | 4,630     |        |   |         |      |       
|                                                                         | Stock-based expense  Hosted messaging               |                            |         | 185       |        |   |         | 8     |       
|                                                                         | Stock-based expense  Professional
    services      |                            |         | 81        |        |   |         | 3     |       
|                                                                         | Stock-based expense  Maintenance and
    support    |                            |         | 151       |        |   |         | 6     |       
|                                                                         |                                                      |                            |         |           |        |   |         |      
|                                                                         |                                                      | Total cost of net revenues |         |           | 17,697 |   |         |       | 13,456 | 
|                                                                         |                                                      |                            |         |           |        |   |         |      
|Gross profit                                                             |                                                      |                            | 5,992   |           |        |   | 4,578   |      
|                                                                         |                                                      |                            |         |           |        |   |         |      
|Operating expenses                                                       |                                                      |                            |         |           |        |   |         |      
|                                                                         | Sales and marketing                                  |                            |         | 10,943    |        |   |         | 9,309 |       
|                                                                         | Research and development                             |                            |         | 5,002     |        |   |         | 4,623 |       
|                                                                         | General and administrative                           |                            |         | 6,678     |        |   |         | 3,226 |       
|                                                                         | Amortization of intangible assets                    |                            |         | 6,141     |        |   |         |      |       
|                                                                         | Stock-based expense  Sales and
    marketing        |                            |         | 2,536     |        |   |         | 18    |       
|                                                                         | Stock-based expense  Research and
    development   |                            |         | 422       |        |   |         | 15    |       
|                                                                         | Stock-based expense  General and
    administrative |                            |         | 297       |        |   |         | 9     |       
|                                                                         | Restructuring and other expenses                     |                            |         |          |        |   |         | 3,189 |       
|                                                                         |                                                      |                            |         |           |        |   |         |      
|                                                                         |                                                      | Total operating expenses   |         |           | 32,019 |   |         |       | 20,389 | 
|                                                                         |                                                      |                            |         |           |        |   |         |      
|Loss from operations                                                     |                                                      |                            | (26,027 | )         |        |   | (15,811 | )    
|Interest and other income (expense), net                                 |                                                      |                            | 629     |           |        |   | (6,427  | )    
|Interest expense                                                         |                                                      |                            | (783    | )         |        |   | (769    | )    
|Equity in net loss of joint venture                                      |                                                      |                            | (403    | )         |        |   |        |      
|                                                                         |                                                      |                            |         |           |        |   |         |      
|Net loss before income taxes                                             |                                                      |                            | (26,584 | )         |        |   | (23,007 | )    
|Benefit from (provision for) income taxes                                |                                                      |                            | 573     |           |        |   | (194    | )    
|                                                                         |                                                      |                            |         |           |        |   |         |      
|Net loss                                                                 |                                                      |                            | (26,011 | )         |        |   | (23,201 | )    
|Accretion on mandatorily redeemable preferred
    stock                  |                                                      |                            | (3,206  | )         |        |   | (3,665  | )    
|                                                                         |                                                      |                            |         |           |        |   |         |      
|Net loss attributable to common shares                                   |                                                      | $                          | (29,217 | )         |        | $ | (26,866 | )    
|                                                                         |                                                      |                            |         |           |        |   |         |      
|Net loss per share attributable to common
    shares  basic and diluted |                                                      | $                          | (0.38   | )         |        | $ | (0.34   | )    
|                                                                         |                                                      |                            |         |           |        |   |         |      
|Weighted average shares  basic and
    diluted                          |                                                      |                            | 76,514  |           |        |   | 78,664  |      

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

2



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CRITICAL PATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                          |                                                            |                                                         |        |           |        |   |        |         |         |  
|--------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------------------------- | ------ | --------- | ------ | - | ------ | ------- | ------- | -
|                                                          |                                                            |                                                        
|                                                          |                                                            | Three Months Ended                                     
|                                                          |                                                            |                                                        
|                                                          |                                                            | March 31,                                               |        | March 31,
|                                                          |                                                            | 2002                                                    |        | 2003     
|                                                          |                                                            |                                                         |        |          
|                                                          |                                                            |                                                        
|                                                          |                                                            | (Unaudited)                                            
|                                                          |                                                            | (In thousands)                                         
|Operating                                                 |                                                            |                                                         |        |           |        |   |        |        
|                                                          | Net loss                                                   |                                                         | $      | (26,011   | )      |   | $      | (23,201 | )      
|                                                          | Provision for (recovery of) doubtful accounts              |                                                         |        | 85        |        |   |        | (165    | )      
|                                                          | Depreciation and amortization                              |                                                         |        | 8,009     |        |   |        | 4,624   |        
|                                                          | Amortization of intangible assets                          |                                                         |        | 10,761    |        |   |        |        |        
|                                                          | Amortization of stock-based costs and expenses             |                                                         |        | 3,672     |        |   |        | 59      |        
|                                                          | Equity in net loss of joint venture                        |                                                         |        | 403       |        |   |        |        |        
|                                                          | Change in fair value of preferred stock instrument         |                                                         |        | (200      | )      |   |        | 6,200   |        
|                                                          | Accounts receivable                                        |                                                         |        | (507      | )      |   |        | 3,144   |        
|                                                          | Restructuring charges  non-cash                           |                                                         |        |          |        |   |        | 142     |        
|                                                          | Other assets                                               |                                                         |        | (3,212    | )      |   |        | (3,321  | )      
|                                                          | Accounts payable                                           |                                                         |        | 5,363     |        |   |        | (1,296  | )      
|                                                          | Accrued liabilities                                        |                                                         |        | 19        |        |   |        | 96      |        
|                                                          | Deferred revenue                                           |                                                         |        | (1,489    | )      |   |        | (1,292  | )      
|                                                          |                                                            |                                                         |        |           |        |   |        |        
|                                                          |                                                            | Net cash used in operating activities                   |        |           | (3,107 | ) |        |         | (15,010 | )
|                                                          |                                                            |                                                         |        |           |        |   |        |        
|Investing                                                 |                                                            |                                                         |        |           |        |   |        |        
|                                                          | Notes receivable from officers                             |                                                         |        | 161       |        |   |        | 7       |        
|                                                          | Property and equipment purchases                           |                                                         |        | (1,307    | )      |   |        | (4,319  | )      
|                                                          | Sale of marketable securities                              |                                                         |        |          |        |   |        | 9,573   |        
|                                                          | Purchase of marketable securities                          |                                                         |        | (1,569    | )      |   |        |        |        
|                                                          | Restricted cash                                            |                                                         |        | 4         |        |   |        | 2,729   |        
|                                                          |                                                            |                                                         |        |           |        |   |        |        
|                                                          |                                                            | Net cash provided by (used in) investing
    activities |        |           | (2,711 | ) |        |         | 7,990   |  
|                                                          |                                                            |                                                         |        |           |        |   |        |        
|Financing                                                 |                                                            |                                                         |        |           |        |   |        |        
|                                                          | Proceeds from issuance of preferred stock, net             |                                                         |        | (75       | )      |   |        |        |        
|                                                          | Proceeds from issuance of common stock, net                |                                                         |        | 677       |        |   |        | 5       |        
|                                                          | Proceeds from payments of shareholder notes
    receivable |                                                         |        | 1,221     |        |   |        |        |        
|                                                          | Proceeds from line of credit facility                      |                                                         |        |          |        |   |        | 4,900   |        
|                                                          | Principal payments on note and lease obligations           |                                                         |        | (3,054    | )      |   |        | (307    | )      
|                                                          |                                                            |                                                         |        |           |        |   |        |        
|                                                          |                                                            | Net cash provided by (used in) financing
    activities |        |           | (1,231 | ) |        |         | 4,598   |  
|                                                          |                                                            |                                                         |        |           |        |   |        |        
|Net change in cash and cash equivalents                   |                                                            |                                                         | (7,049 | )         |        |   | (2,422 | )      
|Effect of exchange rates on cash and cash
    equivalents |                                                            |                                                         | (157   | )         |        |   | 333    |        
|Cash and cash equivalents at beginning of period          |                                                            |                                                         | 59,463 |           |        |   | 33,498 |        
|                                                          |                                                            |                                                         |        |           |        |   |        |        
|Cash and cash equivalents at end of period                |                                                            | $                                                       | 52,257 |           |        | $ | 31,409 |        
|                                                          |                                                            |                                                         |        |           |        |   |        |        

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

3



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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.
Built upon an open, extensible software platform, these
solutions help organizations expand the range of digital
communications services they provide, 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. The
unaudited condensed consolidated financial statements
(Financial Statements) of Critical Path, Inc. and
Subsidiaries furnished herein reflect all adjustments that are,
in the opinion of management, necessary to present fairly the
financial position and results of operations for each interim
period presented. All adjustments are normal recurring
adjustments. The Financial Statements should be read in
conjunction with the audited consolidated financial statements
and notes thereto, together with managements discussion
and analysis of financial condition and results of operations,
presented in the Companys 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.



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

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.

The Companys revenues generated from the
sale of its products and services may not increase to a level
that exceeds its operating expenses or could fluctuate
significantly as a result of changes in customer demand or
acceptance of future products. Additionally, the Company expects
operating expenses to decrease during the remainder of 2003, as
a result of its recent restructuring activities. If it is not
successful in generating sufficient revenues or achieving this
cost reduction, the Companys cash flow from operations may
continue to be negatively impacted. However, the Company
believes that its cash and cash equivalents and available line
of credit will be sufficient to maintain current and planned
operations for at least the next twelve months. Failure to
generate sufficient revenues, reduce discretionary spending or
raise additional capital could have a material adverse effect on
the Companys ability to achieve its intended business
objectives.



| |                      
| | ---------------------
| | 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

4



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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.



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



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

Certain amounts previously reported have been
reclassified to conform to the current period presentation and
such reclassifications did not have an effect on the prior
periods net loss attributable to common shares.



| |                         
| | ------------------------
| | 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 advertising 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.

5



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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, during
the first quarters of 2002 and 2003 the pro forma amounts of the
Companys net loss and net loss per share would have been
as follows:

|                                                                                     |                                                                                                                                               |                           |         |         |   |   |         |     | 
|------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------- | ------- | - | - | ------- | --- | 
|                                                                                     |                                                                                                                                               |                          
|                                                                                     |                                                                                                                                               | Three Months Ended       
|                                                                                     |                                                                                                                                               | March 31,                
|                                                                                     |                                                                                                                                               |                          
|                                                                                     |                                                                                                                                               | 2002                      |         | 2003   
|                                                                                     |                                                                                                                                               |                           |         |        
|                                                                                     |                                                                                                                                               |                          
|                                                                                     |                                                                                                                                               | (In thousands, except per
|                                                                                     |                                                                                                                                               | share amounts)           
|Net loss attributable to common
    shares  as reported                             |                                                                                                                                               | $                         | (29,217 | )       |   | $ | (26,866 | )  
|Add:                                                                                 |                                                                                                                                               |                           |         |         |   |   |         |    
|                                                                                     | Stock-based employee compensation expense
    included in reported net loss attributable to common shares, net
    of related tax effects     |                           |         | 3,672   |   |   |         | 59  | 
|Deduct:                                                                              |                                                                                                                                               |                           |         |         |   |   |         |    
|                                                                                     | Total stock-based employee compensation expense
    determined under a fair value based method for all grants, net
    of related tax effects |                           |         | (17,507 | ) |   |         | 515 | 
|                                                                                     |                                                                                                                                               |                           |         |         |   |   |         |    
|Net loss attributable to common
    shares  pro forma                               |                                                                                                                                               |                           | (43,052 | )       |   |   | (26,292 | )  
|                                                                                     |                                                                                                                                               |                           |         |         |   |   |         |    
|Basic and diluted net loss per share attributable
    to common shares  as reported |                                                                                                                                               |                           | (0.38   | )       |   |   | (0.34   | )  
|Basic and diluted net loss per share attributable
    to common shares  pro forma   |                                                                                                                                               | $                         | (0.56   | )       |   | $ | (0.33   | )  

The Company calculated the fair value of each
option grant on the date of grant during the first quarters of
2002 and 2003 using the Black-Scholes option pricing model as
prescribed by SFAS No. 123 using the following assumptions:

|                          |  |                    |       |      |  |  |       |  
|------------------------- |  | ------------------ | ----- | ---- |  |  | ----- | -
|                          |  |                   
|                          |  | Three Months Ended
|                          |  | March 31,         
|                          |  |                   
|                          |  | 2002               |       | 2003
|                          |  |                    |       |     
|Risk-free interest rate   |  |                    | 2.6   | %    |  |  | 3.0   | %
|Expected lives (in years) |  |                    | 4.0   |      |  |  | 4.0   |  
|Dividend yield            |  |                    | 0.0   | %    |  |  | 0.0   | %
|Expected volatility       |  |                    | 111.0 | %    |  |  | 101.0 | %



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

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 beginning after June 15, 2003. In addition, FIN
No. 46 requires that the Company make disclosures in its
consolidated financial statements for the year ended
December 31, 2002 and the three months ended March 31,
2003 when the Company believes it is reasonably possible that it
will consolidate or disclose information about variable interest
entities after FIN No. 46 becomes effective. 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.

6



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 4.

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 $4.4 million in
restructuring charges during that period.

Note 2  Strategic
Restructuring and Employee Severance (in millions)

|                                                            |       |              |     |             |  |               |      |         |   |          |     |              |  |   |      |      |   |   |      |      |   |   |     |     | 
|----------------------------------------------------------- | ----- | ------------ | --- | ----------- |  | ------------- | ---- | ------- | - | -------- | --- | ------------ |  | - | ---- | ---- | - | - | ---- | ---- | - | - | --- | --- | 
|                                                            |       | Liability at |     |             |  |               |      |         |   |          |     | Liability at
|                                                            |       | December 31, |     |             |  | Restructuring |      | Noncash |   | Cash     |     | March 31,   
|                                                            |       | 2002         |     | Adjustments |  | Charges       |      | Charges |   | Payments |     | 2003        
|                                                            |       |              |     |             |  |               |      |         |   |          |     |             
|Workforce reduction                                         |       | $            | 1.2 |             |  | $             | (0.6 | )       |   | $        | 3.7 |              |  | $ | (0.1 | )    |   | $ | (3.0 | )    |   | $ | 1.2 |    
|Facility and operations consolidation and other
    charges |       |              | 1.1 |             |  |               | (0.3 | )       |   |          | 0.4 |              |  |   |     |      |   |   | (0.3 | )    |   |   | 0.9 |    
|Non-core product and service sales and
    divestitures     |       |              | 0.3 |             |  |               | (0.3 | )       |   |          | 0.3 |              |  |   |     |      |   |   | (0.3 | )    |   |   |    |    
|                                                            |       |              |     |             |  |               |      |         |   |          |     |              |  |   |      |      |   |   |      |      |   |   |     |    
|                                                            | Total |              | $   | 2.6         |  |               | $    | (1.2    | ) |          | $   | 4.4          |  |   | $    | (0.1 | ) |   | $    | (3.6 | ) |   | $   | 2.1 | 
|                                                            |       |              |     |             |  |               |      |         |   |          |     |              |  |   |      |      |   |   |      |      |   |   |     |    

In May 2002, the Board of Directors approved a
restructuring plan to further reduce the Companys expense
levels consistent with the current business climate. In
connection with the plan, a restructuring charge of
$1.5 million was recognized in the second quarter of 2002.
This charge was comprised of approximately $1.2 million in
severance and related costs associated with the elimination of
approximately 39 positions and $300,000 in facilities lease
termination costs. The balance of the 2002 restructuring accrual
at March 31, 2003 was approximately $250,000 and is
expected to be utilized by the end of 2003.

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 anticipates an aggregate charge of
approximately $7.5 million resulting from the cost
reduction plan, inclusive of $6.5 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 $668,000 in
severance and related costs and $1.0 million in facilities
lease termination costs. During the first quarter of 2003, the
Company incurred approximately $4.4 million in additional
restructuring charges under the plan, predominantly related to
severance and related employee costs. The Company expects to
incur the remainder of the charge, or $1.4 million, during
the second quarter of 2003.

7



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Additionally, the Company completed two
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 March 31, 2003, the balance of the 2003
restructuring accrual was approximately $1.8 million and is
expected to be utilized by the end of 2003.

Note 3  Goodwill and Other
Intangible Assets

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

Note 4  Commitments and
Contingencies

The Company is a party to lawsuits in the normal
course of our business. Litigation in general, and securities
and intellectual property litigation in particular, can be
expensive and disruptive to normal business operations.
Moreover, the results of complex legal proceedings are difficult
to predict. Other than as described below, 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.

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;
and 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.

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 settlement must be submitted to the Court
for its review and approval.

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

8



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 public
offering of common stock between March 26, 1999 and
December 6, 2000. The complaints allege generally that the
Prospectus under which such securities were sold contained false
and misleading statements with respect to discounts and
commissions received by the underwriters. The over 1,000
complaints have been consolidated into a single action. The
complaints seek an unspecified amount in damages on behalf of
persons who purchased the Companys stock during the
specified period. Similar complaints have been filed against
55 underwriters and more than 300 other companies and other
individuals. Defendants stayed pretrial motions and discovery
pending a ruling on a motion to dismiss the claims. On
February 19, 2003, the court issued an opinion refusing to
dismiss claims against the defendants in the case, except in
certain limited circumstances that did not apply to Critical
Path or its then officers and directors.

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 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. The Company requested a
rehearing on the matter, which the Board of Appeals denied.

In April 2002, the landlord filed suit in San
Francisco Superior Court against the Company alleging, among
other things, breach of the lease. In its complaint, the
landlord sought unspecified compensatory damages for back rent,
attorneys fees, treble damages under relevant statutes,
and unspecified punitive damages. The court subsequently
dismissed a number of the landlords claims of damages. The
landlord filed an amended complaint in September 2002. In
January 2003, the court again dismissed a number of the
landlords claims, including all requests for punitive
damages.

In a related matter, in July 2002, the Company
filed a separate Petition for Writ of Administrative Mandamus
with the San Francisco Superior Court, requesting that the Board
of Appeals decision be reversed and/or remanded for
rehearing by the Board, with instructions from the court.
Litigation in this matter is ongoing.

The uncertainty associated with these and other
unresolved or threatened lawsuits could seriously harm the
Companys business and financial condition. In particular,
the lawsuits or the 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.

Other Contractual
Obligations.The Company has entered
into various contractual obligations which total
$96.1 million at March 31, 2003, primarily related to
the future purchase of equipment, software and maintenance of
hardware and software products being utilized within engineering
and hosted operations, management of data center operations and
network infrastructure storage for its hosted operations. These
obligations are expected to be completed over the next
5 years, including $16.7 million in the remainder of
2003.

9



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

Note 5  Comprehensive
Loss

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

|         |                                          |                          |         |      |         |   |         |     |         |  
|-------- | ---------------------------------------- | ------------------------ | ------- | ---- | ------- | - | ------- | --- | ------- | -
|         |                                          |                         
|         |                                          | Three Months Ended      
|         |                                          | March 31,               
|         |                                          |                         
|         |                                          | 2002                     |         | 2003
|         |                                          |                          |         |     
|         |                                          |                         
|         |                                          | (unaudited)             
|Net loss |                                          | $                        | (29,217 | )    |         | $ | (26,866 | )  
|         | Unrealized investment losses             |                          |         | (497 | )       |   |         | (2  | )      
|         | Foreign currency translation adjustments |                          |         | (339 | )       |   |         | 587 |        
|         |                                          |                          |         |      |         |   |         |    
|         |                                          | Total comprehensive loss |         | $    | (30,053 | ) |         | $   | (26,301 | )
|         |                                          |                          |         |      |         |   |         |    

There were no tax effects allocated to any
components of other comprehensive loss during the three months
ended March 31, 2002 or 2003.

10



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6  Net Loss Per
Share

Net loss per share is calculated as follows:

|                                                                       |  |                           |         |           |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------------- | ------- | --------- |  | - | ------- | -
|                                                                       |  |                          
|                                                                       |  | Three Months Ended       
|                                                                       |  |                          
|                                                                       |  | March 31,                 |         | March 31,
|                                                                       |  | 2002                      |         | 2003     
|                                                                       |  |                           |         |          
|                                                                       |  |                          
|                                                                       |  | (In thousands, except per
|                                                                       |  | share amounts)           
|Net loss                                                               |  |                           |         |           |  |   |         |  
|Net loss attributable to common shares                                 |  | $                         | (29,217 | )         |  | $ | (26,866 | )
|                                                                       |  |                           |         |           |  |   |         |  
|Weighted average shares outstanding                                    |  |                           |         |           |  |   |         |  
|Weighted average shares outstanding                                    |  |                           | 76,916  |           |  |   | 79,008  |  
|Weighted average shares subject to repurchase
    agreements           |  |                           | (58     | )         |  |   |        |  
|Weighted average shares held in escrow related to
    acquisitions     |  |                           | (344    | )         |  |   | (344    | )
|                                                                       |  |                           |         |           |  |   |         |  
|Shares used in computation of basic and diluted
    net loss per share |  |                           | 76,514  |           |  |   | 78,664  |  
|Basic and diluted net loss per share                                   |  |                           |         |           |  |   |         |  
|Net loss per share attributable to common shares                       |  | $                         | (0.38   | )         |  | $ | (0.34   | )
|                                                                       |  |                           |         |           |  |   |         |  

As of March 31, 2002 and 2003, there were
91,603,266 and 115,104,203 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 7  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. During the first quarter of 2003 the Company drew
$4.9 million against this line of credit and had
$5.5 million in letters of credit under the credit
facility. The credit facility is secured by certain of the
Companys assets and borrowings bear variable interest,
Prime rate plus 1.00%, and is subject to certain covenants.
Interest is paid each month with principal due at maturity.
Commitment fees related to the credit facility include an
initial commitment fee of 0.50%, or $75,000, which was paid upon
close, an early termination fee of 0.50% due and payable should
the Company elect to cancel the facility within the first six
months from closing, and an additional fee based on unused
credit of 0.45% payable at the end of each quarterly period in
arrears. The credit facility was scheduled to mature on
September 30, 2003, however it was recently amended on
March 25, 2003, to extend the maturity date to
March 31, 2004 and revise certain covenants. At
March 31, 2003, the Company was not in compliance with one
of the financial covenants required under the amended credit
facility; it has subsequently received a waiver through
June 13, 2003 and anticipates amending the credit facility
during the second quarter of 2003. In connection with the
extension the Company paid an additional commitment fee of
$37,500 and extended the initial six-month period subject to an
early termination fee through September 30, 2003. The
interest rate on the credit facility was 5.25% during 2002 and
the first quarter of 2003. All associated interest and fees are
included as a component of interest expense.

11



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##### Table of Contents



CRITICAL PATH, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 8  Preferred Stock
Financing

The carrying value of the Series D Preferred
Stock at December 31, 2002 and March 31, 2002 was
determined as follows (in thousands):

|                                                                                      |                               |              |        |           |   |   |        |         |  
|------------------------------------------------------------------------------------- | ----------------------------- | ------------ | ------ | --------- | - | - | ------ | ------- | -
|                                                                                      |                               | December 31, |        | March 31,
|                                                                                      |                               | 2002         |        | 2003     
|                                                                                      |                               |              |        |          
|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  |           |   |   | 13,640 |        
|Add accumulated amortization and accretion                                            |                               |              | 14,260 |           |   |   | 17,925 |        
|                                                                                      |                               |              |        |           |   |   |        |        
|Carrying value of Series D Preferred Stock
    and embedded change-in-control feature |                               | $            | 26,900 |           |   | $ | 36,765 |        
|                                                                                      |                               |              |        |           |   |   |        |        

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 other income or expense. At
March 31, 2002 and 2003, the estimated fair value of the
liquidation preference was $6.3 million and
$18.8 million, respectively, resulting in a net charge
(credit) to other expense during the first quarter of 2002 and
2003 of $(200,000) and $6.2 million, respectively, due to
the increase (decrease) in its estimated fair value.

During the first quarter of 2002, the accretion
on redeemable convertible preferred shares totaled
$3.2 million, comprised of $1.1 million in accrued
dividends and accretion of $2.1 million. During the first
quarter of 2003, the accretion on redeemable convertible
preferred shares totaled $3.7 million, comprised of
$711,000 in accrued dividends and accretion of $3.0 million.

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CRITICAL PATH, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
OF

FINANCIAL CONDITION AND RESULTS OF
OPERATIONS







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

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

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

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

Overview

Critical Path, Inc. 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

13



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##### Table of Contents



platform, these solutions help organizations
expand the range of digital communications services they
provide, 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.


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-to-period
comparisons of revenues and operating results, including gross
profit margin and operating expenses as a percentage of total
net revenues, are not meaningful and should not be relied upon
as indications of future performance. At March 31, 2003, we
had 438 employees as compared to 577 employees at
December 31, 2002 and 583 employees at March 31, 2002.
We do not believe that our historical growth rates for revenues,
expenses, or personnel are indicative of future results.



| |             
| | ------------
| | Net Revenues

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

Software License.We
recognized $5.0 million in software license revenues during
the first quarter of 2003 as compared to $10.9 million
during the same quarter in 2002, a decrease of
$5.9 million. This decrease in software license revenues
was primarily attributable to unfavorable worldwide
macroeconomic conditions and an uncertain political climate that
resulted in delayed customer information technology spending
during the quarter.

Hosted Messaging.We
recognized $5.4 million in hosted messaging revenues during
the first quarter of 2003 as compared to $7.0 million
during the first quarter of 2002, a decrease of
$1.6 million. This decrease in hosted messaging revenues
was primarily due to customer churn, specifically the loss of
three customers.

Professional Services.We recognized $3.2 million in
professional services revenues during the first quarter of 2003
as compared to $1.9 million during the same quarter in
2002, an increase of $1.3 million. This increase in
professional services revenues was primarily attributable to
improved utilization rates.

Maintenance and Support.We recognized $4.4 million in
maintenance and support revenues during the first quarter of
2003 as compared to $3.9 million during the first quarter
of 2002, an increase of $504,000. This increase in maintenance
and support revenues was primarily due to favorable renewal
rates and additional license sales during 2002.

Critical Paths international operations
accounted for approximately 61% of net revenues in the first
quarter of 2003 as compared to 52% in the first quarter of 2002.
This significant increase in the percentage of international
revenues reflects continued strength in the European market and
weakness in the domestic market.

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| |                     
| | --------------------
| | 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 $1.8 million during the first quarter of 2003 as
compared to $287,000 during the same quarter in 2002, an
increase of $1.5 million. This increase in software license
costs was primarily attributable to an increase in third party
costs associated with a major European deal recognized in the
fourth quarter of 2002 and the first quarter of 2003.

Hosted Messaging.Cost of net hosted messaging revenues
consists primarily of costs incurred in the delivery and support
of messaging services, including depreciation of capital
equipment used in network infrastructure, amortization of
purchased technology, Internet connection charges, accretion of
acquisition-related retention bonuses, personnel costs incurred
in operations, and other direct and allocated indirect costs.
The cost of net hosted messaging revenues was $6.3 million
during the first quarter of 2003 as compared to
$7.8 million during the first quarter of 2002, a decrease
of $1.5 million. This decrease in hosted messaging costs
was 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 $470,000. These decreases were offset by an
increase of $864,000 in service fees associated with the
management of our data center operations. Depreciation expenses
included in hosted messaging costs totaled $2.4 million in
the first quarter of 2003 as compared to $4.4 million in
the first quarter of 2002, a decrease of $2.0 million.

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
$3.5 million during the first quarter of 2003 as compared
to $2.4 million during the same quarter in 2002, an
increase of $1.1 million. This increase in professional
services costs was primarily attributable to incremental
consulting costs associated with a major European deal
recognized in the fourth quarter of 2002 and the first quarter
of 2003.

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
$1.9 million during the first quarter of 2003 as compared
to $2.1 million during the first quarter of 2002, a
decrease of $174,000. This decrease in maintenance and support
costs was primarily due to cost savings generated through our
2002 and 2003 restructuring initiatives, including the
consolidation of facilities of $219,000 and the cancellation of
certain outside consulting arrangements of $47,000.

Operations, customer support, and professional
services staff decreased to 129 employees at March 31, 2003
from 192 employees at March 31, 2002. As a result of the
recent restructuring initiative, we anticipate cost of net
revenues to decrease approximately 15% in the second quarter of
2003.



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

Sales and Marketing.Sales and marketing expenses consist
primarily of compensation for sales and marketing personnel,
advertising, public relations, other promotional costs, and, to
a lesser extent, related overhead. Sales and marketing expenses
were $9.3 million during the first quarter of 2003 as
compared to $10.9 million during the same quarter in 2002,
a decrease of $1.6 million. This decrease in sales and
marketing expenses was primarily attributable to cost savings
generated through our 2002 and 2003 restructuring initiatives,
including the reduction in certain marketing program costs of
$885,000, the consolidation of facilities of $486,000, and the
reduction of employees, from 143 at March 31, 2002 to 110
at March 31, 2003, resulting in a reduction in related
personnel expenses of approximately $297,000. As a result of the
recent restructuring initiative, we anticipate sales and
marketing expenses to decrease approximately 15% in the second
quarter of 2003.

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Research and Development.Research and development expenses
consist primarily of compensation for technical staff, payments
to outside contractors, depreciation of capital equipment
associated with research and development activities, and, to a
lesser extent, related overhead. Research and development
expenses were $4.6 million during the first quarter of 2003
as compared to $5.0 million during the first quarter of
2002, a decrease of $379,000. This decrease in research and
development expenses was primarily due to cost savings generated
through our 2002 and 2003 restructuring initiatives, including
the consolidation of facilities of $193,000, the reduction of
employees, from 156 at March 31, 2002 to 129 at
March 31, 2003, resulting in a reduction in related
personnel expenses of $124,000, and the cancellation of certain
outside consulting arrangements of $57,000. We anticipate
research and development expenses will be relatively flat in the
second quarter of 2003 as compared with the first quarter.

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 during the first quarter of 2003 as
compared to $6.7 million during the same quarter in 2002, a
decrease of $3.5 million. This significant decrease in
general and administrative expenses was primarily attributable
to cost savings generated through our 2002 and 2003
restructuring initiatives, including the cancellation of certain
outside consulting arrangements of $720,000, the reduction of
bad debt expense of $571,000, the reduction of outside legal and
litigation fees of $487,000, the consolidation of facilities of
$298,000, the reduction of outside accounting and audit fees of
$121,000, and the reduction of employees, from 92 at
March 31, 2002 to 70 at March 31, 2003, resulting in a
reduction in related personnel costs of $720,000. As a result of
the recent restructuring initiative, we anticipate general and
administrative expenses to decrease approximately 5% in the
second quarter of 2003.



| |                                                         
| | --------------------------------------------------------
| | Amortization of 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. There was no amortization expense
recorded in 2002 and the first quarter of 2003.

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 zero were
allocated to the cost of net revenues during the first quarter
of 2002 and 2003, respectively, and amortization expenses of
$6.1 million and zero were allocated to operating expenses
during the first quarter of 2002 and 2003, respectively. This
significant decline in amortization expenses resulted from the
adoption of SFAS No. 142, which eliminated the amortization
of goodwill, and the completion of amortization of all
intangible assets 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
approximately $59,000 during the first quarter of 2003 as
compared to $3.7 million during the first quarter of 2002.
Based on the functions of the employees and consultants
participating in the related option grants, $17,000 was
allocated to cost of net revenues and $42,000 was allocated to
operating expenses in the first quarter of 2003 and $417,000 was
allocated to cost of net revenues and $3.3 million was
allocated to operating expenses in the first quarter of 2002.
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 (in
    millions)

|                                                            |       |              |     |             |  |               |      |         |   |          |     |              |  |   |      |      |   |   |      |      |   |   |     |     | 
|----------------------------------------------------------- | ----- | ------------ | --- | ----------- |  | ------------- | ---- | ------- | - | -------- | --- | ------------ |  | - | ---- | ---- | - | - | ---- | ---- | - | - | --- | --- | 
|                                                            |       | Liability at |     |             |  |               |      |         |   |          |     | Liability at
|                                                            |       | December 31, |     |             |  | Restructuring |      | Noncash |   | Cash     |     | March 31,   
|                                                            |       | 2002         |     | Adjustments |  | Charges       |      | Charges |   | Payments |     | 2003        
|                                                            |       |              |     |             |  |               |      |         |   |          |     |             
|Workforce reduction                                         |       | $            | 1.2 |             |  | $             | (0.6 | )       |   | $        | 3.7 |              |  | $ | (0.1 | )    |   | $ | (3.0 | )    |   | $ | 1.2 |    
|Facility and operations consolidation and other
    charges |       |              | 1.1 |             |  |               | (0.3 | )       |   |          | 0.4 |              |  |   |     |      |   |   | (0.3 | )    |   |   | 0.9 |    
|Non-core product and service sales and
    divestitures     |       |              | 0.3 |             |  |               | (0.3 | )       |   |          | 0.3 |              |  |   |     |      |   |   | (0.3 | )    |   |   |    |    
|                                                            |       |              |     |             |  |               |      |         |   |          |     |              |  |   |      |      |   |   |      |      |   |   |     |    
|                                                            | Total |              | $   | 2.6         |  |               | $    | (1.2    | ) |          | $   | 4.4          |  |   | $    | (0.1 | ) |   | $    | (3.6 | ) |   | $   | 2.1 | 
|                                                            |       |              |     |             |  |               |      |         |   |          |     |              |  |   |      |      |   |   |      |      |   |   |     |    

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 March 31,
2003 was approximately $250,000 and is expected to be utilized
by the end of 2003.

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 anticipate an aggregate charge of approximately
$7.5 million resulting from the cost reduction plan,
inclusive of $6.5 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 $668,000 in severance and
related costs and $1.0 million in facilities lease
termination costs. During the first quarter of 2003, we incurred
approximately $4.4 million in additional restructuring
charges under the plan, predominantly related to severance and
related employee costs. We expect to incur the remainder of the
charge, or $1.4 million, during the second quarter of 2003.

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
March 31, 2003, the balance of the 2003 restructuring
accrual was approximately $1.8 million and is expected to
be utilized by the end of 2003.



| |                                             
| | --------------------------------------------
| | 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.
Interest income was $116,000 during the first quarter of 2003 as
compared to $336,000 during the first quarter of 2002, a
decrease of $220,000. This decrease was 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 three months ended March 31,
2003 due primarily to the funding of our operating activities.
We recognized a net loss from foreign currency transactions
associated with our international operations of $177,000 during
the first quarter of 2003 as compared to a net gain of $202,000
during the first quarter of 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 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 other income or expense. At March 31,
2002 and 2003, the estimated fair value of the liquidation
preference was $6.3 million and $18.8 million,
respectively, resulting in a net charge to other

17



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expense during the first quarter of 2002 and 2003
of $1.1 million and $6.2 million, respectively, due to
the increase in its estimated fair value.




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

Depreciation expense primarily relates to the
expensing, over the estimated useful lives, of capital equipment
used in network infrastructure for our hosted messaging
services, leasehold improvements and equipment used in our
general operations. Depreciation expense totaled
$4.6 million during the first quarter of 2003 as compared
to $7.8 million during the first quarter of 2002, primarily
due to the write-down of equipment. Included in these amounts
was depreciation expense related to cost of net hosted messaging
revenues, which totaled $2.4 million during the first
quarter of 2003 as compared to $4.4 million during the
first quarter of 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.



| |                 
| | ----------------
| | 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
first quarter of 2003, we incurred approximately $769,000 in
interest expense, of which $547,000 related to our Convertible
Subordinated Notes, $89,000 related to our line of credit
facility, $69,000 related to amortization of debt issuance
costs, and $23,000 related to capital leases and other long-term
obligations. During the first quarter of 2002, we incurred
approximately $783,000 in interest expense, of which $552,000
related to our Convertible Subordinated Notes, $69,000 related
to the amortization of debt issuance costs, and $23,000 related
to capital leases and other long-term obligations. 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 is 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.

During the first quarter of 2003, we recorded no
equity in net loss of joint venture as compared to $403,000
during the first quarter of 2002.



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

We recognized a provision for income taxes of
$194,000 in the first quarter of 2003 as certain of our European
operations generated income taxable in certain European
jurisdictions. We recognized a net benefit from income taxes of
$573,000 in the first quarter of 2002 as we recorded an $800,000
U.S. federal income tax benefit due to the repeal of the
federal corporate alternative minimum tax that was partially
offset by provisions for foreign income taxes. No current
provision or benefit for U.S. federal or state income taxes
has been recorded as we have incurred net operating losses for
income tax purposes since our inception. No

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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 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 first quarter of 2003, the accretion on redeemable
convertible preferred shares totaled $3.7 million,
comprised of $711,000 in accrued dividends and accretion of
$3.0 million. During the first quarter of 2002, the
accretion on redeemable convertible preferred shares totaled
$3.2 million, comprised of $1.1 million in accrued
dividends and accretion of $2.1 million.



| |                
| | ---------------
| | 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. During the first quarter of 2003 we drew
$4.9 million against this line of credit and had
$5.5 million in letters of credit under the credit
facility. The credit facility is secured by certain of our
assets and borrowings bear variable interest, Prime rate plus
1.00%, and is subject to certain covenants. Interest is paid
each month with principal due at maturity. Commitment fees
related to the credit facility include an initial commitment fee
of 0.50%, or $75,000, which was paid upon close, an early
termination fee of 0.50% due and payable should we elect to
cancel the facility within the first six months from closing,
and an additional fee based on unused credit of 0.45% payable at
the end of each quarterly period in arrears. The credit facility
was scheduled to mature on September 30, 2003, however it
was recently amended on March 25, 2003, to extend the
maturity date to March 31, 2004 and revise certain
covenants. At March 31, 2003, we were not in compliance
with one of the financial covenants required under the amended
credit facility; we have subsequently received a waiver through
June 13, 2003 and anticipate amending the credit facility
during the second quarter of 2003. In connection with the
extension we paid an additional commitment fee of $37,500 and
extended the initial six-month period subject to an early
termination fee through September 30, 2003. The interest
rate on the credit facility was 5.25% during 2002 and the first
quarter of 2003. All associated interest and fees are included
as a component of interest expense.

Liquidity and Capital Resources



| |                      
| | ---------------------
| | First Quarter of 2003

As of March 31, 2003, our cash and cash
equivalents totaled $31.4 million. Our working capital
amounted to approximately $9.7 million. During the first
quarter of 2003, we used approximately $2.4 million in cash
and cash equivalents.

We used net cash of $15.0 million to fund
operating activities during the first quarter 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. In addition, we used cash of $3.3 million to make
certain insurance, and software and hardware support and
maintenance renewal payments during the quarter. These cash
outflows for operating activities were partially offset by
improved accounts receivable collections of $3.1 million.

We received net cash of $8.0 million from
investing activities during the first quarter of 2003, primarily
through the sale of marketable securities of $9.6 million
and unrestricting $2.7 million in previously restricted

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cash. These cash inflows from investing
activities were partially offset by $4.3 million in
property and equipment purchases, primarily for additional
network infrastructure equipment for our data centers.


We received net cash of $4.6 million from
financing activities during the first quarter of 2003, primarily
through borrowings against our line of credit with Silicon
Valley Bank which totaled $4.9 million during the quarter.
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 March 31, 2004. These
cash inflows from financing activities were partially offset by
approximately $307,000 in principal payments on note and capital
lease obligations.



| |                      
| | ---------------------
| | First Quarter of 2002

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

We used net cash of $3.1 million to fund
operating activities during the first quarter of 2002, primarily
due to our net loss, adjusted for non-cash charges, as operating
costs, primarily employee and employee related costs, exceeded
the related revenues from the sale of our software products and
services. In addition, we used cash of $3.2 million to make
certain insurance, and software and hardware support and
maintenance renewal payments during the quarter. These cash
outflows for operating activities were partially offset by
growth in our accounts payable balances of $5.4 million.

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

We used net cash of $1.2 million in
financing activities during the first quarter of 2002, primarily
to retire $3.1 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 the Companys common
stock of $677,000.

A number of non-cash items have been charged to
expense and increased our net loss in the first quarter of 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.

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. 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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We receive cash from the exercise of stock
options and the sale of stock under our Employee Stock Purchase
Plan. 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 stock option plans and our Employee Stock
Purchase Plan and general market conditions.

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.

Our primary sources of capital have come from
debt and equity financings that we have completed over the past
three years. Revenues generated from the sale of our products
and services may not increase to a level that exceeds our
operating expenses or could fluctuate significantly as a result
of changes in customer demand or acceptance of future products.
We expect operating expenses to decrease during the remainder of
2003, as a result of our recent restructuring activities. If we
are not successful in generating sufficient revenues or
achieving this cost reduction, our cash flow from operations may
continue to be negatively impacted. However, we believe that our
cash and cash equivalents and available line of credit will be
sufficient to maintain current and planned operations for at
least the next twelve months. Failure to generate sufficient
revenues, reduce discretionary spending or raise additional
capital could have a material adverse effect on our ability to
achieve our intended business objectives.

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

Other Contractual Obligations

We have entered into various contractual
obligations which total $96.1 million, at March 31,
2003, primarily related to the future purchase of equipment,
software and maintenance of hardware and software products being
utilized within engineering and hosted operations, management of
data center operations and network infrastructure storage for
our hosted operations. These obligations are expected to be
completed over the next 5 years, including $16.7 million in
the remainder of 2003.

Recent accounting pronouncements

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 beginning after June 15, 2003. In addition, FIN
No. 46 requires that we make disclosures in our
consolidated financial statements for the year ended
December 31, 2002 when we believe it is reasonably possible
that we will consolidate or disclose information about variable
interest entities after FIN No. 46 becomes effective. 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.

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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 $4.4 million in
restructuring charges during that period.

Additional Factors That May Affect Future
Operating Results



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

We cannot accurately forecast our revenues as a
result of our limited operating history, evolving business
strategy and the emerging nature of the Internet messaging
infrastructure market. Forecasting is further complicated by
rapid changes in our business due to integration of acquisitions
we completed in 1999 and 2000, our recent strategic and
operational 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 first quarter
of 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,
    directory, and other products;                                                                                                                    
|
| |  | the demand for outsourced messaging services
    generally and the use of messaging and directory infrastructure
    products and services in particular;                                              
|
| |  | our ability to attract and retain customers and
    maintain customer satisfaction;                                                                                                                    
|
| |  | our ability to attract and retain qualified
    personnel with industry expertise, particularly sales personnel;                                                                                       
|
| |  | the ability to upgrade, develop and maintain our
    systems and infrastructure and to effectively respond to the
    rapid technology change of the messaging and directory
    infrastructure market;
|
| |  | the budgeting and payment cycles of our customers
    and potential customers;                                                                                                                         
|
| |  | the amount and timing of operating costs and
    capital expenditures relating to expansion of business and
    infrastructure;                                                                        
|
| |  | our ability to quickly handle and alleviate
    technical difficulties or system outages;                                                                                                              
|
| |  | the announcement or introduction of new or
    enhanced services by competitors;                                                                                                                       
|
| |  | 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
substantial non-cash charges associated with the grant of stock
options to employees and non-employees and the grant of warrants
to investors and other parties with whom we have business
relationships. These grants of options and warrants also may be
dilutive to existing shareholders.

In addition, our operating results have been
affected and could continue to be impacted by the elimination of
product or service offerings through termination, sale or other
disposition. Future decisions to eliminate, revise or limit any
other offerings of a product or service would involve other
factors affecting operational results including the expenditure
of capital, the realization of losses, further reductions in our
workforce, facility consolidation or the elimination of revenues
along with the associated costs, any of which could harm our
financial condition and operating results.

As a result of the foregoing, we do not believe
that period-to-period comparisons of operating results are a
good indication of future performance. It is likely that
operating results in some quarters will be below market
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 directory infrastructure products and services
require highly trained sales and marketing personnel to educate
prospective customers regarding the use and benefits of our
services. Current and prospective customers, in turn, must be
able to educate their end-users. Any delays or difficulties
encountered in our staffing 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.



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

As of March 31, 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 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

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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.




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

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

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| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, job losses, restructurings and decreased technology
spending in the recent economic downturn. Especially in the
telecommunications industry, which represents a sizeable portion
of our customer base, the relative financial performance of our
customers will continue to impact our sales cycles and ability
to attract new business. 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 directory infrastructure
solutions include:



| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | breadth of platform features and functionality of
    our offerings and the sophistication, innovation of competitors;                                                                                                          
|
| |  | total cost of ownership and operation;                                                                                                                                                                                          
|
| |  | scalability, reliability, 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

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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 directory
    infrastructure industry.

The messaging directory infrastructure industry
is characterized by rapid technological change, changes in user
and customer requirements and preferences, and the emergence of
new industry standards and practices that could render our
existing services, proprietary technology and systems obsolete.
We must continually 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.



| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our preferred stock carries a liquidation
    preference and conversion would mean substantial dilution, which
    could significantly impact return to common equity holders upon
    an acquisition and a decline in the market price of our common
    stock.

In December 2001, we issued 4,000,000 shares of
Series D Cumulative Convertible Redeemable Preferred Stock,
and additional warrants, in a private placement to certain
investors. The shares of Series D Preferred Stock have a
maximum aggregate liquidation preference of $81.4 million.
The shares of Series D Preferred Stock were convertible as
of March 31, 2003 into common stock (including all accreted
amounts) at an aggregate conversion price of $60.8 million
and were convertible into 57.9 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.

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 a liquidation
value, as of March 31, 2003, of between $60.8 million
and $81.4 million depending on the per share value in
connection with the event. In the event that we were to enter
into a merger or sale in which the total value of the
transaction would be less than the then current liquidation
value of each preferred share, a buyer would unlikely be willing
to assume the liquidation preferences and other obligations
represented by the Series D Preferred Stock. Consequently,
we currently anticipate that any

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transaction resulting in the sale of all or
substantially all of the shares of Critical Path would result in
substantially all of the proceeds of such transaction being
distributed to the holders of our Series D Preferred Stock.




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

We believe that existing capital resources will
enable us to maintain current and planned operations through at
least March 31, 2004. However, additional capital may be
required to continue operations and achieve profitability. In
addition, we may be required to raise additional funds due to
unforeseen circumstances and market conditions. If our capital
requirements vary materially from those currently planned, we
may require additional financing even sooner than anticipated.
Such financing may not be available in sufficient amounts or on
terms acceptable to us and may be dilutive to existing
shareholders. Additionally, we face a number of challenges in
operating our business, including but not limited to the
resources to maintain worldwide operations, continued
sluggishness in technology spending, and significant contingent
liabilities associated with litigation. In the event that
resolution of these or other operational matters involve
issuance of stock or other derivative instruments, our existing
shareholders may experience significant dilution.



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

In recent years, we have had filed a number of
lawsuits against us, including securities class action and
shareholder derivative litigation filed in February and August
2001, and certain of our former officers and directors and some
of our subsidiaries, as well as other lawsuits related to
acquisitions, employee terminations and copyright infringement.
While these lawsuits vary greatly in the materiality of
potential liability associated with them, and many have been
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

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such litigation, will be within the coverage
limits of our insurance and/or our ability to pay such amounts.
Likewise, there can be no assurance that the Company will be
able to conclude or settle such litigation on terms that
coincide with the coverage limits of our insurance and/or
ability to pay upon any final determination. A failure to
definitively resolve material litigation in which the Company is
involved or in which it may become involved in the future,
regardless of the merits of the respective cases, could also
cast doubt as to the prospects of the Company in the eyes of our
customers, potential customers and investors, and cause the
Companys stock price to further decline.




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

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



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

In the past, our management of operational
expenses, 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. The
Company participated in a hearing with the Nasdaq Stock Market,
where the Company explained the steps it planned to take to
return to compliance with the minimum bid requirement. Shortly
after the hearing, the Nasdaq National Market announced proposed
rule changes allowing for longer periods of time to regain
compliance and for delisting actions related to minimum bid
price. As a result of the proposed rule changes and the hearing,
the Company was granted until June 25, 2003 to re-establish
compliance with the minimum bid price requirement. Depending
upon the adoption of certain other rule changes proposed by the
Nasdaq

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National Market, the Company may be eligible for
an additional extension until September 15, 2003. The
Company has also filed a preliminary proxy statement in
connection with the Annual Meeting of Stockholders in which the
Company intends to solicit shareholder approval for a reverse
stock split in order to assist the Companys efforts in
regaining compliance with the minimum bid requirement.


Also effective November 1, 2002, we need to
comply with the Nasdaq National Markets revised
quantitative maintenance criteria including a new minimum
requirement of $10 million in stockholders equity.
The Nasdaq National Markets Audit Committee Rules require
that our audit committee be comprised of at least three
independent members. Although we believe that we currently
comply with this requirement and other Nasdaq National
Marketplace Rules, recent amendments to such rules may involve
changes to listing requirements and the membership of our Board
committees, and will require review and potential changes in our
policies, procedures and committee memberships to remain in
compliance. As a result, the Company is currently evaluating its
compliance with rule changes to ensure future compliance with
proposed, and amended rules.

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 first quarter of 2003, the
closing sale prices of our common stock on the Nasdaq National
Market ranged from $0.53 on January 2, 2003 to $0.90 on
January 16, 2003. The closing price of our stock on
March 31, 2003 was $0.87 per share, and on April 30,
2003 it was $0.85 per share. Our stock price may further decline
or fluctuate in response to any number of factors and events,
such as announcements related to technological innovations,
intense regulatory scrutiny and new corporate and securities and
other legislation, strategic and sales relationships, new
product and service offerings by us or our competitors,
litigation outcomes, changes in senior management, changes in
financial estimates and recommendations of securities analysts,
the operating and stock price performance of other companies
that investors may deem comparable, news reports relating to
trends in our markets and the market for our stock, media
interest in accounting scandals and corporate governance
questions, overall market conditions and domestic and
international economic factors unrelated to our performance. In
addition, the stock market in general, particularly with respect
to technology stocks, has experienced extreme volatility and a
significant cumulative decline in recent quarters. This
volatility and decline has affected many companies, including
our company, irrespective of the specific operating performance
of such companies. These broad market influences and
fluctuations may adversely affect the price of our stock, and
our ability to remain listed on the Nasdaq National Market,
regardless of our operating performance or other factors.



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

Our liability insurance for actions taken by
officers and directors during the period from March 1999 to
March 2001, the period during which events related to securities
class action lawsuits against us and certain of former executive
officers are alleged to have occurred, provided only limited
liability protection. While these policies covered the
settlement amount paid in connection with the settlement of the
primary securities class action, there can be no assurance that
the policies will continue to cover other pending matters and
related expenses from that period or future periods. If these
policies do not adequately cover our expenses related to those
lawsuits and the investigation, our business and financial
condition could be seriously harmed. Our current director and
officer liability insurance, which was put in place in March
2003, and continues through March 2004, contains similar
provisions, and in the event circumstances arise requiring
coverage by such

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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.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | 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 first quarter of
2003. 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 the first quarter of 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.

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| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 include the
expenditure of capital, the realization of losses, further
reduction in workforce, facility consolidation, and/or the
elimination of revenues along with the associated costs, any of
which could harm our financial condition and operating results.



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

We intend to continue to license certain
technologies from third parties and incorporate such
technologies into our products and services, including web
server technology, virus and anti-spam solutions, storage and
encryption technology 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 Company
resources to the development of such technologies that could
materially harm our business and operations.

In addition, we may fail to successfully
integrate any licensed 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.

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

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

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.

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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.

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.

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



| |                                                                              
| | -----------------------------------------------------------------------------
| | 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 61% of our revenues from international
sales in the first quarter of 2003 and 52% of our revenues from
international sales in the first quarter 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

34



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##### Table of Contents



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
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                                                                                                                                                                                                       

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

As of March 31, 2003, our investment
portfolio consisted of available-for-sale securities, excluding
those classified as cash equivalents, of $354,000. These
securities related to strategic equity investments in corporate
partners, certain of which are publicly traded and marketable
and certain of which are privately held. These securities are
subject to equity price risk. Critical Paths long-term
obligations consist of our $38.4 million of face value
5.75% Convertible Subordinated Notes due April 2005, and certain
fixed rate capital leases. We do not plan to reduce or eliminate
our market exposure on these securities.

A significant portion of our worldwide operations
has a functional currency other than the United States Dollar.
Accordingly, we are exposed to foreign currency exchange rate
risk inherent in our sales commitments, anticipated sales,
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. During
the three months ended March 31, 2002 and 2003 we
recognized a net gain of $202,000 and a net loss of $177,000,
respectively, from foreign currency transactions. 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-14(c)
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 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 a date within
90 days prior to the filing date of 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 controls.
There were no significant changes in our internal controls or,
to our knowledge, in other factors that could significantly
affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

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##### Table of Contents






PART 2  OTHER INFORMATION






Item 1. Legal
Proceedings


The Company is a party to lawsuits in the normal
course of our business. Litigation in general, and securities
and intellectual property litigation in particular, can be
expensive and disruptive to normal business operations.
Moreover, the results of complex legal proceedings are difficult
to predict. Other than as described below, 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.

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;
and 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.

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 settlement must be submitted to the Court
for its review and approval.

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 public
offering of common stock between March 26, 1999 and
December 6, 2000. The complaints allege generally that the
Prospectus under which such securities were sold contained false
and misleading statements with respect to discounts and
commissions received by the underwriters. The over
1,000 complaints have been consolidated into a single
action. The complaints seek an unspecified amount in damages on
behalf of persons who purchased the Companys stock during
the specified period. Similar complaints have been filed against
55 underwriters and more than 300 other companies and
other individuals. Defendants stayed pretrial motions and
discovery pending a ruling on a motion to dismiss the claims. On
February 19, 2003, the court issued an opinion refusing to
dismiss claims against the defendants in the case, except in
certain limited circumstances that did not apply to Critical
Path or its then officers and directors.

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 Company determined that local zoning laws likely prohibited
a business such as the Company or PeerLogic

37



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##### Table of Contents



from occupying the leased premises, and promptly
sought a zoning determination from the San Francisco Zoning
Administrator to resolve the matter. The Zoning Administrator
determined that the Companys proposed use of the leased
premises was not permitted, but the landlord appealed this
determination and prevailed before the San Francisco Board of
Appeals. The Company requested a rehearing on the matter, which
the Board of Appeals denied.


In April 2002, the landlord filed suit in San
Francisco Superior Court against the Company alleging, among
other things, breach of the lease. In its complaint, the
landlord sought unspecified compensatory damages for back rent,
attorneys fees, treble damages under relevant statutes,
and unspecified punitive damages. The court subsequently
dismissed a number of the landlords claims of damages. The
landlord filed an amended complaint in September 2002. In
January 2003, the court again dismissed a number of the
landlords claims, including all requests for punitive
damages.

In a related matter, in July 2002, the Company
filed a separate Petition for Writ of Administrative Mandamus
with the San Francisco Superior Court, requesting that the Board
of Appeals decision be reversed and/or remanded for
rehearing by the Board, with instructions from the court.
Litigation in this matter is ongoing.

The uncertainty associated with these and other
unresolved or threatened lawsuits could seriously harm the
Companys business and financial condition. In particular,
the lawsuits or the 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.

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.

Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

| |       |  |  |                                                                                                                                  
| | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------
| | 3(ii) |  |  | Amended and Restated By-laws.                                                                                                    
| | 10.1  |  |  | Modification of Loan and Security Agreement dated
    as of March 25, 2003 by and between Registrant and Silicon
    Valley Bank.
| | 99.1  |  |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act.*                                 
| | 99.2  |  |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act.*                                 

(b) Reports on Form 8-K



| |  |                                                                                                                                                                                                                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Report on Form 8-K filed on January 2, 2003
    disclosing the receipt of a Nasdaq Staff Determination that
    Registrant failed to comply with the minimum bid price
    requirement for continued listing on the Nasdaq National Market
    and the grant of a hearing date with respect to such
    determination.

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| |  |                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Report on Form 8-K filed on February 7,
    2003 disclosing the announcement of Paul Bartlett, formerly
    Executive Vice President, Corporate Development of the
    Registrant as Executive Vice President and Chief Financial
    Officer, succeeding Laureen DeBuono who will step down.
|
| |  | Report on Form 8-K filed on
    February 19, 2003 disclosing the resignation of Klaus Esser
    as a member of the Board of Directors of Registrant.                                                                                                                                         



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The material contained in Exhibits 99.1 and 99.2
    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.

39



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##### Table of Contents






SIGNATURE

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



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



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

| |                                       
| | --------------------------------------
| |                                       
| | Paul H. Bartlett                      
| | Chief Financial Officer and           
| | Executive Vice President,             
| | Corporate Development                 
| | (Duly Authorized Officer and Principal
| | Financial and Accounting Officer)     

Date: May 15, 2003

40



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##### Table of Contents



CERTIFICATION

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

1.     I have reviewed
this quarterly report on Form 10-Q of Critical Path, Inc.

2.     Based on my
knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report.

3.     Based on my
knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:



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

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



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

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



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

Date: May 15, 2003

41



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##### Table of Contents



CERTIFICATION

I, Paul H. Bartlett, certify that:

1.     I have reviewed
this quarterly report on Form 10-Q of Critical Path, Inc.

2.     Based on my
knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report.

3.     Based on my
knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:



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

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



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

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



| |                            
| | ---------------------------
| | /s/ PAUL H. BARTLETT       
| |                            
| | Paul H. Bartlett           
| | Chief Financial Officer and
| | Executive Vice President,  
| | Corporate Development      

Date: May 15, 2003

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INDEX TO EXHIBITS

|        |       |                     |  |                                                                                                                                  
|------- | ----- | ------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                    
|Number  |       | Exhibit Description
|        |       |                    
|        | 3(ii) |                     |  | Amended and Restated By-laws.                                                                                                    
|        | 10.1  |                     |  | Modification of Loan and Security Agreement dated
    as of March 25, 2003 by and between Registrant and Silicon
    Valley Bank.
|        | 99.1  |                     |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act.*                                 
|        | 99.2  |                     |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act.*                                 



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The material contained in Exhibits 99.1 and 99.2
    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.