##### Table of Contents



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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q



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

For the quarterly period ended June 30, 2002

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

For the transition period from                      to                      .

Commission File Number: 000-25331

Critical Path, Inc.

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

350 The Embarcadero
San Francisco, California 94105
415-808-8800

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

As
of July 31, 2002, the company had outstanding 79,642,000 shares of
common stock, $0.001 par value per share.



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TABLE OF CONTENTS



|                           |                                                                                               |                                                                  |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|PART I                    
|                           | Item 1. Condensed Consolidated Financial Statements (Unaudited)                              
|                           |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                           
|                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                 
|                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                           |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|                           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                           |                                                                                               | SUPPLEMENTAL ALTERNATIVE MEASUREMENT FINANCIAL DATA             
|                           | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART 2  OTHER INFORMATION
|                           | Item 1. Legal Proceedings                                                                    
|                           | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                           | Item 6. Exhibits and Report on Form 8-K                                                      
|SIGNATURE                 
|INDEX TO EXHIBITS         
|Exhibit 10.1              
|Exhibit 10.2              
|Exhibit 10.3              
|Exhibit 10.4              
|Exhibit 10.5              
|Exhibit 10.6              
|Exhibit 10.7              
|Exhibit 10.8              
|Exhibit 15.1              
|Exhibit 99.1              



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##### Table of Contents



CRITICAL PATH, INC.

INDEX

|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                       |  | Page
|        |  |                                                                                       |  |     
|        |  | PART I                                                                                |  |     
|       
|       
|       
|       
|Item 1. |  | Condensed Consolidated Financial Statements (Unaudited)                               |  |     
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|        |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|        |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|        |  | Supplemental Alternative Measurement Financial Data (Unaudited)                       |  | 29  
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 30  
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|
|        |  | Report of
Independent Accountants                                                     |  | 31  
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|        |  | PART II                                                                               |  |     
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|Item 1. |  | Legal Proceedings                                                                     |  | 32  
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|       
|       
|       
|       
|Item 4. |  | Submission of Matters to a Vote of Securities Holders                                 |  | 33  
|       
|       
|       
|       
|        |  |                                                                                       |  |     
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 34  

2



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##### Table of Contents






PART I




Item 1.Condensed Consolidated Financial Statements (Unaudited)

CRITICAL PATH, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)


|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            |             |         |         | 
|--------------------------------------------------------------------------- | ------------------------------------------------------- | -------------------------------------------------------------- | ---------------------------------------------------------------------------------- | -------------------------- | --------- | ------------ | ------- | ---------- | ----------- | ------- | ------- | 
|                                                                            |                                                         |                                                                |                                                                                    |                            |           | December 31, |         | June 30,  
|                                                                            |                                                         |                                                                |                                                                                    |                            |           | 2001         |         | 2002      
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |           
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            | (Unaudited)
|ASSETS                                                                     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Current assets                                                              |                                                         |                                                                |                                                                                    |                            |           |              |         |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Cash and cash equivalents                               |                                                                | $                                                                                  | 59,463                     |           |              | $       | 43,195     |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Short-term investments                                  |                                                                |                                                                                    | 9,702                      |           |              |         | 13,302     |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Accounts receivable, net                                |                                                                |                                                                                    | 26,692                     |           |              |         | 27,753     |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Other current assets                                    |                                                                |                                                                                    | 5,367                      |           |              |         | 6,684      |            
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            |            
|                                                                            |                                                         |                                                                |                                                                                    | Total current assets       |           |              | 101,224 |            |             |         | 90,934  | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Investments                                                                 |                                                         |                                                                | 7,215                                                                              |                            |           |              | 1,848   |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Property and equipment, net                                                 |                                                         |                                                                | 36,285                                                                             |                            |           |              | 26,382  |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Goodwill                                                                    |                                                         |                                                                | 5,631                                                                              |                            |           |              | 6,613   |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Other intangible assets, net                                                |                                                         |                                                                | 43,010                                                                             |                            |           |              | 21,524  |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Restricted cash                                                             |                                                         |                                                                | 2,674                                                                              |                            |           |              | 5,692   |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Other assets                                                                |                                                         |                                                                | 3,913                                                                              |                            |           |              | 5,551   |           
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            |            
|                                                                            |                                                         |                                                                |                                                                                    | Total assets               |           | $            | 199,952 |            |             | $       | 158,544 | 
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            |            
|LIABILITIES,
MANDATORILY REDEEMABLE PREFERRED STOCK ANDSHAREHOLDERS EQUITY
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Current liabilities                                                         |                                                         |                                                                |                                                                                    |                            |           |              |         |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Accounts payable                                        |                                                                | $                                                                                  | 25,955                     |           |              | $       | 32,328     |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Accrued expenses                                        |                                                                |                                                                                    | 6,232                      |           |              |         | 4,783      |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Deferred revenue                                        |                                                                |                                                                                    | 10,297                     |           |              |         | 9,690      |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Capital lease and other obligations, current            |                                                                |                                                                                    | 3,431                      |           |              |         | 3,447      |            
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            |            
|                                                                            |                                                         |                                                                |                                                                                    | Total current liabilities  |           |              | 45,915  |            |             |         | 50,248  | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Convertible subordinated notes payable                                      |                                                         |                                                                | 38,360                                                                             |                            |           |              | 38,360  |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Capital lease and other obligations, long-term                              |                                                         |                                                                | 1,149                                                                              |                            |           |              | 1,862   |           
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            |            
|                                                                            |                                                         |                                                                |                                                                                    | Total liabilities          |           |              | 85,424  |            |             |         | 90,470  | 
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            |            
|Commitments
and contingencies (Note 2)                                      |                                                         |                                                                |                                                                                    |                            |           |              |         |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Mandatorily redeemable preferred stock                                      |                                                         |                                                                | 5,373                                                                              |                            |           |              | 15,427  |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Shareholders equity                                                        |                                                         |                                                                |                                                                                    |                            |           |              |         |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Common stock and paid-in-capital, $0.001 par value      |                                                                |                                                                                    |                            |           |              |         |            |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                         | Shares authorized: 500,000                                     |                                                                                    |                            |           |              |         |            |             |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                         | Shares issued and outstanding: 76,581 and 79,639, respectively |                                                                                    |                            | 2,176,370 |              |         |            | 2,173,176   |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Common stock warrants                                   |                                                                |                                                                                    | 5,250                      |           |              |         | 5,947      |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Notes receivable from shareholders                      |                                                                |                                                                                    | (1,222                     | )         |              |         |           |            
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Unearned compensation                                   |                                                                |                                                                                    | (7,050                     | )         |              |         | (1,755     | )          
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Accumulated
deficit, including other comprehensive loss |                                                                |                                                                                    | (2,064,193                 | )         |              |         | (2,124,721 | )          
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            |            
|                                                                            |                                                         |                                                                |                                                                                    | Total shareholders equity |           |              | 109,155 |            |             |         | 52,647  | 
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            |            
|                                                                            |                                                         |                                                                | Total liabilities, mandatorily redeemable preferred stock and shareholders equity |                            | $         | 199,952      |         |            | $           | 158,544 |        
|                                                                            |                                                         |                                                                |                                                                                    |                            |           |              |         |            |            

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

3



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##### Table of Contents






CRITICAL PATH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |        |        |        | 
|--------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------ | -------------------------- | ------ | ------------------ | ------ | ---------------- | ------ | ----------- | ------ | -------- | ------ | ------ | ------- | ------- | ------ | ------ | ------ | 
|                                                          |                                                  |                                                  |                            |        | Three Months Ended |        | Six Months Ended
|                                                          |                                                  |                                                  |                            |        |                    |        |                 
|                                                          |                                                  |                                                  |                            |        | June 30,           |        | June 30,         |        | June 30,    |        | June 30,
|                                                          |                                                  |                                                  |                            |        | 2001               |        | 2002             |        | 2001        |        | 2002    
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |         
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        | (Unaudited) |        |          |        |       
|Net revenues                                              |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Software license                                 |                                                  | $                          | 8,913  |                    |        | $                | 10,900 |             |        | $        | 14,463 |        |         | $       | 21,811 |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Hosted messaging                                 |                                                  |                            | 11,141 |                    |        |                  | 5,582  |             |        |          | 25,580 |        |         |         | 12,546 |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Professional services                            |                                                  |                            | 2,900  |                    |        |                  | 2,645  |             |        |          | 6,317  |        |         |         | 4,582  |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Maintenance and support                          |                                                  |                            | 4,131  |                    |        |                  | 3,315  |             |        |          | 7,868  |        |         |         | 7,192  |       
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|                                                          |                                                  |                                                  | Total net revenues         |        |                    | 27,085 |                  |        |             | 22,442 |          |        |        | 54,228  |         |        |        | 46,131 | 
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|Cost of net revenues                                      |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Software license                                 |                                                  |                            | 126    |                    |        |                  | 586    |             |        |          | 417    |        |         |         | 873    |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Hosted messaging                                 |                                                  |                            | 17,440 |                    |        |                  | 7,570  |             |        |          | 35,378 |        |         |         | 15,387 |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Professional services                            |                                                  |                            | 2,594  |                    |        |                  | 2,166  |             |        |          | 5,560  |        |         |         | 4,609  |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Maintenance and support                          |                                                  |                            | 2,414  |                    |        |                  | 2,224  |             |        |          | 5,000  |        |         |         | 4,327  |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Amortization of purchased technology             |                                                  |                            | 5,672  |                    |        |                  | 4,631  |             |        |          | 11,344 |        |         |         | 9,261  |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Stock-based expense  Hosted messaging           |                                                  |                            | 441    |                    |        |                  | 232    |             |        |          | 826    |        |         |         | 417    |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Stock-based expense  Professional services      |                                                  |                            | 588    |                    |        |                  | 65     |             |        |          | 1,021  |        |         |         | 146    |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Stock-based expense  Maintenance and support    |                                                  |                            | 440    |                    |        |                  | 121    |             |        |          | 925    |        |         |         | 272    |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Impairment of long-lived assets                  |                                                  |                            | 4,207  |                    |        |                  |       |             |        |          | 4,207  |        |         |         |       |       
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|                                                          |                                                  |                                                  | Total cost of net revenues |        |                    | 33,922 |                  |        |             | 17,595 |          |        |        | 64,678  |         |        |        | 35,292 | 
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|Gross profit (loss)                                       |                                                  |                                                  | (6,837                     | )      |                    |        | 4,847            |        |             |        | (10,450  | )      |        |         | 10,839  |       
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|Operating expenses                                        |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Sales and marketing                              |                                                  |                            | 15,694 |                    |        |                  | 11,374 |             |        |          | 34,406 |        |         |         | 22,317 |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Research and development                         |                                                  |                            | 8,333  |                    |        |                  | 5,173  |             |        |          | 18,267 |        |         |         | 10,175 |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | General and administrative                       |                                                  |                            | 11,745 |                    |        |                  | 6,296  |             |        |          | 25,038 |        |         |         | 12,974 |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Amortization of intangible assets                |                                                  |                            | 4,112  |                    |        |                  | 6,227  |             |        |          | 8,245  |        |         |         | 12,358 |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Acquisition-related retention bonuses            |                                                  |                            | 793    |                    |        |                  |       |             |        |          | 963    |        |         |         | 11     |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Stock-based expense  Sales and marketing        |                                                  |                            | 6,681  |                    |        |                  | 650    |             |        |          | 13,281 |        |         |         | 3,185  |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Stock-based expense  Research and development   |                                                  |                            | 1,229  |                    |        |                  | 353    |             |        |          | 2,326  |        |         |         | 775    |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Stock-based expense  General and administrative |                                                  |                            | 6,334  |                    |        |                  | 3,111  |             |        |          | 15,067 |        |         |         | 3,408  |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Restructuring expense, net                       |                                                  |                            | 8,481  |                    |        |                  | 1,539  |             |        |          | 8,481  |        |         |         | 1,539  |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Impairment of long-lived assets                  |                                                  |                            | 9,991  |                    |        |                  |       |             |        |          | 9,991  |        |         |         |       |       
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|                                                          |                                                  |                                                  | Total operating expenses   |        |                    | 73,393 |                  |        |             | 34,723 |          |        |        | 136,065 |         |        |        | 66,742 | 
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|Loss from operations                                      |                                                  |                                                  | (80,230                    | )      |                    |        | (29,876          | )      |             |        | (146,515 | )      |        |         | (55,903 | )     
|                                                         
|                                                         
|                                                         
|                                                         
|Interest and other income (expense), net                  |                                                  |                                                  | 2,193                      |        |                    |        | (3,359           | )      |             |        | 4,618    |        |        |         | (2,730  | )     
|                                                         
|                                                         
|                                                         
|                                                         
|Interest expense                                          |                                                  |                                                  | (5,315                     | )      |                    |        | (733             | )      |             |        | (10,382  | )      |        |         | (1,516  | )     
|                                                         
|                                                         
|                                                         
|                                                         
|Equity in net loss of joint venture                       |                                                  |                                                  | (397                       | )      |                    |        | (1,005           | )      |             |        | (1,173   | )      |        |         | (1,408  | )     
|                                                         
|                                                         
|                                                         
|                                                         
|Gain on retirement of convertible subordinated notes, net |                                                  |                                                  | 3,818                      |        |                    |        |                 |        |             |        | 3,818    |        |        |         |        |       
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|Loss before income taxes                                  |                                                  |                                                  | (79,931                    | )      |                    |        | (34,973          | )      |             |        | (149,634 | )      |        |         | (61,557 | )     
|                                                         
|                                                         
|                                                         
|                                                         
|Provision for income taxes                                |                                                  |                                                  | (1,150                     | )      |                    |        | (594             | )      |             |        | (1,493   | )      |        |         | (21     | )     
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|Net loss                                                  |                                                  |                                                  | (81,081                    | )      |                    |        | (35,567          | )      |             |        | (151,127 | )      |        |         | (61,578 | )     
|                                                         
|                                                         
|                                                         
|                                                         
|Accretion on redeemable convertible preferred shares      |                                                  |                                                  |                           |        |                    |        | (3,261           | )      |             |        |         |        |        |         | (6,467  | )     
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|Net loss attributable to common shares                    |                                                  | $                                                | (81,081                    | )      |                    | $      | (38,828          | )      |             | $      | (151,127 | )      |        | $       | (68,045 | )     
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|Net loss per share  basic and diluted                    |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                  | Net loss per share                               |                            | $      | (1.10              | )      |                  | $      | (0.46       | )      |          | $      | (2.07  | )       |         | $      | (0.80  | )     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                  | Net
loss per share attributable to common shares |                            | $      | (1.10              | )      |                  | $      | (0.50       | )      |          | $      | (2.07  | )       |         | $      | (0.88  | )     
|                                                          |                                                  |                                                  |                            |        |                    |        |                  |        |             |        |          |        |        |         |         |       
|                                                          |                                                  | Weighted average common shares outstanding       |                            |        | 73,794             |        |                  |        | 77,790      |        |          |        | 72,966 |         |         |        | 77,152 |       

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

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##### Table of Contents






CRITICAL PATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


|                                                      |                                                        |                                       |          |                  |         |          |         |         |         |  
|----------------------------------------------------- | ------------------------------------------------------ | ------------------------------------- | -------- | ---------------- | ------- | -------- | ------- | ------- | ------- | -
|                                                      |                                                        |                                       |          | Six Months Ended
|                                                      |                                                        |                                       |          |                 
|                                                      |                                                        |                                       |          | June 30,         |         | June 30,
|                                                      |                                                        |                                       |          | 2001             |         | 2002    
|                                                      |                                                        |                                       |          |                  |         |         
|                                                      |                                                        |                                       |          | (Unaudited)     
|Operating                                            
|
|                                                      | Net loss                                               |                                       | $        | (151,127         | )       |          | $       | (61,578 | )      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Provision for doubtful accounts                        |                                       |          | 3,746            |         |          |         | 457     |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Depreciation and amortization                          |                                       |          | 24,139           |         |          |         | 15,319  |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Amortization of intangible assets                      |                                       |          | 19,588           |         |          |         | 21,619  |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Amortization of stock-based expenses                   |                                       |          | 33,463           |         |          |         | 8,342   |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Equity in net loss of joint venture                    |                                       |          | 1,173            |         |          |         | 1,408   |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Impairment of long-lived
assets                        |                                       |          | 14,198           |         |          |         |        |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Change in fair value of preferred stock instrument     |                                       |          |                 |         |          |         | 3,320   |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Gain on retirement of convertible debt,
net            |                                       |          | (3,818           | )       |          |         |        |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Provision for restructured operations                  |                                       |          |                 |         |          |         | 1,022   |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accounts receivable                                    |                                       |          | 6,333            |         |          |         | (1,311  | )      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Other assets                                           |                                       |          | 2,384            |         |          |         | (1,546  | )      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accounts payable                                       |                                       |          | (3,570           | )       |          |         | 2,978   |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accrued expenses                                       |                                       |          | (2,380           | )       |          |         | (1,509  | )      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Deferred revenue                                       |                                       |          | (14              | )       |          |         | (607    | )      
|                                                      |                                                        |                                       |          |                  |         |          |         |        
|                                                      |                                                        | Net cash used in operating activities |          |                  | (55,885 | )        |         |         | (12,086 | )
|                                                      |                                                        |                                       |          |                  |         |          |         |        
|Investing                                            
|                                                      | Notes receivable from officers                         |                                       |          | 85               |         |          |         | 265     |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Property and equipment purchases                       |                                       |          | (10,733          | )       |          |         | (2,801  | )      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Payments for acquisitions, net of cash acquired        |                                       |          | (9,898           | )       |          |         | 4,511   |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Short-term investments                                 |                                       |          | (18,308          | )       |          |         | (3,600  | )      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Restricted cash                                        |                                       |          | (817             | )       |          |         | (3,018  | )      
|                                                      |                                                        |                                       |          |                  |         |          |         |        
|                                                      |                                                        | Net cash used in investing activities |          |                  | (39,671 | )        |         |         | (4,643  | )
|                                                      |                                                        |                                       |          |                  |         |          |         |        
|Financing                                            
|                                                      | Proceeds from issuance of Common Stock, net            |                                       |          | 1,599            |         |          |         | 1,439   |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Retirement of convertible
debt                         |                                       |          | (1,182           | )       |          |         |        |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from payments of shareholder notes receivable |                                       |          | 33               |         |          |         | 1,222   |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Principal
payments on capital lease obligations        |                                       |          | (4,864           | )       |          |         | (3,130  | )      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Purchase of Common Stock                               |                                       |          | (54              | )       |          |         |        |        
|                                                      |                                                        |                                       |          |                  |         |          |         |        
|                                                      |                                                        | Net cash used in financing activities |          |                  | (4,468  | )        |         |         | (469    | )
|                                                      |                                                        |                                       |          |                  |         |          |         |        
|Net change in cash and cash equivalents               |                                                        |                                       | (100,024 | )                |         |          | (17,198 | )      
|                                                     
|                                                     
|                                                     
|                                                     
|Effect of exchange rates on cash and cash equivalents |                                                        |                                       | (2,240   | )                |         |          | 930     |        
|                                                     
|                                                     
|                                                     
|                                                     
|Cash and cash equivalents at beginning of period      |                                                        |                                       | 216,542  |                  |         |          | 59,463  |        
|                                                      |                                                        |                                       |          |                  |         |          |         |        
|Cash and cash equivalents at end of period            |                                                        | $                                     | 114,278  |                  |         | $        | 43,195  |        
|                                                      |                                                        |                                       |          |                  |         |          |         |        

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

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##### Table of Contents



CRITICAL PATH, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

The Company

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

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

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

Basis of Presentation

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

Segment and Geographic Information

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

Reclassifications

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

Recent accounting pronouncements

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

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

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##### Table of Contents



Company early adopted the rules on accounting and reporting gains and losses
from extinguishment of debt in the second quarter of fiscal 2002. Adoption
resulted in the reclassification of certain gains on extinguishment of debt
recorded in fiscal 2001.

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

Note 2  Commitments and Contingencies

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

Securities Class Actions in Northern District of California.Beginning on
February 2, 2001, a number of securities class action complaints were filed
against the Company and certain of its former officers and directors in the
U.S. District Court for the Northern District of California. The
complaints alleged that the Company and certain of its former
officers and directors made false or
misleading statements about the Companys financial results and its
prospects. In addition, on September 24, 2001, certain former shareholders of
PeerLogic, Inc. filed a putative class action in the Superior Court of the
State of California alleging that Critical Path breached representations and
warranties made in connection with the acquisition of PeerLogic. On November 8,
2001, Critical Path announced that it had reached an agreement in principle to
settle these cases. In February 2002, the Court gave preliminary approval to
the settlement of these cases. In June 2002, the Court entered its final
approval of the settlement. In connection with the settlement, the
Company reached a financial settlement and issued warrants to purchase up to 850,000 shares of
common stock at $10.00 per share and recorded the fair value of the
warrants of $697,000 as a general and administrative expense in the
first quarter of 2002.

On April 30, 2002, MBCP PeerLogic LLC and other named plaintiffs filed
suit in the U.S. District Court for the Southern District of New York against
Critical Path and certain of its former officers. The plaintiff shareholders
opted out of the shareholder litigation settlement which was approved
by the
U.S. District Court for the Northern District of California in June
2002. The complaint alleges breach of contract, unjust
enrichment, common law fraud and violations of federal securities laws and
seeks compensatory and punitive damages in an unnamed amount but in excess of
$200 million.

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

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

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##### Table of Contents



information in violation of California law. While the plaintiffs sought
unspecified damages on the Companys behalf, because of the nature of
derivative litigation, any recovery would inure to the Companys benefit.
Contemporaneously with settlement of the securities class action described
above, an agreement in principle was reached to settle the derivative action.

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

Lease Dispute.In July 2000, PeerLogic, Inc. signed a lease for office
space in San Francisco, California. In December 2000, we acquired
PeerLogic as a wholly-owned subsidiary. After reviewing its obligations under
the lease, we determined that local zoning laws likely prohibited a
business such as the Company or PeerLogic from occupying the leased premises,
and promptly sought a zoning determination from the San Francisco Zoning
Administrator to resolve the matter. The Zoning Administrator determined that
the Companys proposed use of the leased premises was not permitted. The
landlord appealed this determination and prevailed before the San Francisco
Board of Appeals. The Company requested a rehearing on the matter, which the
Board of Appeals denied. In July 2002, the Company filed a Petition for Writ
of Administrative Mandamus with the San Francisco Superior Court, requesting
that the Board of Appeals decision be reversed and/or remanded for rehearing
by the Board, with instructions from the Court. On April 30, 2002, the landlord filed suit
in San Francisco Superior Court against the Company alleging, among other
things, breach of the lease. In its complaint, the landlord sought unspecified
compensatory damages for back rent, attorneys fees, treble damages under
relevant statutes, and unspecified punitive damages. Litigation in this matter
is ongoing.

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

Note 3 Acquisition of Japanese Joint Venture

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

Note 4  Related Party Transactions

Loans to Executive Officers

During 2001 and in connection with his employment agreement, the Company
made a loan and held a note receivable from David Hayden, Executive
Chairman and a Director of the Company,
in the amount of $1.5 million. The full recourse note accrues interest at the
rate of 6.75% per annum and could be repaid by the achievement of
performance-based milestones described in Mr. Haydens employment agreement and
performance loan agreement. The loan was also subject to forgiveness upon
certain change of control events. In February 2002, the Board approved an
amendment of Mr. Haydens employment agreement which eliminated the original
performance-based milestones in favor of a single performance-based milestone
tied to a change of control event. In addition, the Board increased the amount

8



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##### Table of Contents



available under the loan agreement by an additional $450,000, which was
funded in March 2002. The loan amount was secured by a first priority security
interest in all of Mr. Haydens shares and options in the Company, with all
other terms of the loan and other agreements unchanged. In July 2002,
in connection with the settlement of the terms and conditions of
Mr. Haydens termination of employment with the Company,
some of the terms of the loan were altered as described in this section
below under Termination Agreement.

In December 2001, the Board approved a fully secured loan to William
McGlashan, Jr., the Companys Chief Executive Officer, of up to $4.0 million in
connection with the purchase of a principal residence in the San Francisco Bay
Area. In May 2002, the Compensation Committee of the Board and Mr. McGlashan
agreed to amend the agreement in order to reduce the amount of the loan
commitment to $1.5 million. As of August 13, 2002, no portion of the loan
commitment has yet been funded.

In connection with the reduction of the loan commitment, in May 2002 Mr.
McGlashan was granted an option to purchase 1,000,000 shares of the Companys
Common Stock , at an exercise price of $1.74 per share, which was the fair
market value on the date of grant. The option was immediately exercisable
subject to the Companys lapsing right of repurchase at a price
equal to the exercise price per share over a three year period.
Mr. McGlashan exercised his right to early exercise purchase the shares through
a promissory note and stock pledge agreement in May 2002. As such the Company
now holds a promissory note in the amount of $1,740,000 secured by shares of
Common Stock. The promissory note will begin to accrue interest at the
adjustable quarterly reference rate of Fidelity Investments or similar banking
entity as the shares vest with respect to that portion of the purchase price
that represents the purchase price of the vested shares.

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

Termination Agreement

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

Note 5  Restructurings

In May 2002, the Board of Directors approved a restructuring plan to
further reduce the Companys expense levels consistent with the current
business climate. In connection with the plan, a restructuring charge of $1.5
million was recognized in the second quarter of 2002. This charge was comprised
of approximately $1.2 million in severance and related costs associated with
the elimination of approximately 39 positions and $300,000 in facilities lease
termination costs. During the quarter, approximately $500,000 was charged
against this accrual, primarily cash payments of severance related costs. The
balance of the accrual of approximately $1.0 million is expected to be utilized
by the end of this fiscal year.

During 2001, the Company announced a strategic restructuring plan that
involved reorganizing Critical Paths product and service offerings around a
group of core communications solutions, a reduction in the Companys workforce,
and the consolidation of facilities and operations. Total restructuring charges
during 2001 amounted to $18.3 million, of which $8.5 million was recognized
during the second quarter of 2001. As of December 31, 2001 a $2.2 million
accrual associated with these restructuring actions remained as a component of
accounts payable. During the first six months of 2002, approximately $700,000
was charged against this accrual, primarily cash paid related to facilities and
operations consolidation restructuring activities, leaving a remaining
restructuring accrual of $1.5 million as of June 30, 2002, which is expected to
be paid over the next 9 months.

Note 6  Intangible Assets

At June 30, 2002, the Company was carrying net intangible assets of $28.1
million. Of this amount, $21.6 million is associated with acquired intangible
assets which are being amortized and the remaining $6.6 million is associated
with goodwill which is not being
amortized, in accordance with SFAS No. 142. During the second quarter of 2002,
goodwill increased by approximately $1.0 million associated with the Companys
acquisition of its Japanese joint venture, Critical Path Pacific, Inc. See also
Note 3  Acquisition of Japanese Joint Venture.

9



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##### Table of Contents



Goodwill
is detailed as follows (in thousands):

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

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

|                                 |  |        |        |              |  |                |         |   |  |   |        |  | 
|-------------------------------- |  | ------ | ------ | ------------ |  | -------------- | ------- | - |  | - | ------ |  | 
|                                 |  | Gross  |        | Accumulated  |  |                |         |  
|                                 |  | Amount |        | Amortization |  | Net Book Value
|                                 |  |        |        |              |  |               
|                                
|                                
|                                
|                                
|Existing technology              |  | $      | 39,748 |              |  | $              | (30,487 | ) |  | $ | 9,261  | 
|                                
|                                
|                                
|                                
|Strategic relationshipswarrants |  |        | 38,660 |              |  |                | (28,996 | ) |  |   | 9,664  | 
|                                
|                                
|                                
|                                
|Customer base                    |  |        | 12,493 |              |  |                | (10,076 | ) |  |   | 2,417  | 
|                                
|                                
|                                
|                                
|Patents                          |  |        | 726    |              |  |                | (544    | ) |  |   | 182    | 
|                                
|                                
|                                
|                                
|                                 |  |        |        |              |  |                |         |   |  |   |        | 
|                                 |  | $      | 91,627 |              |  | $              | (70,103 | ) |  | $ | 21,524 | 
|                                 |  |        |        |              |  |                |         |   |  |   |        | 

The aggregate amortization
expense related to goodwill
which is no longer being amortized totaled $1.3 million and zero for the
second quarters of 2001 and 2002, respectively, and $2.6 million and zero for
the first six-month periods of 2001 and 2002, respectively. The estimated
total amortization expense related to all intangible assets is $43.1 million
for the fiscal year 2002, at which time all other intangible assets will
be fully amortized.

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

|                                                              |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | -------- | ------- | -------- |  | - | -------- | - |  | - | ------- | -
|                                                              |  | Three Months Ended |         | Six Months Ended
|                                                              |  |                    |         |                 
|                                                              |  | June 30,           |         | June 30,         |  | June 30, |         | June 30,
|                                                              |  | 2001               |         | 2002             |  | 2001     |         | 2002    
|                                                              |  |                    |         |                  |  |          |         |         
|Net
loss                                                      |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|                                                             
|                                                             
|                                                             
|                                                             
|Reported net loss attributable to common shares               |  | $                  | (81,081 | )                |  | $        | (38,828 | )        |  | $ | (151,127 | ) |  | $ | (68,045 | )
|                                                             
|                                                             
|                                                             
|                                                             
|Amortization of goodwill                                      |  |                    | 1,284   |                  |  |          |        |          |  |   | 2,568    |   |  |   |        |  
|                                                              |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|Net loss attributable to common shares, as adjusted           |  | $                  | (79,797 | )                |  | $        | (38,828 | )        |  | $ | (148,559 | ) |  | $ | (68,045 | )
|                                                              |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|Net
loss per share  basic and diluted                        |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|                                                             
|                                                             
|                                                             
|                                                             
|Reported
net loss per share attributable to common shares     |  | $                  | (1.10   | )                |  | $        | (0.50   | )        |  | $ | (2.07    | ) |  | $ | (0.88   | )
|                                                             
|                                                             
|                                                             
|                                                             
|Amortization of goodwill per share                            |  |                    | 0.02    |                  |  |          |        |          |  |   | 0.04     |   |  |   |        |  
|                                                              |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|Net
loss per share attributable to common shares, as adjusted |  | $                  | (1.08   | )                |  | $        | (0.50   | )        |  | $ | (2.03    | ) |  | $ | (0.88   | )
|                                                              |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  

Note 7  Other Comprehensive Loss

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

|                                         |  |                    |         |                  |  |      |         |      |  |   |          |   |  |   |         |  
|---------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                         |  | Three Months Ended |         | Six Months Ended
|                                         |  | June 30,           |         | June 30,        
|                                         |  |                    |         |                 
|                                         |  | 2001               |         | 2002             |  | 2001 |         | 2002
|                                         |  |                    |         |                  |  |      |         |     
|Net loss                                 |  | $                  | (81,081 | )                |  | $    | (35,567 | )    |  | $ | (151,127 | ) |  | $ | (61,578 | )
|                                        
|                                        
|                                        
|                                        
|Net
unrealized investment losses         |  |                    | (687    | )                |  |      | (181    | )    |  |   | (385     | ) |  |   | (678    | )
|                                        
|                                        
|                                        
|                                        
|Foreign currency translation adjustments |  |                    | (1,576  | )                |  |      | 2,068   |      |  |   | (2,414   | ) |  |   | 1,729   |  
|                                         |  |                    |         |                  |  |      |         |      |  |   |          |   |  |   |         |  
|Other comprehensive loss                 |  | $                  | (83,344 | )                |  | $    | (33,680 | )    |  | $ | (153,926 | ) |  | $ | (60,527 | )
|                                         |  |                    |         |                  |  |      |         |      |  |   |          |   |  |   |         |  

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

Note 8  Net Loss Per Share

Net loss per share is calculated as follows:
      (In thousands, except per share amounts)

|                                                                       |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | -------- | ------- | -------- |  | - | -------- | - |  | - | ------- | -
|                                                                       |  | Three Months Ended |         | Six Months Ended
|                                                                       |  |                    |         |                 
|                                                                       |  | June 30,           |         | June 30,         |  | June 30, |         | June 30,
|                                                                       |  | 2001               |         | 2002             |  | 2001     |         | 2002    
|                                                                       |  |                    |         |                  |  |          |         |         
|Net loss                                                               |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Net loss                                                               |  | $                  | (81,081 | )                |  | $        | (35,567 | )        |  | $ | (151,127 | ) |  | $ | (61,578 | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Accretion on redeemable convertible preferred shares                   |  |                    |        |                  |  |          | (3,261  | )        |  |   |         |   |  |   | (6,467  | )
|                                                                       |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|Net loss attributable to common shares                                 |  | $                  | (81,081 | )                |  | $        | (38,828 | )        |  | $ | (151,127 | ) |  | $ | (68,045 | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Weighted average shares outstanding                                    |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Weighted average shares outstanding                                    |  |                    | 74,968  |                  |  |          | 78,168  |          |  |   | 74,619   |   |  |   | 77,542  |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Weighted average common shares issued subject to
repurchase agreements |  |                    | (124    | )                |  |          | (34     | )        |  |   | (325     | ) |  |   | (46     | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Shares held in escrow related to acquisitions                          |  |                    | (1,050  | )                |  |          | (344    | )        |  |   | (1,328   | ) |  |   | (344    | )
|                                                                       |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|Shares used in computation of basic and diluted net
loss per share     |  |                    | 73,794  |                  |  |          | 77,790  |          |  |   | 72,966   |   |  |   | 77,152  |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Net loss per share  basic and diluted                                 |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Net loss                                                               |  | $                  | (1.10   | )                |  | $        | (0.46   | )        |  | $ | (2.07    | ) |  | $ | (0.80   | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Accretion on redeemable convertible preferred
shares                   |  |                    |        |                  |  |          | (0.04   | )        |  |   |         |   |  |   | (0.08   | )
|                                                                       |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  
|Net loss attributable to common shares                                 |  | $                  | (1.10   | )                |  | $        | (0.50   | )        |  | $ | (2.07    | ) |  | $ | (0.88   | )
|                                                                       |  |                    |         |                  |  |          |         |          |  |   |          |   |  |   |         |  

At June 30, 2001 and 2002, approximately
31.3 million and 86.0 million potential common shares, respectively,
were excluded from the determination of diluted net loss per share,
as the effect of such shares is anti-dilutive.

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##### Table of Contents



CRITICAL PATH, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS




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

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

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

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

Overview

Critical Path, Inc., a global leader in Internet communications, delivers
software and services that maximize the value of Internet
communications. We provide messaging and collaboration solutions from wireless,
secure and unified messaging to basic email and personal information
management, as well as identity management solutions that simplify user profile
management and strengthen information security. Our standards-based Critical
Path Communications Platform, built to perform reliably at the scale of public
networks, delivers the industrys lowest total cost of ownership for messaging
solutions and lays a solid foundation for next-generation communications
services.

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

12



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##### Table of Contents



Results of Operations

In
light of the rapidly evolving nature of our business, prior
acquisitions, organizational restructuring, and limited operating history, we
believe that period-to-period comparisons of revenues and operating results,
including gross profit margin and operating expenses as a percentage of total
net revenues, are not meaningful and should not be relied upon as indications
of future performance. At June 30, 2002, we had 587 employees, in comparison
with 562 employees at December 31, 2001 and 784 employees at June 30, 2001. We
do not believe that our historical growth rates for revenue, expenses or
personnel are indicative of future results.

Net Revenues

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

Software License.We recognized $10.9 million and $21.8 million in
software license revenues during the three and six-month periods ended June 30,
2002, respectively, compared to $8.9 million and $14.5 million during the same
periods in 2001, respectively. The significant increase in software license
revenues over the prior year was due primarily to the uncertainty surrounding
Critical Path during the first two quarters of 2001, which caused a number of
current and potential customers to delay making purchase decisions. This
uncertainty was created by the restatement of certain previously released
financial results of Critical Path for the third quarter of 2000, significant
turnover within the senior management group and the termination and resignation
of much of the leadership within our sales organization. During the second half
of 2001 and first half of 2002, we have restructured our business and
management team and rebuilt customer confidence in Critical Path.
Even with the higher license revenue levels during the first quarter and first
six months of 2002, our business activities continue to be impacted by the
difficult worldwide business climate, which has resulted in lower and delayed
information technology spending across the enterprise software market.

During
the second quarter of 2002, we excluded all royalty revenue earned
from Sun Microsystems, Inc. related to the sales of their iPlanet
meta-directory products, which based on the historical calculation
methodology would have approximated $300,000. During August we
entered into a dispute with Sun Microsystems, Inc. over the
calculation of these royalties. Since inception we have recognized
and been paid approximately $3.1 million in royalties under the
agreement. We will not be recognizing royalty
revenue from Sun Microsystems until we come to a mutual agreement on
their current and historic contractual obligations.

Hosted Messaging.We recognized $5.6 million and $12.5 million in hosted
messaging revenues during the three and six-month periods ended June 30, 2002,
respectively, compared to $11.1 million and $25.6 million during the same
periods in 2001, respectively. This decrease in 2002 hosted messaging revenues
resulted in part due to the exiting or sale, as part of our 2001 restructuring
initiatives, certain non-core hosted messaging services during the second-half
of 2001. These non-core services accounted for a significant portion of hosted
messaging revenues for the first six-months of 2001. In addition, during the
second quarter of 2002, we did experience a net loss in customers, which
further contributed to the decline in hosted messaging revenue over the prior
years periods and we have excluded approximately $300,000 in
hosted messaging revenue from the second quarter of 2002 related to
Worldcom. We have reserved for all uncollected balances with this
customer as a result of their recent Chapter 11 bankruptcy filing. We are currently completing work on a new hosted messaging
software and hardware platform as well as working to establish relationships
with strategic partners in order to enhance product capabilities, broaden sales
channels and increase hosted messaging revenues. Until these new initiatives
are substantially in place, and with the elimination of certain non-core hosted
messaging services in the second-half of 2001, we expect hosted messaging
revenues to be lower in the second-half of 2002 in comparison to the prior
years periods.

Professional Services.We recognized $2.6 million and $4.6 million in
professional services revenues during the three and six-month periods ended
June 30, 2002, respectively, compared to $2.9 million and $6.3 million during
the same periods in 2001, respectively. The decrease in professional
services revenues in the second quarter of 2002 was due primarily to our 2001
restructuring initiatives, which eliminated certain non-core products, reducing
the professional services revenues derived from these products. The decrease
in revenue for the first six-months of 2002 was due primarily to higher first
quarter 2001 professional services revenues related to non-core
products directly resulting from our
September 2000 acquisition of PeerLogic, Inc.

Maintenance and Support.We recognized $3.3 million and $7.2 million in
maintenance and support revenues during the three and six-month periods ended
June 30, 2002, respectively, compared to $4.1 million and $7.9 million for the
same periods in 2001, respectively. The decrease in 2002 resulted primarily
from the loss of maintenance and support revenues from the elimination of
certain non-core products and services as part of our 2001 restructuring
initiatives.

13



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##### Table of Contents



Critical Paths international operations accounted for approximately 58%
and 57% of net revenues for the three and six-month periods ended June 30,
2002. Revenues from international operations accounted for approximately 45%
and 37% of net revenues for the three and six-month periods ended June 30,
2001. This significant increase in the percentage of international revenues
related primarily to a dramatic reduction in enterprise information technology
spending during the first and second quarters of 2001, as it particularly
impacted the sale of our license products in international markets.

Cost of Net Revenues

Software License.Cost of net software license revenues consist
primarily of product media duplication, manuals and packaging materials,
personnel and facility costs, and third-party royalties. The cost of net
software license revenues for the second quarter and first six months of 2002
were higher than the same periods in the prior year, consistent with the increase in license
revenue.

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

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

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

Operations, customer support, and professional services staff decreased to
190 employees at June 30, 2002 from 273 employees at June 30, 2001.

Operating Expenses

Sales and Marketing.Sales and marketing expenses consist primarily of
compensation for sales and marketing personnel, advertising, public relations,
other promotional costs, and, to a lesser extent, related overhead. Sales and
marketing expenses for the second quarter and first six months of 2002
decreased significantly over the prior years periods due primarily to cost
savings generated from our 2001 restructuring initiatives. With actions taken
as part of the restructuring, sales and marketing staffing levels were reduced
to 147 employees at June 30, 2002 from 201 employees at June 30, 2001. The
savings in personnel and personnel-related costs together with the termination
of certain strategic marketing relationships related to non-core services
accounted for the reduction in sales and marketing expenses from the second
quarter and first six-months of 2001 compared to the same periods in 2002.

Research and Development.Research and development expenses consist
primarily of compensation for technical staff, payments to outside contractors,
depreciation of capital equipment associated with research and development
activities, and, to a lesser extent, related overhead. This significant
decrease in second quarter and year-to-date 2002 research and development
expenses resulted primarily from a reduction in headcount and related personnel
costs as part of our 2001 restructuring initiatives. These actions have
contributed to a decrease in research and development staffing to 157 employees
at June 30, 2002, from 199 employees at June 30, 2001. In addition, savings
realized from the termination of certain outside consulting arrangements and
consolidation of facilities also contributed to this decrease in research and
development expenses.

General and Administrative.General and administrative expenses consist
primarily of compensation for personnel, fees for outside professional
services, occupancy costs and, to a lesser extent, related overhead. The
significant decrease in second quarter and year-to-date 2002 general and
administrative expenses in comparison to the same periods in the prior year was
due primarily to cost savings realized from our 2001 restructuring initiatives.
Savings were realized from a decrease in general and administrative staffing

14



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##### Table of Contents



levels to 93 employees at June 30, 2002 from 111 employees at June 30,
2001, as well as savings resulting from the reduction in facilities from 77 at
December 31, 2000 to 27 at June 30, 2002. In addition, as a result of the
restatement of certain previously released 2000 financial results, we incurred
higher fees for outside professional services in the first half of 2001, in
particular higher legal and accounting fees related to the SEC investigation
and extended outside audit work.

Amortization of Intangible Assets and Asset Impairment Charge

In connection with the acquisitions we completed in 1999 and 2000, which
were all accounted for using the purchase method of accounting, we recorded
goodwill and other intangible assets, primarily for assembled workforce,
customer base, and existing technology. During 2000, we recorded a charge of
$1.3 billion related to the impairment of certain long-lived assets, including
intangible assets. In addition, in connection with our second quarter
2001 restructuring
initiative, an impairment assessment of certain long-lived assets was
performed. As a result of this assessment in the second quarter of
2001, we recorded an additional
impairment charge of $14.2 million to reduce these intangible assets to their estimated
fair values or eliminate them, as appropriate. Based upon the types
of intangible assets, $4.2 million of this impairment charge was
allocated to cost of net revenues and $10.0 million was
allocated to operating expenses.

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

Acquisition-Related Retention Bonuses

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

Restructuring Expense

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

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

Stock-Based Expenses

Stock-based expenses are comprised of charges related to certain stock
options and warrants granted to employees, directors and consultants and common
stock issued to certain employees, directors and advisors in 1998 and 1999. The
decline in stock-based expenses in the second quarter and first six-months of
2002 in comparison to the same periods in 2001 was primarily the result of
certain stock-based charges related to 1998 grant activity becoming fully
amortized in the second-half of 2001.

Interest and Other Income (Expense)

Interest and other income (expense) consists primarily of interest
earned from cash and cash equivalents, net realized gains (losses) on foreign
exchange transactions, and any gain or loss from changes in the fair value of
the liquidation preference feature granted to the investors who participated in
the Critical Path 2001 preferred stock financing transaction. The net other
expense of $3.4 million and $2.7 million for the second quarter and first
six-months of 2002, respectively, was primarily generated by the recording of a
non-cash loss of $3.5 million in the second quarter associated with the
revaluation of the preferred stock liquidation preference discussed above.

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Interest income amounted to $570,000 and $907,000 for the second quarter
and first six-months of 2002, respectively, compared to interest income of $1.6
million and $3.9 million for the comparable periods in 2001, respectively.
Interest income was lower in 2002 compared to the same periods in the prior
year due to lower cash balances available for investing. Cash balances declined
during the twelve-month period ended June 30, 2002, due primarily to the funding of
our net losses and cash utilized in 2001 to retire a significant portion of our
convertible debt obligations.

We also recognized net losses from foreign currency transactions
associated with our international operations in the amounts of $779,000 and
$577,000 for the second quarter and first six months of 2002, respectively,
compared to net gains of $1.3 million and $1.5 million for the second quarter
and first six months of 2001. The foreign currency losses recognized in 2002
primarily resulted from the strengthening of the Euro in relationship to the
U.S. Dollar and the resulting losses this generated against any U.S. Dollar
denominated balances we carry in Europe.

Interest Expense

Interest
expense consists primarily of the interest charges and amortization of
related issuance costs associated with the Convertible Subordinated Notes we
issued in March 2000, and interest on certain capital leases. Because of the
retirement of a significant portion of our convertible subordinated notes and
capital leases during 2001, interest expense for the second quarter and first
six months of 2002 declined to $733,000 and $1.5 million,
respectively, from
$5.3 million and $10.4 million for the comparable periods in 2001.

Equity in Net Loss of Critical Path Pacific

In
June 2000, we established a joint venture, Critical Path Pacific,
Inc., with
Mitsui and Co., Ltd., NTT Communications Corporation and NEC Corporation to
deliver advanced Internet messaging solutions to businesses in Asia. We
invested $7.5 million and held a 40% ownership interest in the joint venture.
This investment was accounted for using the equity method. During the second
quarter and first six months of 2002, we recorded equity in net loss of joint
venture of approximately $1.0 million and $1.4 million, respectively, compared
to a net loss of $397,000 and $1.2 million recorded in the second quarter and
first six months of 2001.

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

Provision for Income Taxes

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

Liquidity and Capital Resources

As of June 30, 2002, our cash, cash equivalents and short-term investments
totaled $56.5 million, comprised of $43.2 million in cash and cash equivalents
and $13.3 million in short-term investments. Our working capital amounted to
approximately $40.7 million. For the first six months of 2002, we used
approximately $17.2 million in cash.

We used cash of $12.1 million to fund operating activities during the
first six months of 2002 primarily due to our net loss, adjusted for non-cash
charges, as operating costs, primarily employee and employee related costs,
exceeded the related sales of our software products and services. In addition,
we used cash to make certain insurance and software and hardware support and
maintenance renewal payments during the first six months, accounting for the
$1.5 million in cash used for other assets. Accrued expenses decreased by $1.5
million due primarily to the payment of the remaining acquisition retention
bonus amounts during the

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second quarter of 2002. These uses of cash to fund operating activities
were partially offset by the growth in our accounts payable balances by $3.0
million.

We used cash in investing activities during the first six months of 2002
totaling $4.6 million. Cash was primarily used to purchase additional
short-term investments of $3.6 million, issue a cash security deposit of $3.0
million in support of a recently negotiated licensing agreement, and to
purchase capital equipment of approximately $2.8 million, which included investments in
additional network infrastructure equipment and improvements to our new San
Francisco headquarters.

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

We
used cash in financing activities during the first six months of 2002
of $469,000. Cash was principally used to retire $3.1 million in principal on
capital lease obligations. This use of cash was partially offset by proceeds
the Company received from the repayment of notes receivable from former
officers and shareholders totaling $1.2 million, and $1.4 million from the sale
of our common stock, primarily the result of stock option exercises.

In May 2002, the Board of Directors approved a restructuring plan to
further reduce our expense levels consistent with the current business climate.
In connection with the plan, a restructuring charge of $1.5 million was
recognized in the second quarter of 2002. This charge was comprised of
approximately $1.2 million in severance and related costs associated with the
elimination of approximately 39 positions and $300,000 in facilities lease
termination costs. During the quarter, approximately $500,000 was charged
against this accrual, primarily cash payments of severance and related costs.
The balance of the accrual of approximately $1.0 million is expected to be
utilized by the end of this fiscal year.

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

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

Additional Factors That May Affect Future Operating Results

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

We cannot accurately forecast our revenues as a result of our limited
operating history, evolving business strategy and the emerging nature of the
Internet messaging infrastructure market. Forecasting is further complicated by
rapid changes in our business due to integration of acquisitions we completed
in 1999 and 2000, our recent strategic and operational restructuring, as well
as significant fluctuations in license revenues as a percentage of total
revenues from an insignificant percentage in 1999, to 38% in 2000, 30% in 2001
and 49% for the second quarter of 2002. Our revenues have in some quarters and
could continue to fall short of expectations if we experience delays or
cancellations of even a small number of orders. We often offer volume-based
pricing, which may affect operating margins. A number of factors are likely to
cause fluctuations in operating results, including, but not limited to:



| |  |  | the demand for licensed solutions for messaging, directory, and other products;
| | - |  | -------------------------------------------------------------------------------

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| |  |  | the demand for outsourced messaging services generally and the use of
messaging and directory infrastructure products and services in
particular;                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to attract and retain customers and maintain customer satisfaction;                                                                                                            
|
| |  |  | our ability to attract and retain qualified personnel with industry expertise, particularly sales personnel;                                                                               
|
| |  |  | the ability to upgrade, develop and maintain our systems and
infrastructure and to effectively respond to the rapid technology change
of the messaging and directory infrastructure market;
|
| |  |  | the budgeting and payment cycles of our customers and potential customers;                                                                                                                 
|
| |  |  | the amount and timing of operating costs and capital expenditures relating to expansion of business and infrastructure;                                                                    
|
| |  |  | our ability to quickly handle and alleviate technical difficulties or system outages;                                                                                                      
|
| |  |  | the announcement or introduction of new or enhanced services by competitors; and                                                                                                           
|
| |  |  | general economic and market conditions and their affect on our operations and that of our customers.                                                                                       

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

In addition, our operating results have been and could continue to be
impacted by future decisions to eliminate product or service offerings through
termination, sale or other disposition or to sustain certain products and
services at a minimum level where customer commitments prevent us from
eliminating the offering altogether. Decisions to eliminate, revise or limit
any other offerings of a product or service would involve other factors
affecting operational results including the expenditure of capital, the
realization of losses, further reductions in our workforce, facility
consolidation or the elimination of revenues along with the associated costs,
any of which could harm our financial condition and operating results.

As a result of the foregoing, we do not believe that period-to-period
comparisons of operating results are a good indication of future performance.
It is likely that operating results in some quarters will be below market
expectations. In this event, the price of our common stock is likely to prove
volatile and/or decline.

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

Our ability to increase revenues will depend on our ability to continue to
successfully recruit, train and retain experienced and effective sales and
marketing personnel and to achieve results once employed with us. Competition for qualified personnel in certain markets is
intense and we may not be able to hire and retain personnel with relevant
experience. The complexity and implementation of our messaging and directory
infrastructure products and services require highly trained sales and marketing
personnel to educate prospective customers regarding the use and benefits of
our services. Current and prospective customers, in turn, must be able to
educate their end-users. Any delays or difficulties encountered in our staffing
and training efforts would impair our ability to attract new customers and
enhance our relationships with existing customers, and ultimately, grow
revenues. This would also adversely impact the timing and extent of our
revenues. Because we have experienced turnover in our sales force and the
majority of our current sales and marketing personnel have recently joined us
and have limited experience working together, our sales and marketing
organizations may not be able to compete successfully against the sales and
marketing organizations of our competitors. If we do not successfully operate
and grow our sales and marketing activities, our business could suffer and the
price of our common stock could decline.

We depend on strategic relationships as well as other sales channels and the
loss of any key strategic relationships could harm our business and negatively
affect our revenues.

We depend on strategic relationships to expand distribution channels and
to undertake joint product development and marketing efforts. Our ability to
increase revenues depends upon aggressively marketing our services through new
and existing strategic relationships. We depend on a broad acceptance of our
software and outsourced messaging services on the part of potential resellers
and partners and our acceptance as a supplier of outsourced messaging
solutions. We also depend on joint marketing and product development through
strategic relationships to achieve further market acceptance and brand
recognition. Our agreements with strategic partners typically do not restrict
them from introducing competing services. These agreements typically are for
terms of one to three years, and automatically renew for additional one-year
periods unless either party gives prior notice of its intention to terminate
the agreement. In addition, these agreements are terminable by our partners
without cause, and some agreements are terminable by us, upon 30  120 days
notice. Most of the agreements also provide for the partial refund of fees paid
or other monetary penalties in the event that our services fail to meet defined
minimum performance standards. Distribution partners may choose not to renew
existing arrangements on commercially acceptable terms, or at all. In addition
to strategic relationships, we also depend on the ability of our customers to
aggressively sell and market our services to their end-users. If we lose any
strategic relationships, fail to renew these agreements or relationships, fail
to fully exploit our relationships, or fail to develop new strategic
relationships, our business and financial results will suffer, and could have an adverse impact on our current and
future revenues.

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

Throughout
the fiscal year ended December 31, 2001, we announced a series of
changes in our management that included the departure of many senior executives
and later made additional changes in our management and board of directors. A
majority of the current senior executives of the Company joined us in the
latter half of 2001 and in early 2002. Because of these recent changes and
their recent recruitment, our management team has not worked together for a
significant length of time and may not be able to work together effectively to
successfully implement our strategies and run our operations. If our management
team is unable to accomplish our business objectives, our ability to grow our
business and successfully meet operational challenges could be severely
impaired. We do not have long-term employment agreements with any of our
executive officers. It is possible that this high turnover at our senior management
levels may also continue for a variety of reasons. The loss of the services of
one or more of our current senior executive officers could harm our business
and affect our ability to successfully implement our business objectives.

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

As of June 30, 2002, we had an accumulated deficit, including other
comprehensive income, of approximately $2.1 billion. We have not achieved
profitability in any period and expect to continue to incur net losses in
accordance with generally accepted accounting principles for the foreseeable
future. However, we will continue to spend resources on maintaining and
strengthening our business, and this may, in the near term, have a negative
effect on our operating results and our financial condition.

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

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

We expect that sales of our products and services to a limited number of
customers will continue to account for a high percentage of our revenue for the
foreseeable future. Our future success depends on our ability to retain our
current customers, and to attract new customers, in our target markets. The
loss of one or several major customers, whether through termination of
agreements, acquisitions or bankruptcy, could harm our business. Our agreements
with our customers typically have terms of one to three years often with
automatic one-year renewals and can be terminated without cause upon 30  120
days notice. In addition, a number of our customers,

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particularly for our hosted services business and in the technology
industry, have also suffered from falling revenue, job losses, restructuring
and decreased technology spending in the recent economic downturn. Especially
in the telecommunications industry, which represents a sizeable portion of our
customer base, the relative financial performance of our customers will
continue to impact our sales cycles and ability to attract new business. If our
customers terminate their agreements for any reason before the end of the
contract term, the loss of the customer could have an adverse impact on our
current and future revenues. Also, if we are unable to enter into agreements
with new customers and develop business with our existing customers, our
business will not grow and we will not generate additional revenues.

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

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

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



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

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

Our sales cycle is lengthy and our results could be harmed by delays or
cancellations in orders.

Because
we sell complex and sophisticated technology, our sales cycle, in
particular with respect to our software solutions, can
be long and unpredictable, often taking between two to twelve months. Because
of the nature of our product and service offerings it can take many months of
customer education and product evaluation before a purchase decision is made.
In addition, many factors can influence the decision to purchase our product
and service offerings including budgetary restraints and decreases in capital
expenditures, quarterly fluctuations in operating results of customers and
potential customers, the emerging and evolving nature of the internet-based
services and wireless services markets. Furthermore, general global economic
conditions, and a slowdown in technology spending in particular, have further
lengthened and affected our sales cycle, leading to delays and postponements in
purchasing decisions. Any delay or cancellation in sales of our products or
services could cause our operating results to differ from those projected and
cause our stock price to decline.

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

We believe that existing capital resources will enable us to maintain
current and planned operations through at least June 30, 2003. However,
additional capital may be required to continue operations and achieve
profitability. In addition, we may be required to raise additional funds due to
unforeseen circumstances. If our capital requirements vary materially from
those currently planned, we may

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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. Additionally, we face a number of challenges
in operating our business, including but not limited to the resources to
maintain worldwide operations, our leveraged capital structure and significant
contingent liabilities associated with litigation. In the event that resolution
of these or other operational matters involve issuance of stock or other
derivative instruments, our existing shareholders may experience significant
dilution.

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

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

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

Failure to complete the settlement of
shareholder derivative action and otherwise resolve pending
securities claims could materially harm our business.

Although the Company reached and the court approved settlement
agreements in connection with the securities class action pending in the U.S.
District Court for the Northern District of California, a number of plaintiffs
associated with the acquisition of Peer Logic, Inc. opted out of such
settlement. The case against the Company with respect to these plaintiffs
continues. In addition, the Company is a defendant in a number of
securities class action lawsuits filed in the U.S. District Court for the
Southern District of New York, alleging that prospectuses under which
securities were sold contained false and misleading statements with respect to
discounts and commissions received by underwriters. Should these lawsuits
linger for a long period of time, there can be no assurance that fees and
expenses, and any ultimate resolution associated with such litigation, will be
within the coverage limits of our insurance and/or our ability to pay such
amounts. Likewise, there can be no assurance that the Company will be able to
conclude or settle such litigation on terms that coincide with the coverage
limits of our insurance and/or ability to pay upon any final determination. A
failure to definitively resolve class action litigation in which the Company is
involved, could also cast doubt as to the prospects of the Company in the eyes
of our customers, potential customers and investors, and cause the Companys
stock price to decline.

Although concluded without penalty to the Company, lingering effects of the
recent SEC investigation could harm our business.

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

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restatements and such general uncertainty could continue to harm our
business and cause the price of our common stock to continue to fluctuate
and/or decline significantly.

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

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

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

The Nasdaq Stock Market has quantitative maintenance criteria for the
continued listing of common stock on the Nasdaq National Market. The current
requirements affecting us include (i) having net tangible assets of at least $4
million and (ii) maintaining a minimum bid price per share of
$1. As of June 28, 2002 we were in compliance with all Nasdaq National Market listing
requirements. However, there have been recent periods when the closing bid
price per share for our common stock has dropped below $1. Although our bid
price has generally been above $1 per share since November 1, 2001, if the bid
price of our common stock price slips below $1 per share for more
than 30 trading days,
we may be subject to a delisting action of our common stock on The Nasdaq
National Market. Also effective November 1, 2002, we need to comply with
the Nasdaq National Markets revised quantitative maintenance criteria
including a new minimum requirement of $10.0 million in stockholders equity,
or public float. The Nasdaq National Markets Audit Committee Rules require
that our audit committee be comprised of at least three independent members.
Although we believe that we currently comply with this requirement and other
Nasdaq National Marketplace Rules, recent proposed amendments to such rules
involve significant changes to our listing requirements, and the
membership of Board committees, and will require review
and potential changes in our business in order to remain in compliance. As a
result, the Company is currently evaluating its compliance with proposed rule
changes to ensure future compliance with new and amended rules. However, there
can be no assurance that we will be able to comply with the quantitative
maintenance criteria or any of the Nasdaq National Markets
listing requirements and other rules in the
future.

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

Our stock price has demonstrated volatility and overall declines during recent
quarters and continued volatility in the stock market may cause further
fluctuations and/or decline in our stock price.

The trading price of our common stock has been and may continue to
experience volatility, wide fluctuations and declines. For example, during the
first and second quarters of 2002, the closing sale prices of our common stock
on the Nasdaq National Market ranged from $3.63 on January 8, 2002 to $1.00 on
June 26, 2002. The closing price of our stock on June 30, 2002 was $1.02 per
share. Our stock price may further decline or fluctuate in response to any
number of factors and events, such as announcements related to litigation,
technological innovations, regulatory scrutiny and new legislation, strategic
and sales relationships, new product and service offerings by us or our
competitors, changes in senior management, changes in financial estimates and
recommendations of securities analysts, the operating and stock price
performance of other companies that investors may deem comparable, news reports
relating to trends in our markets and the market for our stock, media interest
in accounting scandals and corporate governance questions and overall market
conditions. In addition, the stock market in general, particularly with respect
to technology stocks, has experienced extreme volatility and a significant
cumulative decline in recent quarters. This volatility and decline has affected
many companies, including our company, irrespective of the specific operating
performance of such companies. These broad market influences and fluctuations
may adversely affect the price of our stock, and our ability to remain listed
on the Nasdaq National Market, regardless of our operating performance or other
factors.

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

Our liability insurance for actions taken by officers and directors during
the period from March 1999 to March 2001, the period during which events
related to securities class action lawsuits against us and certain of our
current and former executive officers are alleged to have occurred, provides
only limited liability protection. If these policies do not adequately cover
our expenses related to those lawsuits, our business and financial condition
could be seriously harmed. Our director and officer liability insurance, that
was in place through March 2002, and our current insurance that continues
through March 2003, contain similar provisions.

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

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

The loss of the services of key personnel could harm our business results.
Our success also depends on our ability to recruit, retain and motivate highly
skilled sales and marketing, operational, technical and managerial personnel.
Competition for these people is intense and we may not be able to successfully
recruit, train or retain qualified personnel. If we fail to do so, we may be
unable to develop new services or continue to provide a high level of customer
service, which could result in the loss of customers and revenues.

We do not have long-term employment agreements with any of our key
personnel. In addition, we do not maintain key person life insurance on our
employees and have no plans to do so. The loss of the services of one or more
of our current key personnel could harm our business and affect our ability to
successfully implement our business objectives.

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

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

We may face continued technical, operational and strategic challenges
preventing us from successfully continuing the integration or divestiture of
acquired businesses.

Acquisitions involve risks related to the integration and management of
acquired technology, operations and personnel. In addition, in connection with
our strategic restructuring, the Company elected to divest or discontinue many
of the acquired businesses. Both the integration and divestiture of acquired
businesses have been and will continue to be complex, time consuming and
expensive processes, which may disrupt and distract our management from its
core business. With respect to integration, we must operate as a combined
organization utilizing common information and communication systems, operating
procedures, financial controls and human resources practices to be successful.
In particular, we are currently evaluating, upgrading or replacing our
financial information systems and establishing uniformity among the systems of
the acquired businesses. With divestitures, the timing and transition of those
businesses and their customers to other entities has required and will continue
to require resources from our legal, finance and corporate development teams as
well as expenses associated with the conclusion of those transactions, and we
may not achieve anticipated revenues and benefits and/or cost reductions.

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Further, due in part to the significant underperformance of some of our
acquisitions relative to expectations, we have reviewed the products and
services we sell to customers, the locations in which we operate and the manner
in which we go to market with our core product and service offerings. As a
result of this review, in 2001, we eliminated certain acquired product or
service offerings through termination, sale or other disposition or to sustain
certain products and services at a minimum level where customer commitments
prevent us from eliminating the offering altogether. Such decisions to
eliminate or limit our offering of an acquired product or service involved and
could continue to include the expenditure of capital, the realization of
losses, further reduction in workforce, facility consolidation, and/or the
elimination of revenues along with the associated costs, any of which could
harm our financial condition and operating results.

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

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

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

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

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

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

Few laws currently apply directly to activity on the Internet and the
messaging business, however new laws are proposed and other laws made
applicable to Internet communications every year. In particular, the operations
of the Companys business faces risks associated with privacy, confidentiality
of user data and communications, consumer protection, taxation, content,
copyright, trade secrets, trademarks, antitrust, defamation and other legal
issues. In particular, legal concerns with respect to communication of
confidential data have affected our financial services and health care
customers due to newly enacted federal legislation. The growth of the industry
and the proliferation of Internet-based messaging devices and services may
prompt further legislative attention to our industry and thus invite more
regulatory control of our business. The imposition of more stringent
protections and/or new regulations and application of laws to our business
could burden our company and those with which we do business. Further, the
adoption of additional laws and regulations could limit the growth of our
business and that of our business partners and customers. Any decreased
generalized demand for our services or the loss of, or decrease, in business by
a key partner due to regulation or the expense of compliance with any
regulation, could either increase the costs associated with our business or
affect revenue, either of which could harm our financial condition or operating
results. Certain of our service offerings include operations subject to the
Digital Millenium Copyright Act of 1998. The Company has expended resources and
implemented processes and controls in order to remain in compliance with DMCA
but there can be no assurance that our efforts will be sufficient and/or new
legislation and case law will not affect the operation of certain services.

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In addition, the applicability of laws and regulations directly applicable
to the businesses of our customers, particularly customers in the fields of
banking and health care, will continue to affect us. The security of
information about our customers end-users continues to be an area where a
variety of laws and regulations with respect to privacy and confidentiality are
enacted. As our customers implement the protections and prohibitions with
respect to the transmission of end user data, our customers will look to us to
assist them in remaining in compliance with this evolving area of regulation.
In particular the Gramm-Leach-Blilely Act contains restrictions with respect to
the use and protection of banking records for end-users whose information may
pass through our system and the Health Insurance Portability and Accountability
Act contains provisions that require our customers to ensure the
confidentiality of their customers health care
information.

Finally, the
Company faces increased regulatory scrutiny and criminal liability
for its executives associated
with various accounting and corporate governance rules promulgated under the
Sarbanes-Oxley Act of 2002. The Company plans to review all of its
accounting policies and practice under the new legislation, including those
related to its relationships with its independent accountants, enhanced
financial disclosures, corporate responsibility and loan practices,
and will comply with such laws in full. Nevertheless, such
increased scrutiny and penalties involve risks to both the Company and its executive
officers and directors in monitoring and insuring compliance.

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

Our software products are inherently complex. Additionally, our product
and service offerings depend on complex software, both internally developed and
licensed from third parties. Complex software often contains defects or errors
in translation, particularly when first introduced or when new versions are
released or localized for international markets. We may not discover software
defects in our products or that affect new or current services or enhancements
until after they are deployed. Although we have not experienced any material
software defects to date, it is possible that, despite testing, defects may
occur in the software. These defects could cause service interruptions, which
could damage our reputation or increase service costs, cause us to lose
revenue, delay market acceptance or divert development resources, any of which
could cause our business to suffer.

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

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

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

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

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

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

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

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

Our proprietary rights may not be adequately protected because:



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

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

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

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

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

We assume a certain level of credit risk with our customers in order to do
business. Conditions affecting any of our customers could cause them to become
unable or unwilling to pay us in a timely manner, or at all, for products or
services we have already provided them. For example, if the current economic
conditions continue to decline or if new or unanticipated government
regulations are enacted which affect our customers, they may be unable to pay
their bills. In the past, we have experienced significant collection delays
from certain customers, and we cannot predict whether we will continue to
experience similar or more severe delays in the future. In particular, some of
our customers are suffering from the general weakness in the economy and among
technology companies in particular. Although we have established reserves that
we believe are sufficient to cover losses due to delays in or inability to pay
and while we take a consistently conservative position on the collectability of
revenue with respect to particular customers, there can

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

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

We derived 55% of our revenues from international sales in the first half
2002 and 37% of our revenues from international sales in the first half of
2001. We intend to continue to operate in international markets and to spend
significant financial and managerial resources to do so. In particular, we have
recently purchased the remaining interests of our joint venture partners for
our operations in Japan. We plan to expend revenues and resources to grow our
operations in the Asian market. If revenues from international operations do
not exceed the expense of establishing and maintaining these operations, our
business, financial condition and operating results will suffer. We have
limited experience in international operations and may not be able to compete
or operate effectively in international markets. We face certain risks inherent
in conducting business internationally, including:



| |  |  | difficulties and costs of staffing and managing international operations;                         
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | fluctuations in currency exchange rates and imposition of currency exchange controls;             
|
| |  |  | differing technology standards and language and translation issues;                               
|
| |  |  | difficulties in collecting accounts receivable and longer collection periods;                     
|
| |  |  | changes in regulatory requirements, including U.S. export restrictions on encryption technologies;
|
| |  |  | political and economic instability;                                                               
|
| |  |  | potential adverse tax consequences; and                                                           
|
| |  |  | reduced protection for intellectual property rights in some countries.                            

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

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

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

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

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

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

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

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SUPPLEMENTAL ALTERNATIVE MEASUREMENT FINANCIAL DATA

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

CRITICAL PATH, INC.
ALTERNATIVE MEASUREMENT CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA
Excluding Certain Special Charges
(In thousands, except per share amounts)

|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |        |        | 
|------------------------------------------- | -------------------------- | -------------------------- | ------- | ------------------ | ------ | ---------------- | ------- | -------- | ------ | -------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                            |                            |                            |         | Three Months Ended |        | Six Months Ended
|                                            |                            |                            |         |                    |        |                 
|                                            |                            |                            |         | June 30,           |        | June 30,         |         | June 30, |        | June 30,
|                                            |                            |                            |         | 2001               |        | 2002             |         | 2001     |        | 2002    
|                                            |                            |                            |         |                    |        |                  |         |          |        |         
|                                            |                            |                            |         | (Unaudited)       
|Net revenues                                |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|                                           
|                                           
|                                           
|                                           
|                                            | Software license           |                            | $       | 8,913              |        |                  | $       | 10,900   |        |          | $       | 14,463 |        |   | $       | 21,811 |       
|                                           
|                                           
|                                           
|                                           
|                                            | Hosted messaging           |                            |         | 11,141             |        |                  |         | 5,582    |        |          |         | 25,580 |        |   |         | 12,546 |       
|                                           
|                                           
|                                           
|                                           
|                                            | Professional services      |                            |         | 2,900              |        |                  |         | 2,645    |        |          |         | 6,317  |        |   |         | 4,582  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Maintenance and support    |                            |         | 4,131              |        |                  |         | 3,315    |        |          |         | 7,868  |        |   |         | 7,192  |       
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|                                            |                            | Total net revenues         |         |                    | 27,085 |                  |         |          | 22,442 |          |         |        | 54,228 |   |         |        | 46,131 | 
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Cost of net revenues                        |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|                                           
|                                           
|                                           
|                                           
|                                            | Software license           |                            |         | 126                |        |                  |         | 586      |        |          |         | 417    |        |   |         | 873    |       
|                                           
|                                           
|                                           
|                                           
|                                            | Hosted messaging           |                            |         | 17,440             |        |                  |         | 7,570    |        |          |         | 35,378 |        |   |         | 15,387 |       
|                                           
|                                           
|                                           
|                                           
|                                            | Professional services      |                            |         | 2,594              |        |                  |         | 2,166    |        |          |         | 5,560  |        |   |         | 4,609  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Maintenance and support    |                            |         | 2,414              |        |                  |         | 2,224    |        |          |         | 5,000  |        |   |         | 4,327  |       
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|                                            |                            | Total cost of net revenues |         |                    | 22,574 |                  |         |          | 12,546 |          |         |        | 46,355 |   |         |        | 25,196 | 
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Gross profit                                |                            |                            | 4,511   |                    |        |                  | 9,986   |          |        |          | 7,873   |        |        |   | 20,935  |       
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Operating expenses                          |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|                                           
|                                           
|                                           
|                                           
|                                            | Sales and marketing        |                            |         | 15,694             |        |                  |         | 11,374   |        |          |         | 34,406 |        |   |         | 22,317 |       
|                                           
|                                           
|                                           
|                                           
|                                            | Research and development   |                            |         | 8,333              |        |                  |         | 5,173    |        |          |         | 18,267 |        |   |         | 10,175 |       
|                                           
|                                           
|                                           
|                                           
|                                            | General and administrative |                            |         | 11,745             |        |                  |         | 6,296    |        |          |         | 25,038 |        |   |         | 12,974 |       
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|                                            |                            | Total operating expenses   |         |                    | 35,772 |                  |         |          | 22,843 |          |         |        | 77,711 |   |         |        | 45,466 | 
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Loss from operations                        |                            |                            | (31,261 | )                  |        |                  | (12,947 | )        |        |          | (69,838 | )      |        |   | (24,531 | )     
|                                           
|                                           
|                                           
|                                           
|Interest and other income (expense), net    |                            |                            | 2,895   |                    |        |                  | 161     |          |        |          | 5,320   |        |        |   | 694     |       
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                            |                            | (5,311  | )                  |        |                  | (665    | )        |        |          | (10,362 | )      |        |   | (1,235  | )     
|                                           
|                                           
|                                           
|                                           
|Equity in net loss of joint venture         |                            |                            | (397    | )                  |        |                  | (1,005  | )        |        |          | (1,173  | )      |        |   | (1,408  | )     
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Loss before income taxes                    |                            |                            | (34,074 | )                  |        |                  | (14,456 | )        |        |          | (76,053 | )      |        |   | (26,480 | )     
|                                           
|                                           
|                                           
|                                           
|Provision for income taxes                  |                            |                            | (1,150  | )                  |        |                  | (594    | )        |        |          | (1,493  | )      |        |   | (21     | )     
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Net loss                                    |                            | $                          | (35,224 | )                  |        | $                | (15,050 | )        |        | $        | (77,546 | )      |        | $ | (26,501 | )     
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |        |       
|Net loss per share  basic and diluted      |                            | $                          | (0.48   | )                  |        | $                | (0.19   | )        |        | $        | (1.06   | )      |        | $ | (0.34   | )     
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |        |       
|Weighted average shares  basic and diluted |                            |                            | 73,794  |                    |        |                  | 77,790  |          |        |          | 72,966  |        |        |   | 77,152  |       
|                                           
|                                           
|                                           
|                                           
|EBITDA(1)                                   |                            | $                          | (19,933 | )                  |        | $                | (5,565  | )        |        | $        | (47,326 | )      |        | $ | (9,349  | )     
|                                            |                            |                            |         |                    |        |                  |         |          |        |          |         |        |        |   |         |        |       



---

|(1) |  | Earnings before interest, taxes, depreciation and amortization, equity in
net loss of joint venture and one-time charges identified in the following
table. EBITDA is calculated by excluding from loss from operations
depreciation expense of approximately $11.3 million and $22.5 million for
the three and six-month periods ended June 30, 2001, and depreciation
expense of $7.4 million and $15.2 million for the three and
six-month
periods ended June 30, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29



---



##### Table of Contents



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

|                                              |                                                                    |   |                    |         |                  |   |          |         |          |   |          |         |   |   |         |         |  
|--------------------------------------------- | ------------------------------------------------------------------ | - | ------------------ | ------- | ---------------- | - | -------- | ------- | -------- | - | -------- | ------- | - | - | ------- | ------- | -
|                                              |                                                                    |   | Three Months Ended |         | Six Months Ended
|                                              |                                                                    |   |                    |         |                 
|                                              |                                                                    |   | June 30,           |         | June 30,         |   | June 30, |         | June 30,
|                                              |                                                                    |   | 2001               |         | 2002             |   | 2001     |         | 2002    
|                                              |                                                                    |   |                    |         |                  |   |          |         |         
|                                              |                                                                    |   | (Unaudited)       
|Supplemental alternative measurement net loss |                                                                    | $ | (35,224            | )       |                  | $ | (15,050  | )       |          | $ | (77,546  | )       |   | $ | (26,501 | )      
|                                             
|                                             
|                                             
|                                             
|                                              | Amounts excluded from alternative measurement net loss             |   |                    |         |                  |   |          |         |          |   |          |         |   |   |         |         |  
|                                             
|                                             
|                                             
|                                             
|                                              | Amortization of purchased technology                               |   |                    | (5,672  | )                |   |          | (4,631  | )        |   |          | (11,344 | ) |   |         | (9,261  | )
|                                             
|                                             
|                                             
|                                             
|                                              | Amortization of intangible assets                                  |   |                    | (4,112  | )                |   |          | (6,227  | )        |   |          | (8,245  | ) |   |         | (12,358 | )
|                                             
|                                             
|                                             
|                                             
|                                              | Acquisition-related retention bonuses in operating expenses        |   |                    | (793    | )                |   |          |        |          |   |          | (963    | ) |   |         | (10     | )
|                                             
|                                             
|                                             
|                                             
|                                              | Restructuring expense                                              |   |                    | (8,481  | )                |   |          | (1,539  | )        |   |          | (8,481  | ) |   |         | (1,539  | )
|                                             
|                                             
|                                             
|                                             
|                                              | Impairment of long-lived assets                                    |   |                    | (14,198 | )                |   |          |        |          |   |          | (14,198 | ) |   |         |        |  
|                                             
|                                             
|                                             
|                                             
|                                              | Stock-based expense in cost of revenue                             |   |                    | (1,469  | )                |   |          | (418    | )        |   |          | (2,772  | ) |   |         | (835    | )
|                                             
|                                             
|                                             
|                                             
|                                              | Stock-based expense in operating expenses                          |   |                    | (14,244 | )                |   |          | (4,114  | )        |   |          | (30,674 | ) |   |         | (7,369  | )
|                                             
|                                             
|                                             
|                                             
|                                              | Amortization of debt issuance costs in non-operating expense       |   |                    | (4      | )                |   |          | (68     | )        |   |          | (20     | ) |   |         | (281    | )
|                                             
|                                             
|                                             
|                                             
|                                              | Loss on investments in non-operating expense                       |   |                    | (702    | )                |   |          |        |          |   |          | (702    | ) |   |         | (104    | )
|                                             
|                                             
|                                             
|                                             
|                                              | Gain on retirement of convertible subordinated notes               |   |                    | 3,818   |                  |   |          |        |          |   |          | 3,818   |   |   |         |        |  
|                                             
|                                             
|                                             
|                                             
|                                              | Preferred stock instrument marked to market                        |   |                    |        |                  |   |          | (3,520  | )        |   |          |        |   |   |         | (3,320  | )
|                                              |                                                                    |   |                    |         |                  |   |          |         |          |   |          |         |   |   |         |        
|                                              | Subtotal
of amounts excluded from alternative measurement net loss |   |                    | (45,857 | )                |   |          | (20,517 | )        |   |          | (73,581 | ) |   |         | (35,077 | )
|                                              |                                                                    |   |                    |         |                  |   |          |         |          |   |          |         |   |   |         |        
|GAAP net loss                                 |                                                                    |   | (81,081            | )       |                  |   | (35,567  | )       |          |   | (151,127 | )       |   |   | (61,578 | )      
|                                             
|                                             
|                                             
|                                             
|                                              | Accretion on redeemable convertible preferred shares               |   |                    |        |                  |   |          | (3,261  | )        |   |          |        |   |   |         | (6,467  | )
|                                              |                                                                    |   |                    |         |                  |   |          |         |          |   |          |         |   |   |         |        
|GAAP net loss attributable to common shares   |                                                                    | $ | (81,081            | )       |                  | $ | (38,828  | )       |          | $ | (151,127 | )       |   | $ | (68,045 | )      
|                                              |                                                                    |   |                    |         |                  |   |          |         |          |   |          |         |   |   |         |        

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Item 3.Quantitative and Qualitative Disclosures About Market Risk

As of June 30, 2002, our investment portfolio consisted of
available-for-sale securities, excluding those classified as cash equivalents,
of $15.2 million. These securities consist of $1.8 million of strategic equity
investments in corporate partners, certain of which are publicly traded and
marketable and certain of which are privately held and $13.3 million of high
grade, low risk government securities and corporate bonds. These equity
securities are subject to price risk. Critical Paths long-term obligations
consist of our $38.4 million of face value 5.75% Convertible Subordinated Notes
due April 2005, and certain fixed rate capital leases. We do not plan to reduce
or eliminate our market exposure on these securities.

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

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

30



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of Critical Path, Inc.

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

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

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

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

/s/ PricewaterhouseCoopers LLP

San Jose, CA
August 7, 2002

31



---



##### Table of Contents






PART 2  OTHER INFORMATION




Item 1.Legal Proceedings

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

Securities Class Actions in Northern District of California.Beginning on
February 2, 2001, a number of securities class action complaints were filed
against the Company, and certain of our former officers and directors in the
United States District Court for the Northern District of California. The
complaints alleged that the Company and certain of its former officers made false or
misleading statements about the Companys financial results and its
prospects. In addition, on September 24, 2001, certain former shareholders of
PeerLogic, Inc. filed a putative class action in the Superior Court of the
State of California alleging that Critical Path breached representations and
warranties made in connection with the acquisition of PeerLogic. On November 8,
2001, Critical Path announced that it had reached an agreement in principle to
settle these cases. In February 2002, the Court gave preliminary approval to
the settlement of these cases. In June 2002, the Court entered its final
approval of the settlement. In connection with the settlement, the
Company reached a financial settlement and issued warrants to purchase
up to 850,000 shares of common stock at $10.00 per share.

On April 30, 2002, MBCP PeerLogic LLC and other named plaintiffs filed
suit in the U.S. District Court for the Southern District of New York against
Critical Path and certain of its former officers. The plaintiff shareholders
opted out of the shareholder litigation settlement which was approved
by the
U.S. District Court for the Northern District of California in June
2002. The complaint alleges breach of contract, unjust
enrichment, common law fraud and violations of federal securities laws and
seeks compensatory and punitive damages in an unnamed amount but in excess of
$200 million.

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

Derivative Actions in Northern District of California.Beginning on
February 5, 2001, Critical Path was named as a nominal defendant in a number of
derivative actions, purportedly brought on the Companys behalf, filed in the
Superior Court of the State of California and in the United States District
Court for the Northern District of California. The derivative complaints
alleged that certain of the Companys former officers and directors breached
their fiduciary duties, engaged in abuses of control, were unjustly enriched by
sales of the Companys common stock, engaged in insider trading in violation of
California law or published false financial information in violation of
California law. While the plaintiffs sought unspecified damages on the
Companys behalf, because of the nature of derivative litigation, any recovery
would inure to the Companys benefit. Contemporaneously with settlement of the
securities class action described above, an agreement in principle was reached
to settle the derivative action.

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

Lease Dispute.In July 2000, PeerLogic, Inc. signed a lease for office
space in San Francisco, California. In December 2000, we acquired
PeerLogic as a wholly-owned subsidiary. After reviewing its obligations under
the lease, the Company determined that local zoning laws likely prohibited a
business such as the Company or PeerLogic from occupying the leased premises,
and promptly sought a zoning determination from the San Francisco Zoning
Administrator to resolve the matter. The Zoning

32



---



##### Table of Contents



Administrator determined that the Companys proposed use of the leased
premises was not permitted. The landlord appealed this determination and
prevailed before the San Francisco Board of Appeals. We requested a
rehearing on the matter, which the Board of Appeals denied. In July 2002, the
Company filed a Petition for Writ of Administrative Mandamus with the San
Francisco Superior Court, requesting that the Board of Appeals decision be
reversed and/or remanded for rehearing by the Board, with instructions from the
Court. On April 30,
2002, the landlord filed suit in San Francisco Superior Court against the
Company alleging, among other things, breach of the lease. In its complaint,
the landlord sought unspecified compensatory damages for back rent, attorneys
fees, treble damages under relevant statutes, and unspecified punitive damages.
Litigation in this matter is ongoing.

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




Item 4.Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Shareholders on July 23, 2002 at 10:00
am in San Francisco, California. During the Annual Meeting of
Shareholders, for which a quorum was met, the
matters that were voted upon by shareholders of (i) the Common
Stock of the Company, and (ii) Series D Cumulative
Redeemable Convertible Participating Preferred Stock, were as follows:

| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
|
|
|
|
| | 1. Election of Directors                                                                                 
| | 2. Ratification of the appointment of PricewaterhouseCoopers LLP as the
Companys independent accountants

The following are the results of the voting:

|                                                                                         |      |                        |  |                 |            |  |  |  |           | 
|---------------------------------------------------------------------------------------- | ---- | ---------------------- |  | --------------- | ---------- |  |  |  | --------- | 
|1. To
elect Directors for a term expiring at the Annual Meeting of
Shareholders in 2003: |      | Shares for             |  | Shares withheld
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | (i)  | Common Stock           |  |                 |            |  |  |  |           | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |      | William McGlashan, Jr. |  |                 | 57,316,622 |  |  |  | 1,881,270 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |      | Klaus Esser            |  |                 | 57,315,570 |  |  |  | 1,882,322 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |      | Raul J. Fernandez      |  |                 | 57,314,195 |  |  |  | 1,883,697 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |      | Jeffrey T. Webber      |  |                 | 57,327,957 |  |  |  | 1,869,935 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | (ii) | Preferred Stock        |  |                 |            |  |  |  |           | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |      | William
McGlashan, Jr. |  |                 | 3,127,273  |  |  |  | 0         | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |      | Klaus Esser            |  |                 | 3,127,273  |  |  |  | 0         | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |      | Raul J. Fernandez      |  |                 | 3,127,273  |  |  |  | 0         | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         |      | Jeffrey T. Webber      |  |                 | 3,127,273  |  |  |  | 0         | 

2. To ratify the appointment of PricewaterhouseCoopers LLP as the
Companys independent accountants for the 2002 fiscal year.

|                                |            |         |        
|------------------------------- | ---------- | ------- | -------
|(i) Shares of Common
Stock:     |            |         |        
|                                | FOR        | AGAINST | ABSTAIN
|                                | 58,709,001 | 440,582 | 48,309 
|                               
|                               
|                               
|                               
|(ii) Shares of
Preferred Stock: |            |         |        
|                                | 3,127,273  | 0       | 0      

33



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##### Table of Contents






Item 6.Exhibits and Report on Form 8-K

(a)  Exhibits

|     |  |                                                                                                                                          
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Loan Agreement by and between Registrant and William McGlashan, Jr.
and his spouse dated as of May 20, 2002                              
|    
|    
|    
|    
|10.2 |  | Secured Promissory Note and Pledge Agreement by and between Registrant and
William McGlashan, Jr. and his spouse dated as of May 20, 2002
|    
|    
|    
|    
|10.3 |  | Notice of Early Exercise of Stock Option by and between Registrant
and William McGlashan, Jr. dated as of May 8, 2002                    
|    
|    
|    
|    
|10.4 |  | Promissory Note by William McGlashan, Jr. dated as of May 7, 2002                                                                        
|    
|    
|    
|    
|10.5 |  | Stock Pledge Agreement by and between Registrant and William McGlashan, Jr. dated May 8, 2002                                            
|    
|    
|    
|    
|10.6 |  | Nonstatutory Stock Option Agreement by and between Registrant and
William McGlashan Jr. dated
May 8, 2002                                
|    
|    
|    
|    
|10.7 |  | Separation Agreement and Mutual Release dated as of July 21, 2002 by and between Registrant
and David C. Hayden                          
|    
|    
|    
|    
|10.8 |  | Full Recourse Second Amended and Restated Promissory Note issued by
David C. Hayden dated as of July 21, 2002                            
|    
|    
|    
|    
|15.1 |  | Letter of PricewaterhouseCoopers LLP on Unaudited Interim Financial Information                                                          
|    
|    
|    
|    
|99.1 |  | Certifications of Chief Executive and Chief Financial Officers of the
Registrant                                                         



---

|(b) |  | Report on Form 8-K
|--- |  | ------------------

On May 13, 2002, we filed a report on Form 8-K under Items 5 and 7 noting
the issuance of a press release announcing the resignation of
David C. Hayden from employment with the Company and from the
Company's Board of Directors.

34



---



##### Table of Contents






SIGNATURE

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

|                      |  |                     |  |                                                                                                                                          
|--------------------- |  | ------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|                      |  | Critical Path, Inc.
|                     
|                     
|                     
|                     
|                      |  |                     |  |                                                                                                                                          
|                      |  |                     |  |                                                                                                                                          
|                      |  |                     |  |                                                                                                                                          
|                     
|                     
|                     
|                     
|                      |  | By:                 |  | /s/ Laureen DeBuono                                                                                                                      
|                      |  |                     |  |                                                                                                                                          
|                      |  |                     |  | Laureen DeBuonoExecutive Vice President,
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
|                     
|                     
|                     
|                     
|Date: August 14, 2002 |  |                     |  |                                                                                                                                          

35



---



##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                                                                          
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                          
|Number  |  | Exhibit Description                                                                                                                      
|        |  |                                                                                                                                          
|10.1    |  | Loan Agreement
by and between Registrant and William McGlashan, Jr. and his spouse dated as of
May 20, 2002                              
|       
|       
|       
|       
|10.2    |  | Secured Promissory Note and Pledge Agreement by and between Registrant and
William McGlashan, Jr. and his spouse dated as of May 20, 2002
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|10.3    |  | Notice of Early Exercise of Stock Option by and between Registrant
and William McGlashan, Jr. dated as of May 20, 2002                   
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|10.4    |  | Promissory Note by William McGlashan, Jr. dated as of May 7, 2002                                                                        
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|10.5    |  | Stock Pledge Agreement by and between Registrant and William
McGlashan, Jr. dated May 8, 2002                                            
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|10.6    |  | Nonstatutory Stock Option Agreement by and between Registrant and
William McGlashan Jr. dated
as of May 8, 2002                          
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|10.7    |  | Separation Agreement and Mutual Release dated as of July 21, 2002 by and between Registrant
and David C. Hayden                          
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|10.8    |  | Full Recourse Second Amended and Restated Promissory Note issued by
David C. Hayden dated as of July 21, 2002                            
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|15.1    |  | Letter of PricewaterhouseCoopers LLP on Unaudited Interim Financial Information                                                          
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|99.1    |  | Certifications
of Chief Executive and Chief Financial Officers of the
Registrant                                                         



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

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