<PAGE>

                                 United States
                      Securities and Exchange Commission
                            Washington, D.C. 20549

                                   FORM 10-Q


[x]  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934
for the quarterly period ended June 30, 1999
                               -------------

[_]  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 0-25331

                              CRITICAL PATH, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

            California                                    91-1788300
--------------------------------------------------------------------------------
   (State or other jurisdiction of                     (I.R.S. Employer
    incorporation or organization)                    Identification No.)

              320 First Street, San Francisco, California  94105
--------------------------------------------------------------------------------
             (Address of principal executive offices)  (Zip code)

                                 415-808-8800
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)

                                Not Applicable
--------------------------------------------------------------------------------
  (Former name, former address and former fiscal year, if changed since last
                                    report)


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.                               [X] Yes [_] No

Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date:

As of June 30, 1999, the Company had outstanding 38,156,462 shares of Common
Stock, $ 0.001 par value per share.
<PAGE>

                              CRITICAL PATH, INC.
                                     INDEX

<TABLE>
<CAPTION>
                                                                        Page
                                                                        ----
<S>                                                                     <C>
Part I.  Financial Information

  Item 1.  Financial Statements (Unaudited)

         Condensed consolidated balance sheets: June 30, 1999
         and December 31, 1998                                             3

         Condensed consolidated statements of operations: Three
         and six months ended June 30, 1999 and 1998                       4

         Condensed consolidated statements of cash flows: Six
         months ended June 30, 1999 and 1998                               5

         Notes to condensed consolidated financial statements:
         June 30, 1999                                                   6-8

  Item 2.  Management's discussion and analysis of financial
         condition and results of operations                            9-32

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk     33

Part II. Other Information

  Item 2.  Changes in Securities and Use of Proceeds                      34

  Item 6.  Exhibits and Reports on Form 8-K                               34

Signature                                                                 35
</TABLE>

                                       2
<PAGE>

                        PART 1 -- FINANCIAL INFORMATION

ITEM 1 -- FINANCIAL STATEMENTS

                              CRITICAL PATH, INC.
                     Condensed Consolidated Balance Sheets
                                  (unaudited)
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                   June  30,                 Dec. 31,
                                                                                     1999                      1998
                                                                                   ---------                 --------
<S>                                                                               <C>                        <C>
ASSETS
Current assets:
     Cash and cash equivalents                                                     $ 244,340                 $ 14,791
     Restricted cash                                                                     325                      325
     Accounts receivable, net                                                          1,815                      121
     Prepaid expenses and other current assets                                         6,986                      138
                                                                                   ---------                 --------
          Total current assets                                                       253,466                   15,375
Notes receivable from officers                                                           700                      500
Intangibles, net                                                                      19,050                        -
Investments                                                                           17,489                        -
Furniture and equipment, net                                                          15,629                    4,687
Other assets                                                                             238                      101
                                                                                   ---------                 --------
                                                                                   $ 306,572                 $ 20,663
                                                                                   =========                 ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued liabilities                                      $   2,971                 $    423
     Accrued compensation and benefits                                                   888                      426
     Deferred revenue                                                                      -                      500
     Capital lease obligations, current                                                3,274                    1,502
                                                                                   ---------                 --------
          Total current liabilities                                                    7,133                    2,851
Capital lease obligations, long-term                                                   4,717                    2,454
                                                                                   ---------                 --------
          Total liabilities                                                           11,850                    5,305
                                                                                   ---------                 --------
Contingencies (Note 8)
Shareholders' equity:
     Series A Convertible Preferred Stock, $0.001 par value, -0- and
      13,288 shares authorized, -0- and 12,725 shares issued and outstanding               -                       13
     Series B Convertible Preferred Stock, $0.001 par value, -0- and
      10,000 shares authorized, -0- and 3,637 shares issued and outstanding                -                        4
     Common Stock, $0.001 par value, 150,000 and 38,636 shares
          authorized, 38,209 shares issued and outstanding (net of 53
          treasury shares at a cost of $4.26) at June 30, 1999; 8,294 shares
          issued and outstanding at December 31, 1998                                     38                        8
    Additional paid-in capital                                                       435,435                   46,390
    Notes receivable from shareholders                                                (1,125)                  (1,151)
    Unearned compensation                                                           (107,665)                 (17,371)
    Unrealized gain on investments                                                    14,489                        -
    Accumulated deficit                                                              (46,450)                 (12,535)

        Total shareholders' equity                                                   294,722                   15,358
                                                                                   ---------                 --------
                                                                                   $ 306,572                 $ 20,663
                                                                                   =========                 ========
</TABLE>

                            See accompanying notes

                                       3
<PAGE>

                              CRITICAL PATH, INC.
                Condensed Consolidated Statements of Operations
                                  (unaudited)
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                            Three Months Ended                        Six Months Ended
                                                     -----------------------------------       ---------------------------------
                                                     June 30,  1999        June 30, 1998       June 30,  1999      June 30, 1998
                                                     --------------        -------------       --------------      -------------
<S>                                                  <C>                   <C>                 <C>                 <C>
Net revenues (1)                                     $        2,006        $          66       $        3,055      $         136
Cost of net revenues (2)                                     (3,977)                (230)              (6,337)              (312)
                                                     --------------        -------------       --------------      -------------
          Gross profit (loss)                                (1,971)                (164)              (3,282)              (176)
                                                     --------------        -------------       --------------      -------------
Operating expenses:
     Sales and marketing                                      3,219                  143                5,203                278
     Research and development                                 1,430                  404                2,809                677
     General and administrative                               2,691                  886                4,241              1,193
     Amortization of intangibles                                550                    -                  550                  -
     Stock-based expenses                                     8,162                  201               19,819                644
                                                     --------------        -------------       --------------      -------------
          Total operating expenses                           16,052                1,634               32,622              2,792
                                                     --------------        -------------       --------------      -------------

Loss from operations                                        (18,023)              (1,798)             (35,904)            (2,968)

Other income (expense):
     Interest income                                          1,882                   72                2,233                 72
     Interest expense (3)                                      (180)                 (25)                (244)              (175)
                                                     --------------        -------------       --------------      -------------
Net loss                                             $      (16,321)       $      (1,751)      $      (33,915)     $      (3,071)
                                                     --------------        -------------       --------------      -------------

Other comprehensive income, before tax:
          Unrealized gain on investment              $       14,489                   --       $       14,489                 --
                                                     --------------        -------------       --------------      -------------
Other comprehensive income, before tax               $       14,489                   --       $       14,489                 --
          Income tax effect                                      --                   --                   --                 --
                                                     --------------        -------------       --------------      -------------
Other comprehensive income, net of tax               $       14,489                   --       $       14,489                 --
                                                     --------------        -------------       --------------      -------------
Comprehensive income                                 $       (1,832)       $      (1,751)      $      (19,426)     $      (3,071)
                                                     ==============        =============       ==============      =============

Net loss per share (basic and diluted)               $        (0.49)       $       (0.50)      $        (1.70)     $       (0.99)
                                                     ==============        =============       ==============      =============

Weighted average shares (basic and diluted)Shares            32,977                3,530               19,994              3,109
                                                     ==============        =============       ==============      =============

Stock-based charges included in:
  (1)  Net revenues                                  $            -        $          20       $          106      $          20
  (2)  Cost of net revenues                          $          743        $          16       $       11,189      $          21
  (3)  Interest expense                              $          (16)       $         (10)      $          (32)     $        (129)
</TABLE>

                            See accompanying notes

                                       4
<PAGE>

                              CRITICAL PATH, INC.
                Condensed Consolidated Statements of Cash Flows
                                  (unaudited)
                                (in thousands)

<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                                              -------------------------------
                                                                June 30,          June 30,
                                                                  1999              1998
                                                              -------------     -------------
<S>                                                           <C>               <C>
Operating activities:
      Net loss                                                $     (33,915)    $      (3,071)
      Adjustments to reconcile net loss to net cash used in
      operating activities:
      Provision for doubtful accounts                                    99                 -
      Depreciation and amortization                                   2,565               190
      Amortization of warrants and stock purchase rights             12,630               231
      Amortization of unearned compensation                           8,516               583
      Changes in  assets and liabilities, net of
        amount acquired:
           Accounts receivable                                       (1,793)             (106)
           Prepaid expenses and other assets                         (6,985)              (32)
           Accounts payable and accrued liabilities                   2,548              (235)
           Accrued expenses compensation and benefits                   462                11
           Deferred revenue                                            (500)                -
                                                              -------------     -------------
Net cash used in operating activities                               (16,373)           (2,429)
                                                              -------------     -------------

Cash flows from investing activities:
      Purchases of furniture and equipment                           (7,255)             (210)
      Purchase of investments                                        (3,000)                -
      Acquisition of Fabrik Connect Service                         (12,000)                -
      Notes receivable from officers                                   (200)                -
                                                              -------------     -------------
Net cash used in investing activities                               (22,455)             (210)
                                                              -------------     -------------

Cash flows from financing activities:
      Proceeds from issuance of Convertible Preferred Stock,
       net                                                           12,496             7,990
      Proceeds from issuance of Common Stock, net                   257,221                 4
      Proceeds from equipment lease line                                  -               198
      Proceeds from convertible promissory notes payable                  -               500
      Repayment of convertible promissory notes payable                   -              (227)
      Proceeds from payments of shareholder note receivable              55                 -
      Principal payments on capital lease obligations                (1,168)             (156)
      Purchase of treasury stock                                       (227)                -
                                                              -------------     -------------
Net cash provided by financing activities                           268,377             8,309
                                                              -------------     -------------

Net increase in cash and cash equivalents                           229,549             5,670
Cash and cash equivalents at beginning of period                     14,791                 1
                                                              -------------     -------------
Cash and cash equivalents at end of period                    $     244,340     $       5,671
                                                              =============     =============
Supplemental cash flow disclosure:
      Cash paid for interest                                  $         212     $          53
Non-cash investing and financing activities:
      Property and equipment leases                           $       5,203     $       2,071
      Common stock issued for notes receivable                $          29     $          85
      Conversion of notes payable into Convertible
       Preferred Stock                                        $          --     $       1,120
      Unrealized gain on investment                           $      14,489     $          --
      Common stock issued for acquisition of
       Fabrik Connect Service                                 $       8,000     $          --
</TABLE>

                            See accompanying notes

                                       5
<PAGE>

                              CRITICAL PATH, INC.
             Notes to Condensed Consolidated Financial Statements


NOTE 1 - BASIS OF PRESENTATION

The accompanying financial information is unaudited but reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations, for the fiscal
year ended December 31, 1998 as presented in the Critical Path, Inc.'s (the
"Company") Form S-1 Registration Statement filed on June 1, 1999. The results of
operations for the six months ended June 30, 1999 are not necessarily indicative
of the results to be expected for the entire fiscal year.


NOTE 2 - NET LOSS PER SHARE

Net loss per share is calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" and Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed
by dividing the net loss available to common stockholders for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the net loss for the period by the
weighted average number of common and potential common shares outstanding during
the period if their effect is dilutive. Potential common shares are composed
of restricted Common Stock and incremental common and preferred shares
issuable upon the exercise of stock options and warrants. At June 30, 1999,
15,368,669 potential common shares are excluded from the determination of
diluted net loss per share as the effect of such shares is anti-dilutive.


NOTE 3 - COMMON STOCK WARRANT ISSUED FOR SERVICES

In January 1999, the Company entered into an agreement with ICQ, Inc., a
subsidiary of America Online, Inc., pursuant to which it will provide email
hosting services that will be integrated with ICQ's instant messaging service
provided to ICQ's customers. The ICQ instant messaging service is designed to
allow users to communicate in real time over the Internet. As part of the
agreement, ICQ agreed to provide sub-branded advertising for the Company in
exchange for a warrant to purchase 2,442,766 shares of Common Stock, issuable
upon attainment of each of five milestones. The following table summarizes the
shares underlying each milestone and the related exercise price:


                                       6

<PAGE>

<TABLE>
<CAPTION>
                                                        Shares
                                                      Underlying   Exercise
                                                        Warrant     Price
                                                       ---------    -----
<S>                                                   <C>          <C>
Milestone 1...........................................   814,254    $ 4.26
Milestone 2...........................................   407,128    $ 5.50
Milestone 3...........................................   407,128    $ 6.60
Milestone 4...........................................   407,128    $ 8.80
Milestone 5...........................................   407,128    $11.00
                                                       ---------
  Totals.............................................. 2,442,766
                                                       =========
</TABLE>


In the quarter ended June 30, 1999, the Company amended the vesting terms of its
agreement with ICQ. The revised vesting terms did not impact the shares
underlying the first milestone, which vested immediately upon the execution of
the agreement. The shares underlying the remaining milestones vest on the date
in a quarter in which ICQ completes a minimum registration of 100,000 sub-
branded ICQ mailboxes, compared to 250,000 sub-branded ICQ mailboxes as provided
in the terms of the original agreement. The amended agreement allows also
provides that only one milestone may be achieved on a quarterly basis.

Using the Black-Scholes option pricing model and assuming a term of seven years
and expected volatility of 90%, the initial fair value of the warrant on the
effective date of the agreement approximated $16.5 million. The shares
underlying the second through fifth milestones will be remeasured at each
subsequent reporting date until each sub-branded ICQ mailbox registration
threshold is achieved. In the event such remeasurement results in increases or
decreases from the initial fair value, which could be substantial, these such
increases or decreases will be recognized immediately, in the event the fair
value of the shares underlying the milestone has been previously recognized, or
over the remaining term.

At March 31, 1999, none of the registration milestones specified within the ICQ
warrant had been achieved. Therefore, the shares underlying the second through
the fifth milestones of the ICQ warrant were remeasured using the closing price
of our common stock on March 31, 1999 of $77 per share. This remeasurement
resulted in an increase to the fair value of the warrant of $109.4 million,
bringing the total fair value of the warrant to $125.9 million as of March 31,
1999.

At June 30, 1999, none of the registration milestones specified within the ICQ
warrant agreement had been achieved. Therefore, the shares underlying the second
through the fifth milestones of the ICQ warrant were remeasured using the
closing price of our common stock on June 30, 1999 of $55.3125 per share. This
remeasurement resulted in a decrease to the fair value of the warrant of $35.0
million compared to the fair value of the warrant on March 31, 1999, bringing
the total fair value of the warrant to $90.9 million as of June 30, 1999. This
revised fair value will be amortized ratably over the remainder of the four year
term of the agreement, resulting in a quarterly amortization charge to
advertising expense in the amount of $5.7 million. Based on this revised fair
value of the warrant, the resulting cumulative amortization charge totaled
$11.4 million for the two quarters ended June 30, 1999. As an amortization
charge of $7.9 million was recognized for the quarter ended March 31, 1999,
the difference of $3.5 million was recognized in the quarter ended
June 30, 1999.

As of June 30, 1999, none of the remaining milestones had been attained. We
expect that future changes in the trading price of our common stock at the end
of each quarter, and at the time certain milestones are achieved, will cause
additional substantial changes in the ultimate amount of the related stock-based
compensation.

                                       7

<PAGE>

NOTE 4 - INITIAL AND SECONDARY PUBLIC OFFERING OF COMMON STOCK

On March 29, 1999, the Company completed its initial public offering of
5,175,000 shares of Common Stock (including the exercise of the underwriters'
overallotment option) and realized net proceeds of $114.1 million.

On June 2, 1999, the Company completed its secondary public offering of
3,000,000 shares of common stock and realized net proceeds of $140.7 million.


NOTE 5 - ACQUISITION OF FABRIK CONNECT SERVICE

On May 26, 1999, the Company acquired substantially all the operating assets of
the Connect Service business of Fabrik Communications. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the net
assets and results of operations of Fabrik's Connect Service have been included
in the Company's consolidated financial statements since the acquisition date.
The purchase price has been allocated to the tangible and intangible assets
acquired on the basis of their respective fair values on the date of
acquisition. The total purchase price was $20.1 million, consisting of $12.0
million cash, common stock valued at $8.0 million, and other acquisition-related
expenses of approximately $100,000. Of the total purchase price, approximately
$500,000 was allocated to property and equipment, and the remainder was
allocated to intangible assets, including customer list ($2.1 million),
assembled workforce ($400,000) and goodwill ($17.1 million). The acquired
intangible assets will be amortized over their estimated useful lives of two to
three years. Goodwill will be amortized using the straight-line method over
three years, resulting in a quarterly charge of $1,425,000 during the
amortization period.

The following table presents the pro forma consolidated results of operations
of the Company for the six months ended June 30, 1999 and 1998 as if the
acquisition had been consummated at the beginning of each period. The pro
forma consolidated results of operations include certain pro forma
adjustments, including the amortization of intangible assets and the reduction
of interest income for lower cash balances as a result of the elimination of
the Fabrik cash balance which is not being acquired by the Company, and the
reduction in cash balances due to the $12 million paid on acquisition.

The unaudited pro forma consolidated results of operations are prepared for
comparative purposes only and do not necessarily reflect the results that would
have occurred had the acquisition occurred at the beginning of the periods
presented or the results which may occur in the future (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
                                                      Six Months Ended
                                                          June 30,
                                                    -------------------
                                                      1999       1998
                                                    --------    -------
<S>                                                 <C>         <C>
Net revenues                                        $  4,487    $ 6,035
Net loss                                             (37,163)    (6,686)
Let loss per share:
  Basic and diluted                                    (1.84)     (2.08)
</TABLE>

NOTE 6 - ACQUISITION OF DOT.ONE CORPORATION

On July 21, 1999, the Company acquired all outstanding shares of dotOne
Corporation in exchange for $17.5 million in cash and common stock valued at $35
million. The acquisition will be accounted for using the purchase method of
accounting and, accordingly, the purchase price will be allocated to the
tangible and intangible assets acquired on the basis of their respective fair
values on the date of the acquisition.

NOTE 7 - ACQUISITION OF AMPLITUDE SOFTWARE CORPORATION

On June 23, 1999, the Company announced that it had signed a definitive
agreement to acquire all outstanding shares of Amplitude Software Corporation.
The closing of this transaction is contingent upon approval by the Amplitude
shareholders and other provisions within the agreement. Should this
acquisition close, the Company intends to account for this transaction using
the purchase method of accounting and, accordingly, the purchase price will be
allocated to the tangible and intangible assets acquired on the basis of their
respective fair values on the date of the acquisition.

NOTE 8 - CONTINGENCIES

The Company is party to various legal proceedings in the ordinary course of its
business. The Company believes that the ultimate outcome of these matters will
not have a material adverse impact on its financial position or results of
operations.

NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. In June 1999 the FASB
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of Effective Date of
FASB Statement No. 133" ("SFAS 137"). SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000, with earlier application encouraged. Critical Path does not currently use
derivative instruments, but is required to adopt SFAS 133 during fiscal year
2000. Critical Path has not yet determined what the effect of SFAS 133 will be
on its financial position or results of operations.

                                       8
<PAGE>

ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS


"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
-----------------------------------------------------------------------------
1995
----

The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this report. The following discussion contains forward-looking statements.
Critical Path's actual results may differ significantly from those projected
in the forward-looking statements. Factors that might cause future results to
differ materially from those projected in the forward-looking statements
include, but are not limited to, future enhancements of our service offering,
potential expansion of our employee base and operating assets, acquisitions,
development of new strategic relationships, opening of new data centers and
sales offices, additional investments in technology, impact of Year 2000
issues, and those discussed in "Additional Factors That May Affect Future
Operating Results" and elsewhere in this report.

Overview

Critical Path was founded in February 1997, to deliver email hosting solutions
to Internet service providers, web hosting companies, web portals and
corporations. From its inception to October 1997, Critical Path's operating
activities related primarily to the planning and development of our proprietary
technological solution, recruitment of personnel, raising of capital and
purchase of operating assets. Critical Path initiated its email hosting service
in October 1997. We have since continued to make investments to improve the
quality of our service. In December 1997, we enhanced our initial service
offering, a hosting service based on Post Office Protocol 3, with the addition
of a web mail interface. Post Office Protocol 3 is a standard protocol for
receiving email commonly referred to "POP3". In January 1999, we enhanced
service with the addition of an offering based on the Lightweight Directory
Access Protocol, or LDAP, a directory software protocol. In May of 1999, we
acquired substantially all the operating assets of the Connect Service business
of Fabrik Communications, Inc. We purchased both the ongoing business operations
and nearly 500 customer relationships of Fabrik Connect. The acquisition has
been accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets
acquired on the basis of their respective fair values on the date of
acquisition. The total purchase price of $20.1 million consisted of $12.0
million cash, common stock valued at $8.0 million, and other acquisition costs
of approximately $100,000. Of the total purchase price, approximately $500,000
was allocated to property and equipment, and the remainder was allocated to
intangible assets, including customer list ($2.1 million), assembled workforce
($400,000), and goodwill ($17.1 million). The acquired intangible assets will be
amortized over their estimated useful lives of two to three years. Goodwill will
be amortized using the straight-line method over three years, resulting in a
quarterly charge of $1,425,000 during the amortization period. At June 30,
1999, amortization of intangibles totaled $550,000.

In July of 1999, we acquired all outstanding shares of dotOne Corporation in
exchange for $17.5 million in cash and common stock valued at $35 million.
dotOne is a provider of corporate email and messaging services. The
acquisition will be accounted for using the purchase method of accounting and,
accordingly, the purchase price will be allocated to the tangible and
intangible assets acquired on the basis of their respective fair values on the
date of the acquisition.

We derive substantially all of our revenues through our email hosting services.
Our service revenues are derived primarily from contractual relationships which
provide for revenues on a per mailbox and per message basis. These contracts are
typically one to three years in length. Revenues based upon a percentage of the
email advertising revenues generated by customers are


                                       9
<PAGE>

recognized when those revenues are earned and reported by the customer. Other
set-up fees are comprised of customized installation of email services. Payments
are based on a contractual fee for the customization, and revenue is recognized
upon completion of the work. Agreements with some of our customers require
minimum performance standards regarding the availability and response time of
our email 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. Service revenues are recognized and billed on a monthly
basis as the service is performed.

We expect to expand our operations and employee base, including our sales,
marketing, technical, operational and customer support resources. In particular,
we intend to expand our sales force to deliver our email outsourcing services to
customers in our four target markets: ISPs, web hosting companies, web portals
and corporations. We also intend to further develop new and existing strategic
relationships to expand our distribution channels and to undertake joint product
development and marketing efforts.

We intend to develop worldwide sales offices and data centers. We currently have
sales offices in the United States, Germany, Great Britain, and France, and data
centers in the United States and Germany. We expect to open additional data
centers in the United States, Europe and Asia during the next 12 months.

Future investments in technology may involve the development, acquisition or
licensing of technologies that complement or augment our existing services and
technologies.

During 1998, we recorded aggregate unearned compensation totaling approximately
$19.9 million in connection with the certain sales of stock and the grant of
certain options to employees, directors and consultants. This amount is being
amortized over the four-year vesting period of the related options. These
options were issued to create incentives for continued performance. Of the total
unearned compensation, approximately $448,000366,000, $217,000, $269,000 and
$1.7 million were amortized in the quarters ended March 31, June 30, September
30, and December 31, 1998, respectively. In January and March 1999, we granted
options resulting in an additional $18.1 million of unearned compensation.
Amortization of unearned compensation was approximately $3.7 million during the
three months ended March 31,first quarter of 1999, and approximately $4.9
million during the three months ended June 30,second quarter of 1999. We expect
aggregate per quarter amortization related to unearned compensation of between
$4.9 million and $4.0 million during 1999, between $3.2 million and $2.1 million
during 2000, between $1.7 million and $1.0 million during 2001, and between
$742,000 and $331,000 during 2002. These amortization amounts are allocated
among the operating expense categories based upon the primary activity of the
individuals who received the option grants.

In January 1999, we entered into an agreement with ICQ, a subsidiary of America
Online, Inc., pursuant to which we will provide email hosting services that will
be integrated with ICQ's instant messaging service provided to ICQ's customers.
The ICQ instant messaging service is designed to allow users to communicate in
real time over the Internet. As part of the agreement, ICQ agreed to provide
sub-branded advertising for Critical Path in exchange for a warrant to purchase
2,442,766 shares of common stock, issuable upon attainment of each of five
milestones. We believe that this agreement will have a significant current and
potential future impact on our results of operations. The following table
summarizes the shares underlying each milestone and the related exercise price:


                                      10
<PAGE>

<TABLE>
<CAPTION>
                                                         Shares
                                                       Underlying Exercise
                                                         Warrant    Price
                                                         -------   -----
<S>                                                    <C>        <C>
Milestone 1...........................................   814,254   $ 4.26
Milestone 2...........................................   407,128   $ 5.50
Milestone 3...........................................   407,128   $ 6.60
Milestone 4...........................................   407,128   $ 8.80
Milestone 5...........................................   407,128   $11.00
                                                         -------
  Totals.............................................. 2,442,766
                                                       =========
</TABLE>


In the quarter ended June 30, 1999, the Company amended the vesting terms of its
agreement with ICQ. The revised vesting terms did not impact the shares
underlying the first milestone, which vested immediately upon the execution of
the agreement. The shares underlying the remaining milestones vest on the date
in a quarter in which ICQ completes a minimum registration of 100,000 sub-
branded ICQ mailboxes, compared to 250,000 sub-branded ICQ mailboxes as provided
in the terms of the original agreement. The amended agreement allows also
provides that only one milestone may be achieved on a quarterly basis.

Using the Black-Scholes option pricing model and assuming a term of seven years
and expected volatility of 90%, the initial fair value of the warrant on the
effective date of the agreement approximated $16.5 million. The shares
underlying the second through fifth milestones will be remeasured at each
subsequent reporting date until each sub-branded ICQ mailbox registration
threshold is achieved. In the event such remeasurement results in increases or
decreases from the initial fair value, which could be substantial, these such
increases or decreases will be recognized immediately, in the event the fair
value of the shares underlying the milestone has been previously recognized, or
over the remaining term.

At March 31, 1999, none of the registration milestones specified within the ICQ
warrant had been achieved. Therefore, the shares underlying the second through
the fifth milestones of the ICQ warrant were remeasured using the closing price
of our common stock on March 31, 1999 of $77 per share. This remeasurement
resulted in an increase to the fair value of the warrant of $109.4 million,
bringing the total fair value of the warrant to $125.9 million as of March 31,
1999.

At June 30, 1999, none of the registration milestones specified within the ICQ
warrant agreement had been achieved. Therefore, the shares underlying the second
through the fifth milestones of the ICQ warrant were remeasured using the
closing price of our common stock on June 30, 1999 of $55.3125 per share. This
remeasurement resulted in a decrease to the fair value of the warrant of $35.0
million compared to the fair value of the warrant on March 31, 1999, bringing
the total fair value of the warrant to $90.9 million as of June 30, 1999. This
revised fair value will be amortized ratably over the remainder of the four year
term of the agreement, resulting in a quarterly amortization charge to
advertising expense in the amount of $5.7 million. Based on this revised fair
value of the warrant, the resulting cumulative amortization charge totaled
$11.4 million for the two quarters ended June 30, 1999. As an amortization
charge of $7.9 million was recognized for the quarter ended March 31, 1999,
the difference of $3.5 million was recognized in the quarter ended
June 30, 1999.

As of June 30, 1999, none of the remaining milestones had been attained. We
expect that future changes in the trading price of our common stock at the end
of each quarter, and at the time certain milestones are achieved, will cause
additional substantial changes in the ultimate amount of the related stock-based
compensation.

                                      11
<PAGE>

We have incurred significant losses since our inception, and as of June 30, 1999
had an accumulated deficit of approximately $46.5 million. We intend to invest
heavily in sales and marketing, continued development of our network
infrastructure and continued technology developments. We expect to continue to
incur substantial operating losses for the foreseeable future.

In view of the rapidly evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of our revenues and
operating results, including our 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 June 30, 1999, we had 212
employees, in comparison with 46 employees at June 30, 1998. However, we do not
believe that our historical growth rates for revenue, expenses, or personnel are
indicative of future results.


                                      12
<PAGE>

Results of Operations

The following tables set forth the historical results of our operations,
expressed in absolute dollars and as a percentage of revenues, for the three
months and six months ended June 30, 1999 and 1998, respectively.

                                  (unaudited)
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                     Absolute Dollars                           Percentage of Revenues
                                             -----------------------------------          -----------------------------------
                                                    Three Months Ended                            Three Months Ended
                                             -----------------------------------          -----------------------------------
                                             June 30, 1999         June 30, 1998          June 30, 1999         June 30, 1998
                                             -------------         -------------          -------------         -------------
<S>                                          <C>                   <C>                    <C>                   <C>
Net revenues (1)                             $       2,006         $          66              100.0                  100.0
Cost of net revenues (2)                            (3,977)                 (230)             198.3                  348.5
                                             -------------         -------------          -------------         -------------
          Gross profit (loss)                       (1,971)                 (164)              98.3                  248.5
                                             -------------         -------------          -------------         -------------
Operating expenses:
     Sales and marketing                             3,219                   143              160.5                  216.7
     Research and development                        1,430                   404               71.3                  612.1
     General and administrative                      2,691                   886              134.1                1,342.4
     Amortization of intangibles                       550                     -               27.4                      -
     Stock-based expenses                            8,162                   201              406.9                  304.5
                                             -------------         -------------          -------------         -------------
          Total operating expenses                  16,052                 1,634              800.2                2,475.7
                                             -------------         -------------          -------------         -------------

Loss from operations                               (18,023)               (1,798)             898.5                2,724.2

Other income (expense):
     Interest and other income                       1,882                    72               93.8                  109.1
                                             -------------         -------------          -------------         -------------
     Interest expense (3)                             (180)                  (25)               9.0                   37.9
                                             -------------         -------------          -------------         -------------
Net loss                                     $     (16,321)        $      (1,751)             813.6                2,653.0
                                             =============         =============          =============         =============

Net loss per share (basic and diluted)       $       (0.49)        $       (0.50)
                                             =============         =============

Weighted average shares (basic and  diluted)        32,977                 3,530
                                             =============         =============

Stock-based charges included in:
  (1) Net revenues                                       -         $          20
  (2) Cost of net revenues                   $         743         $          16
  (3) Interest expense                       $         (16)        $          10
</TABLE>


                                      13
<PAGE>

                                  (unaudited)
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                     Absolute Dollars                           Percentage of Revenues
                                             -----------------------------------          -----------------------------------
                                                     Six Months Ended                              Six Months Ended
                                             -----------------------------------          -----------------------------------
                                             June 30, 1999         June 30, 1998          June 30, 1999         June 30, 1998
                                             -------------         -------------          -------------         -------------
<S>                                          <C>                   <C>                    <C>                   <C>
Net revenues (1)                             $       3,055         $         136                100.0                100.0
Cost of net revenues (2)                            (6,337)                 (312)               207.4                229.4
                                             -------------         -------------          -------------         -------------
          Gross profit (loss)                       (3,282)                 (176)               107.4                129.4
                                             -------------         -------------          -------------         -------------
Operating expenses:
     Sales and marketing                             5,203                   278                170.3                204.4
     Research and development                        2,809                   677                 91.9                497.7
     General and administrative                      4,241                 1,193                138.8                877.2
     Amortization of intangibles                       550                     -                 18.0                    -
     Stock-based expenses                           19,819                   644                648.7                473.5
                                             -------------         -------------          -------------         -------------
          Total operating expenses                  32,622                 2,792              1,067.7              2,052.8
                                             -------------         -------------          -------------         -------------

Loss from operations                               (35,904)               (2,968)             1,175.1              2,182.2

Other income (expense):
     Interest and other income                       2,233                    72                 73.1                 52.9
     Interest expense (3)                             (244)                 (175)                 8.0                128.7
                                             -------------         -------------          -------------         -------------
Net loss                                     $     (33,915)        $      (3,071)             1,110.0              2,258.0
                                             =============         =============          =============         =============

Net loss per share (basic and diluted)       $       (1.70)        $       (0.99)
                                             =============         =============
Weighted average shares (basic and diluted)         19,994                 3,109
                                             =============         =============

Stock-based charges included in:
  (1) Net revenues                           $         106         $          20
  (2) Cost of net revenues                   $       1,189         $          21
  (3) Interest expense                       $          32         $         129
</TABLE>


Net Revenues

Revenues. We derive substantially all of our revenues from our email hosting
--------
services. Our service revenues are derived primarily from contractual
relationships which provide for revenues on a per mailbox and per message basis.
These contracts are typically one to three years in


                                      14
<PAGE>

length. Revenues based upon a percentage of the email advertising revenues
generated by customers are recognized when those revenues are earned and
reported by the customer. Other set-up fees are comprised of customized
installation of email services. Payments are based on a contractual fee for the
customization, and revenue is recognized upon completion of the work. Agreements
with some of our customers require minimum performance standards regarding the
availability and response time of our email 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. Service revenues are recognized
and billed on a monthly basis as the service is performed.

During the quarter ended June 30, 1999, our revenues were $2,006,000, an
increase of $1,940,000 over the corresponding quarter of 1998. For the six
months ended June 30, 1999, our revenues increased to $3,055,000 from $136,000
in the corresponding period of the previous fiscal year. These increases in
revenue resulted primarily from a substantial increase in the number of
mailboxes we hosted during the current fiscal year in comparison with the
corresponding periods of the previous fiscal year, as well as the contribution
of acquired companies to current period revenues. At June 30, 1999, we hosted
4.2 million active mailboxes. At June 30, 1998, by comparison, we hosted
approximately 150,000 mailboxes. For the quarter ended June 30, 1999, we earned
revenues of $ 0.26 per mailbox for the weighted average of active mailboxes
hosted during the quarter.

In connection with certain customer contracts executed in 1998, we granted
warrants or options to purchase Series B Convertible Preferred Stock. to such
customers. The fair value of these warrants or options, determined using the
Black-Scholes option pricing model, has been recognized ratably as a sales
discount over the terms of the respective agreements. Amortization of this
discount amounted to $106,000 and $20,000 for the six months ended June 30, 1999
and 1998, respectively, and zero and $20,000 during the quarter ended June 30,
1999 and 1998, respectively.

In early 1998, we executed agreements with E*TRADE, an on-line brokerage
services company, and Verio, a web hosting organization, pursuant to which we
derive revenue for providing email services. During the six months ended June
30, 1999, E*TRADE and Verio accounted for approximately 38% and 16%,
respectively, of our net revenues, excluding the value of stock purchase rights
received by customers. For the entirety of 1998, E*TRADE and Verio accounted for
approximately 62% and 30%, respectively, of our net revenues excluding the value
of stock purchase rights received by customers.

Cost of Net Revenues

Cost of net revenues consists principally of costs incurred in the delivery and
support of our email services, including depreciation of capital equipment used
in our network infrastructure and personnel costs in our operations and customer
support functions. During the quarter ended June 30, 1999, these costs were
$3,977,000, or 198% of net revenues, in comparison with costs of $230,000, or
3498% of net revenues, for the corresponding quarter of 1998. For the six months
ended June 30, 1999, cost of net revenues was $6,337,000, or 207% of net
revenues, in comparison with costs of $312,000, or 229% of net revenues, for the
corresponding period of 1998. We have made significant acquisitions of equipment
for our data centers over the past 12 months, and as a result our depreciation
expense of networking equipment during 1999 has increased substantially in
comparison with the corresponding periods of the previous fiscal year.
Additionally, we incurred $708,000 of consulting and outside contractor charges
during the quarter ended June 30, 1999 to migrate our network to a new storage
platform. We have also significantly increased our staffing in operations and
customer support over the past year, and consequently compensation and other
personnel costs were higher in the current fiscal year. From January 1, 1999 to
June 30, 1999, our operations and customer support staff increased from

                                      15
<PAGE>

25 employees to 63 employees. At June 30, 1998, we had 14 employees on staff in
operations and customer support functions.

Operating Expenses

Sales and Marketing.  Our sales and marketing expenses consist principally of
-------------------
compensation for our sales and marketing personnel, advertising, public
relations and other promotional costs, and, to a lesser extent, related
overhead. Sales and marketing expense during the quarter ended June 30, 1999,
amounted to $3,219,000, or 161% of net revenue, in comparison with $143,000, or
217%, during the corresponding quarter of the previous fiscal year. For the six
months ended June 30, 1999, sales and marketing expense came to $5,203,000, or
170% of net revenues, in comparison with $278,000, or 204% of net revenues, for
the corresponding period of the previous fiscal year. Increases in marketing and
promotional expenses, incentive compensation payments to sales personnel, and
increases in compensation associated with additional headcount accounted for the
increase to sales and marketing expense during 1999. From January 1, 1999 to
June 30, 1999, our sales and marketing staff increased from 30 employees to 73
employees. At June 30, 1998, we had six employees on staff in sales and
marketing functions.

Research and Development. Our research and development expenses consist
------------------------
principally of compensation for our technical staff, payments to outside
contractors, and, to a lesser extent, related overhead. We expense research and
development expenses as they are incurred. Research and development expenses
amounted to $1,430,000, or 71% of net revenues, during the quarter ended June
30, 1999, in comparison with $404,000, or 612% of net revenues, for the
corresponding quarter of the previous fiscal year. For the six months ended June
30, 1999, research and development expenses were $2,809,000, or 92% of net
revenues, in comparison with $677,000, or 498% of net revenues, for the
corresponding period of the previous fiscal year. These significant dollar
increases resulted primarily from increases in personnel and use of outside
contractors. From January 1, 1999 to June 30, 1999, our research and development
staff increased from 27 employees to 56 employees. At June 30, 1998, we had 19
employees on staff in research and development functions.

General and Administrative. Our general and administrative expenses consist
--------------------------
principally of compensation for personnel, fees for outside professional
services, allocated occupancy costs and, to a lesser extent, related overhead.
General and administrative expenses amounted to $2,691,000, or 134% of net
revenues, during the quarter ended June 30 1999, in comparison with $886,000 or
1,342% of net revenues, during the corresponding quarter of the previous fiscal
year. For the six months ended June 30, 1999, general and administrative
expenses came to $4,241,000 or 139% of net revenues, in comparison with
$1,193,000, or 877% of net revenues, for the corresponding period of the
previous fiscal year. These increases were attributable primarily to increases
in compensation associated with additional headcount, higher fees for outside
professional services, and higher occupancy costs. From January 1, 1999 to June
30, 1999, our general and administrative staff increased from 11 employees to 20
employees. At June 30, 1998, we had seven employees on staff in general and
administrative functions.

Stock-Based Expenses

During 1998, we recorded aggregate unearned compensation in the amount of $19.9
million in connection with the grant of certain stock options during 1998. In
the first quarter of 1999, we recorded an additional $18.1 million of unearned
compensation related to the grant of stock options in the months of January 1999
and March 1999. Amortization of such unearned compensation amounted to
approximately $4.9 million for the three months ended June 30, 1999, in
comparison with $217,000 for the three months ended June 30, 1998. Approximately
$743,000 and $16,000 of amortized unearned compensation was allocated to cost of
net revenues


                                      16
<PAGE>

and the remaining $4.1 million and $201,000 was amortized to operating expenses
for the three months ended June 30, 1999 and 1998, respectively. For the six
months ended June 30, 1999 and 1998, the Company amortized $8.5 million and
$665,000 of unearned compensation, respectively, relating to the grant of stock
options. Of this amortized unearned compensation, approximately $1.1 million and
$21,000 was allocated to cost of net revenues and approximately $7.4 million and
$644,000 was allocated to operating expenses for the six months ended June 30,
1999 and 1998, respectively.

Additionally, we incurred stock-based expenses for warrants we granted to ICQ, a
subsidiary of AOL, and to one other strategic partner. Amortization of the fair
value of these warrants resulted in stock-based expenses of approximately $4.0
million for the quarter ended June 30, 1999, and $12.4 million for the six
months ended June 30, 1999. As noted in the Overview section, quarterly
amortization associated with the ICQ warrant is subject to substantial increase
or decrease in future quarters based upon future changes in the trading price of
our common stock.

Interest and Other Income and Interest Expense

Interest and other income consists primarily of interest earnings on our cash
and cash equivalents. Interest and other income amounted to $1,882,000 during
the quarter ended June 30, 1999, and $2,233,000 for the six months ended June
30, 1999. We concluded private placements of equity securities in April 1998,
September 1998, and January 1999, and closed public offerings of common stock in
April 1999 and June 1999. As a result, interest income increased
significantly during the 1999 in comparison with corresponding periods in 1998
due to higher cash balances available for investment. During the six months
ended June 30, 1999, we incurred interest expense on capital lease obligations
in the amount of $244,000. In the corresponding period of 1998, we incurred
interest expense of $175,000, of which $129,000 related to the amortization of
stock-based charges and the remainder to interest payments on notes payable and
capital lease obligations.

Income Taxes

No provision for federal and state income taxes has been recorded as we have
incurred net operating losses from inception through June 30, 1999. As of
December 31, 1998, we had approximately $8.8 million of federal and state net
operating loss carryforwards available to offset future taxable income which
expire in varying amounts beginning in 2012. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. For example, the amount of net
operating losses that we may utilize in any one year would be limited in the
presence of a cumulative ownership change of more than 50% over a three year
period. Because there is significant doubt as to whether we will realize any
benefit from this deferred tax asset, we have established a full valuation
allowance as of December March 31, 1998.

Liquidity and Capital Resources

Our cash and cash equivalents increased by approximately $229.5 million during
the six months ended June 30, 1999. This net change occurred as we raised
approximately $270.2 million in proceeds from the sale of equity securities, net
of issuance costs, used $16.4 million in cash to fund operating activities, and
applied $23.0 million towards acquisitions, and investments in strategic
partners, and purchases of property and equipment. Net of depreciation, our
investment in property and equipment increased approximately $10.97 million
during the six months ended June 30, 1999. Installation of network
infrastructure equipment in our data centers, purchases of furniture and
equipment for new employees, and leasehold improvements related to expansion of

                                      17
<PAGE>

our facilities accounted for this increase. We expect that our investment in
property and equipment will continue to grow as we seek to increase our capacity
to provide email hosting services.

We have a credit agreement with a bank which provides a line of credit for
working capital advances of up to $1.0 million. There were no borrowings under
this line of credit as of June 30, 1999. Outstanding borrowings accrue interest
at a rate equal to the bank's prime rate plus 2.0%. Capital lease obligations,
including both short-term and long-term portions, increased approximately
$4.02.6 million, net of principal repayments, during the six months ended
June 30March 31, 1999 as we secured financing for a substantial share of our
additions to property and equipment. Deferred revenue decreased $500,000 during
the six months ended June 30, 1999quarter as we recognized into revenue a
payment we had previously received from one customer as an advance for future
service. Our line of credit and capital lease obligations contain no provisions
that would limit our future borrowing ability.

In January 1999 we completed the second round of the Series B Convertible
Preferred Stock financing through the issuance of approximately 3.2 million
shares, including 454,544 shares issued pursuant to outstanding stock purchase
rights, for net proceeds of $12.513.6 million. Also in January 1999, we
sold 1,090,909 shares of common stock for net proceeds of $2.4 million. In
April 1999, we received approximately $114.1 million in net proceeds upon the
closing of our initial public offering of common stock. In June 1999, we
received approximately $140.71 million in net proceeds upon the closing of our
secondary public offering of common stock.

We believe that our current cash balances are sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months. We
anticipate that further expansion of our operations will cause us to incur
negative cash flows on a short-term basis, and therefore require us to consume
our cash and other liquid resources to support our growth in operations.

We believe that our current cash balances will be sufficient to meet our working
capital and capital requirements beyond the next 12 months. However, our
operating and investing activities on a long-term basis may require us to obtain
additional equity or debt financing. In addition, we may, from time to time,
evaluate potential acquisitions of other businesses, products, and technologies.
In May 1999 we acquired substantially all the operating assets of Fabrik Connect
Service, and in July 1999 we completed the acquisition of dotOne Corporation. In
connection with these transactions, we disbursed $17.0 million in cash as of
June 30, 1999, and an additional $12.5 million in July 1999. We expect that
future acquisitions of businesses and other strategic assets will require
considerable outlays of capital. In order to consummate potential acquisitions,
we may need additional equity or debt financings in the future.


Year 2000 Issues

The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of operations for any
company using these computer programs or hardware, including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities. As a result, many companies' computer systems may
need to be upgraded or replaced in order to avoid "Year 2000" issues.

We are a comparatively new enterprise, and, accordingly, the software and
hardware we use to manage our business has all been purchased or developed
internally us within the past 30 months.

                                      18
<PAGE>

While this fact pattern does not uniformly protect us against Year 2000
exposure, we believe we gain some mitigation from the fact that the information
technology ("IT") we use to manage our business is not based upon "legacy"
hardware and software systems. "Legacy system" is a term often used to describe
hardware and software systems which were developed in previous decades when
there was less awareness of Year 2000 issues. Generally, hardware and software
design within the current decade and the past several years in particular has
given greater consideration to Year 2000 issues. All of the software code we
have internally developed to manage our network traffic, for example, is written
with four digits to define the applicable year.

We are in the process of testing our internal IT and non-IT systems, as well as
the systems of those companies we have recently acquired. All of the testing we
have completed has been performed by our own personnel; to date, we have not
retained any outside service or consultants to test or review our systems for
Year 2000 compliance. Based on the testing we have performed to date, we believe
that our software is Year 2000 compliant; however, we will continue to test our
systems and take corrective actions where necessary.

In addition to our internally developed software, we use software and
hardware developed by third parties both for our network and internal
information systems. To date, we have not performed any testing of such
third-party software or hardware to determine Year 2000 compliance. We have,
however, obtained certifications from our key suppliers of hardware and
networking equipment for our data centers that this hardware and networking
equipment is Year 2000 compliant. Additionally, we have received assurances from
the providers of key software applications for our internal operations that
their software is Year 2000 compliant. Based upon an evaluation of our broader
list of software and hardware providers, we are aware that all of these
providers are in the process of reviewing and implementing their own Year 2000
compliance programs, and we will work with these providers to address any the
Year 2000 issues and continue to seek assurances from them that their products
are Year 2000 compliant.

In addition, we rely on third party network infrastructure providers to gain
access to the Internet. If these providers experience business interruptions
as a result of their failure to achieve Year 2000 compliance, our ability to
provide Internet connectivity could be impaired, which could have a material
adverse effect on our business, results of operations and financial condition.

Our customers' success in maintaining Year 2000 compliance is also significant
to our ability to generate revenues and execute our business plan. We currently
derive revenue either by charging a fixed fee per month for each mailbox we
host, or by sharing advertising revenues with our customers. In either case,
interruptions in our customers' services and on-line activities caused by Year
2000 problems could have a material, adverse effect on our revenues to the
extent that these interruptions may limit or delay our customers' ability to
expand their base of email users.

We have not incurred any significant expenses to date, and we do not anticipate
that any future costs associated with our Year 2000 remediation efforts will be
material. However, if we, our customers, our providers of hardware and software,
or our third party network providers fail to remedy any Year 2000 issues, our
service could be interrupted and we could experience a material loss of revenues
that could have a material, adverse effect on our business, results of
operations, and financial condition. We would consider such an interruption to
be the most reasonably likely unfavorable result of any failure by us, or
failure by the third parties upon whom we rely, to achieve Year 2000 compliance.
Presently, we believe we are unable to reasonably estimate the duration and
extent of any possible interruption, or quantify the effect it may have on
our future revenues. We have yet to develop a comprehensive contingency plan to
address the issues which could result from this type of an event. We are
prepared to develop such a plan if our ongoing assessment leads us to conclude
we have significant exposure.


                                      19
<PAGE>

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. In June 1999 the FASB issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 133, as amended by SFAS 137, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application encouraged. Critical Path does not currently use derivative
instruments, but is required to adopt SFAS 133 during fiscal year 2000. Critical
Path has not yet determined what the effect of SFAS 133 will be on its financial
position or results of operations.


                                      20
<PAGE>

Additional Factors That May Affect Future Operating Results
---------------------------------------------------------------

Because we have a limited operating history, it is difficult to evaluate our
business and we may face various risks, expenses and difficulties associated
with early stage companies

Because we have only a limited operating history upon which you can evaluate our
business and prospects, you should consider the risks, expenses and difficulties
that we may encounter when making your investment decision. These risks include
our ability to:

 . expand our sales and marketing activities;

 . create and maintain strategic relationships;

 . expand our customer base and retain key clients;

 . introduce new services;

 . manage growing operations;

 . integrate new businesses and technologies;

 . compete in a highly competitive market;

 . upgrade our systems and infrastructure to handle any increases in
   messaging traffic;

 . reduce service interruptions; and

 . recruit and retain key personnel.


We expect that our operating expenses will increase as we spend resources on
building our business, and that this increase may have a negative effect on our
operating results and financial condition

We have spent heavily on technology and infrastructure development. We expect to
continue to spend substantial financial and other resources on developing and
introducing new email service offerings, and expanding 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 will continue to increase in absolute
dollars and may increase as a percent of revenues. If our revenues do not
correspondingly increase, our operating results and financial condition could be
negatively affected.


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

We incurred net losses of approximately $1.1 million for the period from
February 19, 1997 (inception) through December 31, 1997, $11.5 million for the
year ended December 31, 1998, and $33.9 million for the period from January 1,
1999 to June 30, 1999. As of June 30, 1999, we


                                      21
<PAGE>

had an accumulated deficit of approximately $46.5 million. We have not achieved
profitability in any period, and we expect to continue to incur net losses for
the foreseeable future. Should we continue to incur net losses in future
periods, we may not be able to increase our number of employees or our
investment in capital equipment, sales and marketing programs, and research and
development in accordance with our present plans. Continuation of our net losses
may also require us to secure additional financing sooner than anticipated. Such
financing may not be available in sufficient amounts, or on terms acceptable to
us, and may dilute existing shareholders. We may never obtain sufficient
revenues to achieve profitability. If we do achieve profitability, we may not
sustain or increase profitability in the future. This may, in turn, cause our
stock price to decline.


Due to our limited operating history and the emerging nature of the email
services 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 and the emerging nature of the Internet-based email services market. Our
revenues could fall short of our expectations if we experience delays or
cancellations of even a small number of orders. We often offer volume-based
pricing, which may affect our operating margins. A number of factors are likely
to cause fluctuations in our operating results, including, but not limited to:

 . continued growth of the Internet in general and of email usage in particular;

 . demand for outsourced email services;

 . our ability to attract and retain customers and maintain customer
   satisfaction;

 . our ability to upgrade, develop and maintain our systems and infrastructure;

 . the amount and timing of operating costs and capital expenditures relating to
   expansion of our business and infrastructure;

 . technical difficulties or system outages;

 . the announcement or introduction of new or enhanced services by our
   competitors;

 . our ability to attract and retain qualified personnel with Internet industry
   expertise, particularly sales and marketing personnel;

 . the pricing policies of our competitors;

 . our ability to integrate operations, technology, and personnel of acquired
   companies;


 . our failure to increase our international sales; and

 . governmental regulation surrounding the Internet and email in particular.

In addition to the factors set forth above, our operating results will be
impacted toby the extent to which we incur non-cash charges associated with
stock-based arrangements with employees and non-employees. In particular, we
expect to incur substantial non-cash charges associated with the grant of a
warrant to America Online. In addition to the amortization of the fair value of
this warrant, which totaled $90.9 million at June 30, 1999, we expect that
future changes in the


                                      22
<PAGE>

trading price of our common stock at the end of each quarter, and at the date
certain milestones are achieved,, will cause additional substantial changes in
the fair value of this warrant. ultimate amount of such amortization.

Due to lead times required to purchase, install and test equipment, we typically
need to purchase equipment well in advance of the receipt of any expected
revenues. Delays in obtaining this equipment could result in unexpected revenue
shortfalls. Small variations in the timing of the recognition of specific
revenues could cause significant variations in operating results from quarter to
quarter.

Period-to-period comparisons of our operating results are not a good indication
of our future performance. It is likely that our operating results in some
quarters will be below market expectations. In this event, the price of our
common stock is likely to decline.


If we fail to expand our sales and marketing activities, we may be unable to
expand our business

Our ability to increase our revenues will depend on our ability to successfully
recruit, train and retain sales and marketing personnel. As of June 30, 1999, we
had 73 sales and marketing personnel. We plan to continue to invest significant
resources to expand our sales and marketing organizations. Competition for
additional qualified personnel is intense and we may not be able to hire and
retain personnel with relevant experience. We have hired most of our sales and
marketing personnel within the last 12 months, including our Vice President of
Sales, who joined us in November 1998.

The complexity and implementation of our Internet messaging services require
highly trained sales and marketing personnel to educate prospective customers
regarding the use and benefits of our services. Our current and prospective
customers, in turn, must be able to educate their end-users. With our relatively
brief operating history and our plans for expansion, we have considerable need
to recruit, train, and retain qualified staff. Any delays or difficulties we
encounter in these staffing efforts would impair our ability to attract new
customers and to enhance our relationships with existing customers. This in turn
would adversely impact the timing and extent of our revenues. Because the
majority of our sales and marketing personnel have recently joined Critical Path
and have limited experience working together, our sales and marketing
organizations may not be able to compete successfully against bigger and more
experienced sales and marketing organizations of our competitors. If we do not
successfully expand our sales and marketing activities, our business could
suffer and our stock price could decline.


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

Our customers have in the past experienced some interruptions in our email
service. We believe that these interruptions will continue to occur from time to
time. These interruptions are due to hardware failures, unsolicited bulk email,
or "spam," attacks and operating system failures. For example, in May 1999 our
customers experienced an interruption in service due to the failure of a
hardware component of our network. Our revenues depend on the number of end-
users who use our email services. Our business will suffer if we experience
frequent or long system interruptions that result in the unavailability or
reduced performance of our systems or networks or reduce our ability to provide
email services. We expect to experience occasional temporary capacity
constraints due to sharply increased traffic, which may cause unanticipated
system


                                      23
<PAGE>

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 service agreements with some of our customers that require
certain minimum performance standards, including standards regarding the
availability and response time of our email 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. Any unplanned interruption
of services may adversely affect our ability to attract and retain customers.

Our failure to acquire or successfully integrate acquired businesses or
technologies could harm our operating results and our business

We expect that we will continue to acquire or invest in invest in businesses,
products, services and technologies that complement or augment our current
business and service offerings. To implement our growth strategy, we must
identify new businesses and technologies that are complementary to our own and
integrate these businesses and technologies. Integrating any newly acquired
businesses or technologies may be expensive, time-consuming and may strain our
resources. We may not be successful in integrating acquired businesses or
technologies and may not achieve anticipated revenues or earnings to justify our
investment in, or expenses related to, these acquisitions or that any synergies
will develop. If we fail to successfully integrate these businesses, our
business, financial condition and results of operations could be materially
adversely affected.

To finance additional acquisitions, it may be necessary for us to raise
additional funds through public or private financings, which may be on terms
that are not favorable to us. In addition, we intend to pay for some of our
acquisitions by issuing additional common stock and this would dilute our
stockholders. Finally, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which could materially increase our operating expenses.

We have experienced rapid growth which has placed a strain on our resources and
our failure to manage our growth could cause our business to suffer

We recently began to expand our operations rapidly and intend to continue this
expansion. The number of our employees increased from 17 on December 31, 1997 to
93 on December 31, 1998 and to 212 employees on June 30, 1999. This expansion
has placed, and is expected to continue to place, a significant strain on our
managerial, operational and financial resources. To manage any further growth,
we will need to improve or replace our existing operational, customer service
and financial systems, procedures and controls. Any failure by us to properly
manage these system and procedural transitions could impair our ability to
attract and service customers, and could cause us to incur higher operating
costs and delays in the execution of our business plan. We will also need to
continue the expansion of our operations and employee base. Our management may
not be able to hire, train, retain, motivate and manage required personnel. In
addition, our management may not be able to successfully identify, manage and
exploit existing and potential market opportunities. If we cannot manage growth
effectively, our business and operating results could suffer.


We depend on strategic relationships and other sales channels and the loss of
any of our strategic relationships could harm our business and have an adverse
impact on our revenue

We depend on our strategic relationships to expand our distribution channels and
to undertake joint product development and marketing efforts. Our ability to
increase revenues depends upon marketing our services through new and existing
strategic relationships. We have entered into written agreements with ICQ, a
subsidiary of America Online, Inc., E*TRADE Group, Inc., Network Solutions,
Inc., Sprint Communications Company L.P. and US West Communications Services,
Inc., among others. We depend on a broad acceptance of outsourced email services
on the part of potential partners and acceptance of us as the supplier for these
outsourced email services. We also depend on joint marketing and product
development through our strategic relationships to achieve market acceptance and
brand recognition. For example, through our relationship with E*TRADE, we can
conduct shared advertising campaigns and include our messaging services in
E*TRADE's international strategic relationships. Our agreements with our
strategic partners typically do not restrict them from introducing competing
services and may be terminated by either party without cause. These agreements
typically are for terms of one to three years, and automatically renew for
additional one-year periods unless either party gives prior notice of its
intention to terminate the agreement. In addition, these agreements are
terminable by our partners without cause, and some agreements are terminable by
us, upon 30-120 days' notice. Most of the agreements also provide for the
partial refund of fees paid or other monetary penalties in the event that our
services fail to meet defined minimum performance standards. Distribution
partners may choose not to renew existing arrangements on commercially
acceptable terms, or at all. If we lose any of our strategic relationships, fail
to renew these agreements or relationships or fail to develop new strategic
relationships, our business will suffer. The loss of any of our key strategic
relationships would have an adverse impact on our current and future


                                      24
<PAGE>

revenue. For example, E*TRADE accounted for approximately 62% of our 1998 net
revenues, excluding the value of stock purchase rights received by E*TRADE, and
TABNet, a wholly owned subsidiary of Verio, accounted for approximately 30% of
our 1998 net revenues. In addition to our strategic relationships, we also
depend on the ability of our customers to sell and market our services to their
end-users.


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

The Internet messaging industry is characterized by rapid technological change,
changes in user and customer requirements and preferences and the emergence of
new industry standards and practices that could render our existing services,
proprietary technology and systems obsolete. We must continually 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 our prospective customers. If we don't properly identify the
feature preferences of prospective customers, or if we fail to deliver email
features which meet the standards of these customers, our ability to market our
service successfully and to increase our revenues could be impaired. The
development of proprietary technology and necessary service enhancements entail
significant technical and business risks and require substantial expenditures
and lead-time. We may not be able to keep pace with the latest technological
developments. We may also not be able to use new technologies effectively or
adapt our services to customer requirements or emerging industry standards. If
we cannot, for technical, legal, financial or other reasons, adapt or respond in
a cost-effective and timely manner to changing market conditions or customer
requirements, our business and operating results would suffer.

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

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


We depend on broad market acceptance for outsourced Internet-based email service

The market for outsourced Internet-based email service is new and rapidly
evolving. Concerns over the security of online services and the privacy of users
may inhibit the growth of the Internet and commercial online services. We cannot
estimate the size or growth rate of the potential market for our service
offerings, and we do not know whether our service will achieve broad market
acceptance. To date, substantially all of our revenues have been derived from
sales of our email service offerings and we currently expect that our email
service offerings will account for


                                      25
<PAGE>

substantially all of our revenues for the foreseeable future. We depend on the
widespread acceptance and use of outsourcing as an effective solution for email.
If the market for outsourced email fails to grow or grows more slowly than we
currently anticipate, our business would suffer dramatically.


We expect the email services market will be very competitive and we will need to
compete successfully in this market

We expect that the market for Internet-based email service will be intensely
competitive. In addition to competing with companies that develop and maintain
in-house solutions, we compete with email service providers, such as USA.NET,
Inc., and iName, and with product-based companies, such as Software.com, Inc.
and Lotus Development Corporation. We believe that competition will increase and
that companies such as Microsoft Corporation and Netscape Communications Corp.,
which currently offer email products primarily to Internet service providers who
provide access to the Internet, web hosting companies, World Wide Web sites
intended to be major starting site for users when they connect to the Internet,
commonly referred to as web portals, and corporations, may leverage their
existing relationships and capabilities to offer email services.

We believe competition will increase as our current competitors increase the
sophistication of their offerings and as new participants enter the market. Many
of our current and potential competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than we do and may enter into strategic or
commercial relationships with larger, more established and better-financed
companies. Further, any delays in the general market acceptance of the email
hosting concept would likely harm our competitive position. Any such delay would
allow our competitors additional time to approve their service or product
offerings, and also provide time for new competitors to develop email service
solutions 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.


A limited number of customers account for a high percentage of our revenues, and
the loss of a major customer or failure to attract new customers could harm our
business

In 1998, E*TRADE accounted for approximately 62% and TABNet, a wholly owned
subsidiary of Verio, accounted for approximately 30% of our net revenues,
excluding the value of stock purchase rights received by customers. In the first
six months of of 1999, E*TRADE accounted for approximately 38% and Verio
accounted for approximately 16% of our net revenues, excluding the value of
stock purchase rights received by customers.  We expect that sales of our
services to a limited number of customers will continue to account for a high
percentage of our revenue for the foreseeable future. Our future success depends
on our ability to retain our current customers and attract new customers in our
target markets. The loss of a major customer or our inability to attract new
customers could have a material adverse effect on our business. Our agreements
with our customers have terms of one to three years with automatic one-year
renewals and can be terminated without cause upon 30-120 days' notice.


If we do not successfully address service design risks, our reputation could be
damaged and our business and operating results could suffer


                                      26
<PAGE>

We must accurately forecast the features and functionality required by target
customers. In addition, we must design and implement service enhancements that
meet customer requirements in a timely and efficient manner. We may not
successfully determine customer requirements and we may be unable to satisfy
customer demands. Furthermore, we may not be able to design and implement a
service incorporating desired features in a timely and efficient manner. In
addition, if any new service we launch is not favorably received by customers
and end-users, our reputation could be damaged. If we fail to accurately
determine customer feature requirements or service enhancements or to market
services containing such features or enhancements in a timely and efficient
manner, our business and operating results could suffer materially.


We need to upgrade our systems and infrastructure to accommodate increases in
email traffic

We must continue to expand and adapt our network infrastructure as the number of
users and the amount of information they wish to transmit increases, and as
their requirements change. The expansion and adaptation of our network
infrastructure will require substantial financial, operational and management
resources. Due to the limited deployment of our services to date, the ability of
our network to connect and manage a substantially larger number of customers at
high transmission speeds is unknown, and we face risks related to the network's
ability to operate with higher customer levels while maintaining expected
performance.

As the frequency and complexity of messaging increases, we will need to make
additional investments in our infrastructure, which may be expensive. In
addition, we may not be able to accurately project the rate or timing of email
traffic increases or upgrade our systems and infrastructure to accommodate
future traffic levels. We may also not be able to achieve or maintain a
sufficiently high capacity of data transmission as customer usage increases.
Customer demand for our services could be greatly reduced if we fail to maintain
high capacity data transmission. In addition, as we upgrade our network
infrastructure to increase capacity available to our customers, we are likely to
encounter equipment or software incompatibility which may cause delays in
implementations, as well as increased costs.  For example, during the quarter
ended June 30, 1999, we incurred $708,000 in additional consulting and outside
contractor charges to migrate our network to a new storage platform.  We may not
be able to expand or adapt our network infrastructure to meet additional demand
or our customers' changing requirements in a timely manner or at all. If we fail
to do so, our business and operating results could suffer materially.


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

We intend to continue to expand into international markets and to spend
significant financial and managerial resources to do so. If our revenues from
international operations do not exceed the expense of establishing and
maintaining these operations, our business, financial condition and operating
results will suffer. At present, we have subsidiaries in Germany and the United
Kingdom, and we have plans to commence operations in France. We have limited
experience in international operations and may not be able to compete
effectively in international markets. We face certain risks inherent in
conducting business internationally, such as:

 . unexpected changes in regulatory requirements;

 . difficulties and costs of staffing and managing international operations;


                                      27
<PAGE>

 . differing technology standards;

 . difficulties in collecting accounts receivable and longer collection
   periods;

 . political and economic instability;

 . fluctuations in currency exchange rates;

 . imposition of currency exchange controls;

 . potentially adverse tax consequences; and

 . reduced protection for intellectual property rights in certain countries.

Any of these factors could adversely affect our international operations and,
consequently, our business and operating results. Specifically, failure by us to
successfully manage our 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.


Because we provide our email messaging services over the internet, our business
could suffer if efficient transmission of data over the internet is interrupted

The recent growth in the use of the Internet has caused frequent interruptions
and delays in accessing the Internet and transmitting data over the Internet. To
date we have not experienced a significant adverse effect from these
interruptions. However, because we provide email messaging services over the
Internet, interruptions or delays in Internet transmissions will adversely
affect our customers' ability to send or receive their email messages. We rely
on the speed and reliability of the networks operated by third parties.
Therefore, our market depends on improvements being made to the entire Internet
infrastructure to alleviate overloading and congestion.

We depend on telecommunications network suppliers such as MCI WorldCom and
Sprint to transmit email messages across their networks. In addition, to deliver
our services, we rely on a number of public and private peering
interconnections, which are arrangements among access providers to carry traffic
of each other. If these providers were to discontinue these arrangements, and
alternative providers did not emerge or were to increase the cost of providing
access, our ability to transmit our email traffic would be reduced. If we were
to increase our current prices to accommodate any increase in the cost of
providing access, it could negatively impact our sales. If we did not increase
our prices in response to rising access costs, our margins would be negatively
affected. Furthermore, if additional capacity is not added as traffic increases,
our ability to distribute content rapidly and reliably through these networks
will be adversely affected.


If we encounter system failure, we may not be able to provide adequate service
and our business and reputation could be damaged

Our ability to successfully receive and send email messages and provide
acceptable levels of customer service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware and network
systems. Substantially all of our computer and communications systems are
located in Palo Alto (California), San Francisco (California), Laurel
(Maryland), and Munich (Germany). Our systems and operations are vulnerable to
damage or


                                      28
<PAGE>

interruption from fire, flood, earthquake, power loss, telecommunications
failure and similar events. The occurrence of any of the foregoing risks could
subject us to contractual monetary penalties if we fail to meet our minimum
performance standards, and could have a material adverse effect on our business
and operating results and damage our reputation.


We must recruit and retain our key employees to expand our business


Our success depends on the skills, experience and performance of our senior
management and other key personnel, many of whom have worked together for only a
short period of time. For example, our Chief Executive Officer, Chief Financial
Officer, Vice President of Sales and Vice President and Chief Information
Officer have joined us within the past nine months. The loss of the services of
any of our senior management or other key personnel, including our founder,
David Hayden, and our President and Chief Executive Officer, Douglas Hickey,
could materially and adversely affect our business. We do not have long-term
employment agreements with any of our senior management and other key personnel.
Our success also depends on our ability to recruit, retain and motivate other
highly skilled sales and marketing, technical and managerial personnel.
Competition for these people is intense, and we may not be able to successfully
recruit, train or retain qualified personnel. In particular, we may not be able
to hire a sufficient number of qualified software developers for our email
services. If we fail to retain and recruit necessary sales and marketing,
technical and managerial personnel, our business and our ability to develop new
services and to provide acceptable levels of customer service could suffer.


Unknown software defects could disrupt our services, which could harm our
business and reputation

Our service offerings depend on complex software, both internally developed and
licensed from third parties. Complex software often contains defects,
particularly when first introduced or when new versions are released. Although
we conduct extensive testing, we may not discover software defects that affect
our 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 by us, defects may occur in the software. These
defects could cause service interruptions, which could damage our reputation or
increase our service costs, cause us to lose revenue, delay market acceptance or
divert our development resources, any of which could cause our business to
suffer.


We may need additional capital and raising additional capital may dilute
existing shareholders

We believe that our existing capital resources, including the anticipated
proceeds of our recent public offering of common stock, will enable us to
maintain our current and planned operations for at least the next 12 months.
However, we may be required to raise additional funds due to unforeseen
circumstances. If our capital requirements vary materially from those currently
planned, we may require additional financing sooner than anticipated. Such
financing may not be available in sufficient amounts or on terms acceptable to
us and may be dilutive to existing shareholders.



                                      29
<PAGE>

We may not be able to protect our intellectual property and proprietary rights

We regard our copyrights, service marks, trademarks, trade secrets and similar
intellectual property as critical to our success, and rely on trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers and partners to protect our proprietary
rights. Despite our precautions, unauthorized third parties may copy certain
portions of our services or reverse engineer or obtain and use information that
we regard as proprietary. End-user license provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed program may
be unenforceable under the laws of certain jurisdictions and foreign countries.
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 have one patent pending in the United States and we may
seek additional patents in the future. We do not know if our patent application
or any future patent application will be issued with the scope of the claims we
seek, if at all, or whether any patents we receive will be challenged or
invalidated. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States. Our
means of protecting our proprietary rights in the United States or abroad may
not be adequate and competitors may independently develop similar technology.

Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. In addition, other parties may assert infringement
claims against us. Although we have not received notice of any alleged
infringement, we cannot be certain that our products do not infringe issued
patents that may relate to our products. In addition, because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which relate to our software products.
We may be subject to legal proceedings and claims from time to time in the
ordinary course of our business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties. Intellectual
property litigation is expensive and time-consuming and could divert
management's attention away from running our business.


We may need to license third party technologies and we face risks in doing so

We also intend to continue to license certain technology from third parties,
including our web server and encryption technology. The market is evolving and
we may need to license additional technologies to remain competitive. We may not
be able to license these technologies on commercially reasonable terms or at
all. In addition, we may fail to successfully integrate any licensed technology
into our services. These third-party in-licenses may expose us to increased
risks, including risks with the integration of new technology, the diversion of
resources from the development of our own proprietary technology, our inability
to generate revenues from new technology sufficient to offset associated
acquisition and maintenance costs. Our inability to obtain any of these licenses
could delay product and service development until equivalent

                                      30
<PAGE>

technology can be identified, licensed and integrated. Any such delays in
services could cause our business and operating results to suffer.


Governmental regulation and legal uncertainties could impair the growth of the
internet and decrease demand for our services or increase our cost of doing
business

Although there are currently few laws and regulations directly applicable to
the Internet and commercial email services, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. Further, the growth and development of the market for
online email may prompt calls for more stringent consumer protection laws that
may impose additional burdens on those companies conducting business online.
The adoption of any additional laws or regulations may impair the growth of the
Internet or commercial online services which could decrease the demand for our
services and increase our cost of doing business, or otherwise harm our business
and operating results. Moreover, the applicability to the Internet of existing
laws in various jurisdictions governing issues such as property ownership, sales
and other taxes, libel and personal privacy is uncertain and may take years to
resolve.


If we do not adequately address "Year 2000" issues, we may incur significant
costs and our business could suffer

The Year 2000 issue is the result of computer programs and embedded hardware
systems having been developed using two digits rather than four to define the
applicable year. These computer programs or hardware that have date-sensitive
software or embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions, send invoices or engage in normal
business activities. As a result, many companies' computer systems may need to
be upgraded or replaced in order to comply with the "Year 2000." We are in the
process of testing our internally developed software. Many of our customers
maintain their Internet operations on commercially available operating systems,
which may be impacted by Year 2000 complications. In addition, we rely on third-
party vendors for certain software and hardware included within our services,
which may not be Year 2000 compliant. Failure of our internal computer systems
or third-party equipment or software, or of systems maintained by our suppliers,
to operate properly with regard to the year 2000 and thereafter could require us
to incur significant unanticipated expenses to remedy any problems and could
cause system interruptions and loss of data. Any of these events could harm our
reputation, business and operating results. We have not yet developed a
comprehensive contingency plan to address the issues that could result from Year
2000 complications. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."


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

As a provider of email 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 email. 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.

                                      31
<PAGE>

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 is also a risk that 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 may need to be used in order to settle claims. Any imposition of
liability, particularly liability that is not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on our
reputation and our business and operating results, or could result in the
imposition of criminal penalties.


Our stock has been publicly traded for only a brief period, and as a result our
stock price may be volatile

Our common stock began to trade publicly on March 29, 1999, and as a result has
only a brief history of trading.  The trading price of our shares has proven to
be highly volatile during the period our shares have been publicly traded. We
believe the trading price of our common stock will remain highly volatile, and
may fluctuate substantially due to factors such as:

 . actual or anticipated fluctuations in our results of operations;

 . changes in or failure by us to meet securities analysts' expectations;

 . announcements of technological innovations;

 . introduction of new services by us or our competitors;

 . developments with respect to intellectual property rights;

 . conditions and trends in the Internet and other technology industries;
   and

 . general market conditions.

In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stocks of technology companies, particularly Internet companies. These
broad market fluctuations may result in a material decline in the market price
of our common stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has often been brought against that company. We may become involved in this type
of litigation in the future. Litigation is often expensive and diverts
management's attention and resources, which could have a material adverse effect
upon our business and operating results.


Future sales of our common stock may depress our stock price

Upon the closing of our initial public offering of common stock, we had
approximately 34.1 million shares of common stock outstanding. All the 4.5
million shares sold in the offering are freely tradable. The remaining 29.6
million shares of common stock outstanding after the offering are subject to
lock-up agreements that prohibit the sale of the shares for 180 days after the
date public trading of our shares commenced. Immediately following the 180-day
lockup

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period, approximately 26.4 million shares which were outstanding at the close of
the offering will become available for sale. The remaining shares of our common
stock will become available at various times thereafter upon the expiration of
one-year holding periods. Sales of a substantial number of shares of common
stock in the public market after this offering or after the expiration of the
lockup and the holding periods could cause the market price of our common stock
to decline.


ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURE

The Company invests its marketable securities in accordance with its investment
policy and maintains its portfolio in the form of managed investment accounts
comprised of money market accounts , corporate bonds, and government securities.
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.  The primary objectives of the
Company's portfolio are to preserve capital and maintain proper liquidity to
meet the operating needs of the business.  The Company's policy specifies credit
quality standards for the Company's investments and limits the amount of credit
exposure to any single issue, issuer, or type of investment.

The Company's holdings are subject to interest rate risk and will fall in value
in the event market interest rates increase.  If market interest rates were to
increase immediately and uniformly by 50 basis points from levels as of June 30,
1999, the fair market value of the portfolio would decline by approximately
$14 million.

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                          PART 2 -- OTHER INFORMATION


ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS

The effective date of the Company's second registration statement, filed on Form
S-1 (No. 333-71499) under the Securities Act of 1933  relating to Company's
secondary public offering of its Common Stock, was June 1, 1999.  A total of
3,000,000 shares of the Company's common stock were sold to an underwriting
syndicate.  In addition, the syndicate also purchased 1,025,000 shares of the
Company's common stock from selling shareholders.  The managing underwriters of
the syndicate were BancBoston Robertson Stephens, Hambrecht & Quist, Dain
Rauscher Wessels, and FAC/Equities.   The offering commenced and was completed
on June 2, 1999, at a price of $49.375 per share.  The secondary public offering
resulted in gross proceeds to the Company of $148.1 million, $6.7 million of
which was applied toward the underwriting discount.  Other expenses related to
the offering totaled approximately $700,000.  The Company's net proceeds from
the offering were $140.7 million, all of which were deposited into the Company's
accounts in June 1999 following the close of the offering.


ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K

     a)   Exhibits



     27.1 Financial Data Schedule



     b)   Reports on Form 8-K

          1. On August 2, 1999, the Company filed a report on Form 8-K
             announcing the acquisition of dotOne Corporation.

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                                   SIGNATURE

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



Date:  August 16, 1999
                              CRITICAL PATH, INC.



                              by:   /s/   David A. Thatcher
                              -------------------------------------------------
                              David A. Thatcher
                              Chief Financial Officer (Duly Authorized Officer
                              and Principal Financial Officer)

                                      35
<PAGE>

                              CRITICAL PATH, INC.

                                    EXHIBITS
                               TABLE OF CONTENTS





     Exhibit No.  Description
     ----------   -----------


     27.1         Financial Data Schedule