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

For the three months ended September 30, 2007



| ̈ | 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



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Critical Path, Inc.



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

2 Harrison Street, 2nd Floor

San Francisco, California 94105

415-541-2500



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Check one:

Large Accelerated Filer ̈Accelerated Filer ̈Non-accelerated Filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

As of
November 1, 2007, the Company had outstanding 37,682,065 shares of common stock, $0.001 par value per share.



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##### Table of Contents

TABLE OF CONTENTS



|                              |  |                                                                                      |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------ |  | ----
|                              |  |                                                                                      |  | Page
|PART 1- FINANCIAL INFORMATION |  | 3                                                                                   
|                              |  |                                                                                     
|ITEM 1                        |  | UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                |  | 3   
|                              |  |                                                                                     
|ITEM 2                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 20  
|                              |  |                                                                                     
|ITEM 3                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           |  | 30  
|                              |  |                                                                                     
|ITEM 4                        |  | CONTROLS AND PROCEDURES                                                              |  | 31  
|                              | 
|PART II- OTHER INFORMATION    |  | 32                                                                                  
|                              |  |                                                                                     
|ITEM 1                        |  | LEGAL PROCEEDINGS                                                                    |  | 32  
|                              |  |                                                                                     
|ITEM 1A                       |  | RISK FACTORS                                                                         |  | 33  
|                              |  |                                                                                     
|ITEM 5                        |  | OTHER INFORMATION                                                                    |  | 46  
|                              |  |                                                                                     
|ITEM 6                        |  | EXHIBITS                                                                             |  | 46  
|                              | 
|SIGNATURE                     |  | 47                                                                                  
|                              | 
|Exhibit Index                 |  | 48                                                                                  



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##### Table of Contents

PART I - FINANCIAL INFORMATION



|ITEM 1. | UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|------- | -----------------------------------------------------

CRITICAL PATH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                         |  |                           |            |   |                     |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ------------------- | - | ---------- | -
|                                                                                                                                                         |  | September 30,2007         |            |   | December 31,2006(a) |  
|                                                                                                                                                         |  | (in thousands, unaudited) |           
|ASSETS                                                                                                                                                   |  |                           |            |   |                     |   |            |  
|Current assets                                                                                                                                           |  |                           |            |   |                     |   |            |  
|Cash and cash equivalents                                                                                                                                |  | $                         | 11,341     |   |                     | $ | 14,542     |  
|Accounts receivable, net                                                                                                                                 |  |                           | 10,794     |   |                     |   | 10,283     |  
|Prepaid and other current assets                                                                                                                         |  |                           | 2,680      |   |                     |   | 2,427      |  
|                                                                                                                                                         |  |                           |            |   |                     |   |            |  
|Total current assets                                                                                                                                     |  |                           | 24,815     |   |                     |   | 27,252     |  
|Property and equipment, net                                                                                                                              |  |                           | 2,325      |   |                     |   | 2,612      |  
|Goodwill                                                                                                                                                 |  |                           | 7,766      |   |                     |   | 7,460      |  
|Restricted cash                                                                                                                                          |  |                           | 212        |   |                     |   | 212        |  
|Other assets                                                                                                                                             |  |                           | 167        |   |                     |   | 467        |  
|                                                                                                                                                         |  |                           |            |   |                     |   |            |  
|Total assets                                                                                                                                             |  | $                         | 35,285     |   |                     | $ | 38,003     |  
|                                                                                                                                                         |  |                           |            |   |                     |   |            |  
|LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS DEFICIT                                                                                        |  |                           |            |   |                     |   |            |  
|Current liabilities                                                                                                                                      |  |                           |            |   |                     |   |            |  
|Accounts payable                                                                                                                                         |  | $                         | 4,292      |   |                     | $ | 3,995      |  
|Accrued compensation and benefits                                                                                                                        |  |                           | 3,565      |   |                     |   | 3,796      |  
|Income and other tax liabilities                                                                                                                         |  |                           | 1,308      |   |                     |   | 4,079      |  
|Other accrued liabilities                                                                                                                                |  |                           | 8,121      |   |                     |   | 8,962      |  
|Deferred revenue                                                                                                                                         |  |                           | 8,066      |   |                     |   | 6,848      |  
|Notes payable, short-term                                                                                                                                |  |                           | 25,638     |   |                     |   |           |  
|Capital lease and other obligations, current                                                                                                             |  |                           | 8          |   |                     |   | 24         |  
|                                                                                                                                                         |  |                           |            |   |                     |   |            |  
|Total current liabilities                                                                                                                                |  |                           | 50,998     |   |                     |   | 27,704     |  
|Deferred revenue, long-term                                                                                                                              |  |                           | 660        |   |                     |   | 229        |  
|Notes payable, long-term                                                                                                                                 |  |                           |           |   |                     |   | 22,396     |  
|Income and other tax liabilities, long-term                                                                                                              |  |                           | 3,600      |   |                     |   |           |  
|Embedded derivative liability                                                                                                                            |  |                           | 430        |   |                     |   | 612        |  
|                                                                                                                                                         |  |                           |            |   |                     |   |            |  
|Total liabilities                                                                                                                                        |  |                           | 55,688     |   |                     |   | 50,941     |  
|                                                                                                                                                         |  |                           |            |   |                     |   |            |  
|Redeemable preferred stock                                                                                                                               |  |                           | 144,821    |   |                     |   | 134,406    |  
|                                                                                                                                                         |  |                           |            |   |                     |   |            |  
|Commitments and contingencies (see Note 5)                                                                                                               |  |                           |            |   |                     |   |            |  
|Shareholders deficit                                                                                                                                    |  |                           |            |   |                     |   |            |  
|Common stock and additional paid-in-capital, par value $0.001; shares authorized: 200,000; shares issued and outstanding 37,198 and 37,228,
respectively |  |                           | 2,170,874  |   |                     |   | 2,181,099  |  
|Accumulated deficit                                                                                                                                      |  |                           | (2,335,495 | ) |                     |   | (2,326,055 | )
|Accumulated other comprehensive loss                                                                                                                     |  |                           | (603       | ) |                     |   | (2,388     | )
|                                                                                                                                                         |  |                           |            |   |                     |   |            |  
|Total shareholders deficit                                                                                                                              |  |                           | (165,224   | ) |                     |   | (147,344   | )
|                                                                                                                                                         |  |                           |            |   |                     |   |            |  
|Total liabilities, redeemable preferred stock and shareholders deficit                                                                                  |  | $                         | 35,285     |   |                     | $ | 38,003     |  
|                                                                                                                                                         |  |                           |            |   |                     |   |            |  

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|(a) | The condensed consolidated balance sheet at December 31, 2006 has been derived from the audited financial statements at that date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

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 OPERATIONS



|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | --------------------------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                         |  | Three months endedSeptember 30,                     |        |   | Nine months endedSeptember 30, |  
|                                                                         |  | 2007                                                |        |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|                                                                         |  | (in thousands, except per share amounts, unaudited) |       
|Net revenues                                                             |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Software licensing                                                       |  | $                                                   | 3,157  |   |                                | $ | 2,688  |      |  | $ | 11,158  |   |  | $ | 9,097   |  
|Hosted services                                                          |  |                                                     | 932    |   |                                |   | 1,220  |      |  |   | 3,441   |   |  |   | 3,609   |  
|Professional services                                                    |  |                                                     | 2,353  |   |                                |   | 2,257  |      |  |   | 7,176   |   |  |   | 7,660   |  
|Maintenance and support                                                  |  |                                                     | 4,781  |   |                                |   | 4,687  |      |  |   | 13,811  |   |  |   | 13,524  |  
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total net revenues                                                       |  |                                                     | 11,223 |   |                                |   | 10,852 |      |  |   | 35,586  |   |  |   | 33,890  |  
|Cost of net revenues                                                     |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Software licensing                                                       |  |                                                     | 1,203  |   |                                |   | 1,105  |      |  |   | 3,672   |   |  |   | 3,470   |  
|Hosted services                                                          |  |                                                     | 756    |   |                                |   | 740    |      |  |   | 2,236   |   |  |   | 2,275   |  
|Professional services                                                    |  |                                                     | 1,784  |   |                                |   | 1,943  |      |  |   | 5,798   |   |  |   | 6,139   |  
|Maintenance and support                                                  |  |                                                     | 1,409  |   |                                |   | 1,303  |      |  |   | 4,193   |   |  |   | 3,820   |  
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total cost of net revenues                                               |  |                                                     | 5,152  |   |                                |   | 5,091  |      |  |   | 15,899  |   |  |   | 15,704  |  
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                                             |  |                                                     | 6,071  |   |                                |   | 5,761  |      |  |   | 19,687  |   |  |   | 18,186  |  
|Operating expenses                                                       |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Selling and marketing                                                    |  |                                                     | 3,001  |   |                                |   | 2,728  |      |  |   | 9,257   |   |  |   | 9,544   |  
|Research and development                                                 |  |                                                     | 2,356  |   |                                |   | 2,375  |      |  |   | 7,075   |   |  |   | 7,219   |  
|General and administrative                                               |  |                                                     | 2,595  |   |                                |   | 2,850  |      |  |   | 8,316   |   |  |   | 9,140   |  
|Restructuring expense                                                    |  |                                                     | 65     |   |                                |   | 137    |      |  |   | 194     |   |  |   | 1,178   |  
|Gain on sale of assets                                                   |  |                                                     |       |   |                                |   | (1,007 | )    |  |   | (129    | ) |  |   | (2,978  | )
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                 |  |                                                     | 8,017  |   |                                |   | 7,083  |      |  |   | 24,713  |   |  |   | 24,103  |  
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating loss                                                           |  |                                                     | (1,946 | ) |                                |   | (1,322 | )    |  |   | (5,026  | ) |  |   | (5,917  | )
|Other income (expense), net                                              |  |                                                     | (1,033 | ) |                                |   | 469    |      |  |   | (974    | ) |  |   | 547     |  
|Interest income (expense), net                                           |  |                                                     | (1,058 | ) |                                |   | (911   | )    |  |   | (3,120  | ) |  |   | (2,664  | )
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss before provision for income taxes                                   |  |                                                     | (4,037 | ) |                                |   | (1,764 | )    |  |   | (9,120  | ) |  |   | (8,034  | )
|Provision for income taxes                                               |  |                                                     | (56    | ) |                                |   | (280   | )    |  |   | (320    | ) |  |   | (594    | )
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                                 |  |                                                     | (4,093 | ) |                                |   | (2,044 | )    |  |   | (9,440  | ) |  |   | (8,628  | )
|Dividends and accretion on redeemable preferred stock                    |  |                                                     | (3,710 | ) |                                |   | (3,551 | )    |  |   | (11,157 | ) |  |   | (10,518 | )
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss attributable to common shareholders                             |  | $                                                   | (7,803 | ) |                                | $ | (5,595 | )    |  | $ | (20,597 | ) |  | $ | (19,146 | )
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share attributable to common shareholders |  | $                                                   | (0.21  | ) |                                | $ | (0.15  | )    |  | $ | (0.56   | ) |  | $ | (0.53   | )
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Shares used in the basic and diluted per share calculations              |  |                                                     | 37,375 |   |                                |   | 36,533 |      |  |   | 36,957  |   |  |   | 36,248  |  
|                                                                         |  |                                                     |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

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



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CRITICAL PATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                      |  |                                |        |   |      |   |        |  
|------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                      |  | Nine months endedSeptember 30, |       
|                                                                                      |  | 2007                           |        |   | 2006 |  
|                                                                                      |  | (in thousands)                 |       
|Cash flows from operating activities:                                                 |  |                                |        |   |      |   |        |  
|Net loss                                                                              |  |                                | (9,440 | ) |      |   | (8,628 | )
|Adjustments to reconcile net loss to net cash used in operating activities:           |  |                                |        |   |      |   |        |  
|Provision for allowance for doubtful accounts                                         |  |                                | (152   | ) |      |   | 80     |  
|Depreciation                                                                          |  |                                | 1,417  |   |      |   | 1,276  |  
|Stock-based expense                                                                   |  |                                | 190    |   |      |   | 550    |  
|Gain on sale of certain Hosted Assets                                                 |  |                                | (129   | ) |      |   | (2,978 | )
|Amortization of debt issuance costs                                                   |  |                                | 118    |   |      |   | 97     |  
|(Gain) Loss on disposal of property and equipment                                     |  |                                | (7     | ) |      |   | 17     |  
|Change in fair value of embedded derivative liabilities                               |  |                                | (182   | ) |      |   | (844   | )
|Accrued interest and accretion notes payable                                          |  |                                | 3,242  |   |      |   | 2,974  |  
|Changes in assets and liabilities:                                                    |  |                                |        |   |      |   |        |  
|Accounts receivable                                                                   |  |                                | 193    |   |      |   | 2,429  |  
|Prepaid expenses and other assets                                                     |  |                                | (71    | ) |      |   | 351    |  
|Accounts payable                                                                      |  |                                | 297    |   |      |   | (60    | )
|Accrued compensation and benefits                                                     |  |                                | (231   | ) |      |   | 1,547  |  
|Income and other tax liabilities                                                      |  |                                | 993    |   |      |   | 370    |  
|Other accrued liabilities                                                             |  |                                | (1,005 | ) |      |   | (3,549 | )
|Deferred revenue                                                                      |  |                                | 1,649  |   |      |   | 2,047  |  
|                                                                                      |  |                                |        |   |      |   |        |  
|Net cash used in operating activities                                                 |  |                                | (3,118 | ) |      |   | (4,321 | )
|                                                                                      |  |                                |        |   |      |   |        |  
|Cash flows from investing activities                                                  |  |                                |        |   |      |   |        |  
|Proceeds from sale of certain Hosted Assets, net of transaction costs of $956 in 2006 |  |                                | 129    |   |      |   | 5,470  |  
|Purchases of property and equipment                                                   |  |                                | (1,123 | ) |      |   | (1,137 | )
|Restricted cash                                                                       |  |                                |       |   |      |   | 66     |  
|                                                                                      |  |                                |        |   |      |   |        |  
|Net cash (used in) provided by investing activities                                   |  |                                | (994   | ) |      |   | 4,399  |  
|                                                                                      |  |                                |        |   |      |   |        |  
|Cash flows from financing activities                                                  |  |                                |        |   |      |   |        |  
|Principal payments on note and lease obligations                                      |  |                                | (16    | ) |      |   | (49    | )
|                                                                                      |  |                                |        |   |      |   |        |  
|Net cash used in financing activities                                                 |  |                                | (16    | ) |      |   | (49    | )
|                                                                                      |  |                                |        |   |      |   |        |  
|Net change in cash and cash equivalents                                               |  |                                | (4,128 | ) |      |   | 29     |  
|Effect of exchange rates on cash and cash equivalents                                 |  |                                | 927    |   |      |   | 678    |  
|Cash and cash equivalents, beginning of period                                        |  |                                | 14,542 |   |      |   | 18,707 |  
|                                                                                      |  |                                |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                              |  | $                              | 11,341 |   |      | $ | 19,414 |  
|                                                                                      |  |                                |        |   |      |   |        |  

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



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CRITICAL PATH, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS DEFICIT

(in thousands)



|                                                                                      |  |                           |        |          |                                             |        |   |                                                  |   |           |       |  |   |            |   |  |   |          |  
|------------------------------------------------------------------------------------- |  | ------------------------- | ------ | -------- | ------------------------------------------- | ------ | - | ------------------------------------------------ | - | --------- | ----- |  | - | ---------- | - |  | - | -------- | -
|                                                                                      |  | Redeemablepreferred stock |        |          | Common stock and additional
paid in capital |        |   | Accumulated deficit and other
comprehensive loss |   |           | Total | 
|                                                                                      |  | Amended Series D          |        | Series E |                                             |        |   |                                                 
|Balance at December 31, 2006                                                          |  | $                         | 62,814 |          | $                                           | 71,592 |   |                                                  | $ | 2,181,099 |       |  | $ | (2,328,443 | ) |  | $ | (147,344 | )
|Accretion of dividend on redeemable preferred stock                                   |  |                           | 2,541  |          |                                             | 3,146  |   |                                                  |   | (5,687    | )     |  |   |           |   |  |   | (5,687   | )
|Accretion to redemption value for redeemable preferred stock                          |  |                           | 1,990  |          |                                             | 3,554  |   |                                                  |   | (5,544    | )     |  |   |           |   |  |   | (5,544   | )
|Conversion to common stock                                                            |  |                           |       |          |                                             | (816   | ) |                                                  |   | 816       |       |  |   |           |   |  |   | 816      |  
|Stock-based compensation associated with grants of stock options and restricted stock |  |                           |       |          |                                             |       |   |                                                  |   | 190       |       |  |   |           |   |  |   | 190      |  
|Foreign currency translation adjustments                                              |  |                           |       |          |                                             |       |   |                                                  |   |          |       |  |   | 1,785      |   |  |   | 1,785    |  
|Net loss                                                                              |  |                           |       |          |                                             |       |   |                                                  |   |          |       |  |   | (9,440     | ) |  |   | (9,440   | )
|                                                                                      |  |                           |        |          |                                             |        |   |                                                  |   |           |       |  |   |            |   |  |   |          |  
|Balance at September 30, 2007                                                         |  | $                         | 67,345 |          | $                                           | 77,476 |   |                                                  | $ | 2,170,874 |       |  | $ | (2,336,098 | ) |  | $ | (165,224 | )
|                                                                                      |  |                           |        |          |                                             |        |   |                                                  |   |           |       |  |   |            |   |  |   |          |  

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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1Basis of Presentation, Liquidity and
Capital Resources and Recent Accounting Pronouncements

The Company

Critical Path, Inc. was incorporated in California on February 19, 1997. Critical Path, along with its subsidiaries (collectively referred to herein as the Company), delivers software and services
that enable the rapid deployment of highly scalable valued-added solutions for messaging and identity management. The Companys messaging and identity management solutions help organizations expand the range of digital communications services
they provide while helping to reduce overall costs. The Companys messaging solutions provide integrated access to a broad range of communication and collaboration applications from wireless devices, web browsers, desktop clients, and voice
systems. The Companys identity management solutions are designed to reduce burdens on helpdesks, simplify the deployment of key security infrastructure, enable compliance with new regulatory mandates, and help reduce the cost and effort of
deploying applications and services to distributed organizations, mobile users, suppliers, and customers.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts in the financial statements and
accompanying notes. These estimates form the basis for judgments the Company makes about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company bases its estimates and judgments on historical
experience and on various other assumptions that the Company believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. United States generally
accepted accounting principles (U.S. GAAP) requires the Company to make estimates and judgments in several areas, including those related to impairment of intangible assets, revenue recognition ,recoverability of accounts receivable, the fair value
of derivative financial instruments, the recording of various accruals (including accruals for restructuring charges), the useful lives of long-lived assets such as property and equipment, income taxes and potential losses from contingencies and
litigation. Actual results could differ from those estimates.

Reclassifications

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

Liquidity and Capital Resources

The
Company has operated at a loss since inception and its history of losses from operations and cash flow deficits, in combination with its cash balances, raise concerns about the Companys ability to fund its operations. The Company has focused
on capital financing initiatives in order to maintain current and planned operations. The Companys primary sources of capital have come from both debt and equity financings that it has completed over the past several years and the sale of the
Hosted Assets in January 2006. In 2003 and 2004, the Company secured additional funds through several rounds of financing that involved the sale of senior secured convertible notes all of which converted into Series E Redeemable Convertible
Preferred Stock (Series E preferred stock) in 2004. In the third quarter of 2004, the Company completed a rights offering resulting in aggregate proceeds to the Company of approximately $4.0 million, and, in the fourth quarter of 2004, the
Company secured and drew $11.0 million from an $18.0 million round of 13.9% debt financing (the 13.9% Notes) and in March 2005, the Company drew down the remaining $7.0 million. The Company is not required to make any payments of principal or
interest under this $18.0 million debt financing until maturity in June 2008, at which time all principal and interest will become due. In January 2006, the Company sold its Hosted Assets for $6.3 million, and later in 2006 the Company received $1.1
million from amounts held in escrow in connection with the satisfaction of certain post-closing conditions related to the sale. Additionally, in January 2007 the Company received $0.1 million, the last of the amounts held in escrow as all
post-closing conditions related to the sale of the Hosted Assets had been satisfied.

The Companys principal sources of liquidity include its cash
and cash equivalents. As of September 30, 2007, the Company had cash and cash equivalents available for operations totaling $11.3 million, of which $8.6 million was located in accounts outside the United States and that is not readily
available for its domestic operations. Accordingly, at September 30 2007 the Companys readily available cash resources in the United States were $2.7 million. Additionally, as of September 30, 2007, the Company had cash
collateralized letters of credit totaling approximately $0.2 million which is recorded as restricted cash on its balance sheet and is not readily available for operations.

If the Company is unable to significantly increase its revenues, reduce the amount of cash used by its operating activities and generate positive cash flow from its operating activities, the Company will need to
undertake additional restructuring initiatives to continue its operations. The Company believes that its existing capital resources are not sufficient to fund the Companys



7



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current operations beyond the second quarter of 2008. Additionally, as the Company approaches the June 2008 maturity of the 13.9% Notes, the Company will
need to restructure its debt to extend the maturity date or seek additional financing in order to pay the 13.9% Notes. As of September 30, 2007, the outstanding principal and interest on these notes was $25.6 million. The Company also will need
to restructure its outstanding preferred stock in order to delay the redemption of these preferred shares beyond their current redemption date in July 2008. If the redemption date is not extended, in July 2008 the Company will be required to redeem
its outstanding shares of Series D and Series E preferred stock to the extent the payment of cash to redeem shares is permitted by applicable law at that time. Based on the currently outstanding number of shares of Series D and Series E preferred
stock, we would be required to pay an aggregate of $161.7 million in July 2008. The Company and the holders of the 13.9% Notes or the Series D and Series E preferred stock may be unable to agree on a structuring of these existing commitments.
Moreover, the Company must obtain the consent from the holders of two-thirds in principal amount of the outstanding 13.9% Notes and the preferred stockholders in order to incur additional indebtedness. Even if the holders of the 13.9% Notes and the
Series D and Series E preferred stock consent to the incurrence of additional indebtedness, such financing may not be available in sufficient amounts or on terms acceptable to the Company. The Company does not believe additional equity financing on
terms reasonably acceptable is currently available. The Companys common stock now trades in the over-the-counter market on the OTC Bulletin Board owned by the Nasdaq Stock Market, Inc., which was established for securities that do not meet the
listing requirements of the Nasdaq Global Market or the Nasdaq Capital Market. The Company believes its listing on the OTC Bulletin Board, and its low stock price, greatly impair its ability to raise additional capital through equity or debt
financing. If the Companys efforts to significantly increase its revenues are unsuccessful, the Company will reduce the amount of cash used by its operating activities, liquidate assets, implement restructuring initiatives, which may include
the previously announced proposal to go private currently under consideration by a special committee of the Companys Board of Directors, seek the protection of applicable bankruptcy laws or some combination of the foregoing. See discussion of
liquidity in the Companys Risk Factors.

The Company continually evaluates potential acquisitions of, or investments in, other
businesses, products and technologies, and may in the future utilize its cash resources or may require additional equity or debt financing to accomplish any acquisitions or investments. These alternatives could increase liquidity through the
infusion of investment capital by third-party investors or decrease liquidity as a result of the Company seeking to fund expansion into these markets. Such expansions might also cause an increase in capital expenditures and operating expenses. The
Company has no present understandings, commitments or agreements for any material acquisitions of, or investments in, other complementary businesses, products or technologies. For the long-term, the Company believes future improvements in its
operating activities and additional financing will be necessary to provide the liquidity and capital resources sufficient to support its business. Additionally, in the past, the Company has elected to divest or discontinue certain business
operations through termination, sale or other disposition. For example, in January 2006, the Company sold substantially all of the assets relating to its hosted messaging business. Furthermore, the Company may choose to divest certain business
operations based on the Companys perception of their strategic value to the Company, even if such operations have been profitable historically. Decisions to eliminate or limit certain business operations have involved in the past, and could in
the future involve, the expenditure of capital, consumption of management resources, realization of losses, transition and wind-up expenses, further reduction in workforce, facility consolidation and the elimination of revenues along with associated
costs, any of which could cause the Companys operating results to decline and may fail to yield the expected benefits.

The following table sets
forth the Companys net losses attributable to common shareholders and the cash used by its operating activities for the periods indicated:



|                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|                                                |  | (in thousands)                  |        |   | (in thousands)                 |  
|Net loss attributable to common shareholders    |  | $                               | (7,803 | ) |                                | $ | (5,595 | )    |  | $ | (20,597 | ) |  | $ | (19,146 | )
|Cash provided by (used in) operating activities |  |                                 | 2,660  |   |                                |   | (998   | )    |  |   | (3,118  | ) |  |   | (4,321  | )

Recent Accounting Pronouncements

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109, (FIN 48) on January 1,
2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN 48
provides guidance on de-recognition, statement of operations classification of interest and penalties, accounting in interim periods, disclosure and transition. The Companys policy is to recognize interest and penalties related to
uncertain tax positions in its provision for income tax expense if warranted. After the adoption of FIN 48, the Companys tax assets and liabilities did not differ from the assets and liabilities before adoption, therefore, the Company did not
record any cumulative effect adjustment as of the adoption date. In addition, consistent with the provisions of FIN 48, the Company classified $3.8 million of income tax liabilities from current to non-current liabilities because payment of cash is
not anticipated within one year of the balance sheet date and the Company is unable to make a reasonably reliable estimate when cash settlement with a taxing authority will occur.

In February 2007, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement
No. 115 , which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company has not yet determined the impact, if any, that the implementation of SFAS No. 159 will have on its financial position and results of operations.



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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which clarifies the principle that
fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has not yet determined the
impact, if any, that the implementation of SFAS No. 157 will have on its financial position and results of operations.

Note 2Goodwill

At September 30, 2007, the Company was carrying $7.8 million of goodwill assets which, in accordance with SFAS No. 142, are not amortized. The
change in the balance subsequent to December 31, 2006 is due to the revaluation of goodwill balances denominated in foreign currencies.

The Company
tests its goodwill assets for impairment annually or on a more frequent basis if events occur or circumstances change that would more likely than not reduce the fair value of any of the Companys reporting units below their carrying value.

Note 3Notes Payable

Notes payable at
September 30, 2007 and December 31, 2006 consisted only of the Companys 13.9% Notes. The Company has recorded the 13.9% Notes as a short-term liability at September 30, 2007 since their maturity date is June 30, 2008.

13.9% Notes

In December 2004, the Company issued
$11.0 million in principal amount of 13.9% Notes to General Atlantic Partners 74, L.P., Gapstar, LLC, GAP Coinvestment Partners II, L.P., (referred to collectively as the General Atlantic Investors) GAPCO GmbH & Co. KG., Cenwell Limited,
Campina Enterprises Limited, Great Affluent Limited, Dragonfield Limited, Lion Cosmos Limited (referred to collectively as the Cheung Kong Investors) and Richmond III, LLC (referred to with the General Atlantic Investors and the Cheung Kong
Investors collectively as the 13.9% Note Investors). As part of the financing transaction, the Company issued warrants to purchase 235,712 shares of Series F preferred stock at a per share purchase price of $14 per share, which is equivalent to
$1.40 per share on a common equivalent basis. In March 2005, the Company issued the remaining $7.0 million of the 13.9% Notes to the 13.9% Note Investors. As part of this financing transaction, the Company issued warrants to purchase an additional
149,998 shares of Series F preferred stock.

On March 5, 2007, the Company and the 13.9% Note Investors entered into an Amendment to Notes (the
13.9% Notes Amendment) whereby the Company and the 13.9% Note Investors agreed to extend the maturity date of all of the 13.9% Notes from December 30, 2007 to June 30, 2008.

The 13.9% Notes accrue interest at a rate of 13.9% per annum; however, the Company is not obligated to make interest payments on the notes prior to their maturity date of June 30, 2008. The 13.9% Notes are
due and payable on the earliest to occur of the maturity date (June 30, 2008) or when declared due and payable upon the occurrence of an event of default, or a change of control of the Company.

The $18.0 million in proceeds from the financing transaction were allocated to the 13.9% Notes and warrants based upon their relative estimated fair values. The
estimated fair value of the warrants has been classified as a derivative instrument and recorded as a liability on the Companys balance sheet in accordance with current authoritative guidance. In accordance with the provisions of SFAS
No. 133, Accounting for Derivative Instruments, the Company is required to adjust the carrying value of the instrument to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of
Other Income (Expense). The warrant derivative liability is being carried on the Companys balance sheet at its fair value of $60,000 at September 30, 2007.

The 13.9% Notes are carried as a short-term liability on the September 30, 2007 balance sheet as short-term Notes payable and were carried as a long-term liability on the December 31, 2006
balance sheet as long-term Notes payable as follows:



|                                                                                                        |  |                      |        |   |                     |   |        |  
|------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ------------------- | - | ------ | -
|                                                                                                        |  | At September 30,2007 |        |   | At December 31,2006 |  
|                                                                                                        |  | (in thousands)       |       
|Proceeds from the issuance of the 13.9% Notes                                                           |  | $                    | 18,000 |   |                     | $ | 18,000 |  
|Less proceeds allocated to the fair value of the Series F preferred stock warrant derivative instrument |  |                      | (2,711 | ) |                     |   | (2,711 | )
|Add accretion to redemption value                                                                       |  |                      | 2,462  |   |                     |   | 1,735  |  
|Add accrued interest                                                                                    |  |                      | 7,887  |   |                     |   | 5,372  |  
|                                                                                                        |  |                      |        |   |                     |   |        |  
|Carrying value of the 13.9% Notes                                                                       |  | $                    | 25,638 |   |                     | $ | 22,396 |  
|                                                                                                        |  |                      |        |   |                     |   |        |  



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For the three and nine months ended September 30, 2007, the Company recorded accrued interest of $0.9 million
and $2.5 million, respectively. For the three and nine months ended September 30, 2006, the Company recorded accrued interest of $0.8 million and $2.2 million, respectively. These notes are carried at cost and had an approximate fair value
of $15.3 million at September 30, 2007.

Note 4Redeemable Preferred Stock

As of September 30, 2007 and December 31, 2006 redeemable preferred stock was comprised of the following:



|             |  |                                                          |        |                    |                |                   |                 |  |        |         |                |            |                 |   |         |  |   |        
|------------ |  | -------------------------------------------------------- | ------ | ------------------ | -------------- | ----------------- | --------------- |  | ------ | ------- | -------------- | ---------- | --------------- | - | ------- |  | - | -------
|             |  | Authorized                                               |        | September 30, 2007 |                | December 31, 2006
|             |  |                                                          | Issued |                    | Carrying value |                   | Liquidity value |  | Issued |         | Carrying value |            | Liquidity value
|             |  | (in thousands, except for amounts authorized and issued)
|Series D (a) |  | 4,188,587                                                |        | 3,520,537          |                | $                 | 67,345          |  | $      | 77,452  |                | 3,520,537  |                 | $ | 62,814  |  | $ | 77,452 
|Series E     |  | 68,000,000                                               |        | 48,346,820         |                |                   | 77,476          |  |        | 85,954  |                | 48,811,945 |                 |   | 71,592  |  |   | 83,623 
|Series F     |  | 450,000                                                  |        |                   |                |                   |                |  |        |        |                |           |                 |   |        |  |   |       
|             |  |                                                          |        |                    |                |                   |                 |  |        |         |                |            |                 |   |         |  |   |        
|             |  | 72,638,587                                               |        | 51,867,357         |                | $                 | 144,821         |  | $      | 163,406 |                | 52,332,482 |                 | $ | 134,406 |  | $ | 161,075
|             |  |                                                          |        |                    |                |                   |                 |  |        |         |                |            |                 |   |         |  |   |        



|(a) | Series D liquidation value at $22 per share. See Series D Cumulative Redeemable Convertible Preferred Stock below.
|--- | ------------------------------------------------------------------------------------------------------------------

Series D Cumulative Redeemable Convertible Preferred Stock

In
December 2001, the Company completed a financing transaction with a group of investors and their affiliated entities. In connection with this financing transaction, the Company issued 4.0 million shares of its Series D Cumulative Redeemable
Convertible Preferred Stock (Series D preferred stock), in a private offering, resulting in gross cash proceeds of approximately $30.0 million, and the simultaneous retirement of approximately $65.0 million in face value of the Companys
outstanding convertible subordinated notes. The investors were led by General Atlantic Partners LLC and affiliates and included Hutchison Whampoa Limited and affiliates and Vectis Group LLC and affiliates. In addition, General Atlantic LLC was
granted warrants to purchase 0.6 million shares of the Companys Common Stock in connection with this offering. These warrants expired unexercised.

At issuance, costs of $3.1 million were recorded as a reduction of the carrying amount of the Series D preferred stock and will accrete over the term of the Series D preferred stock. Additionally, at issuance, the Series D
preferred stock was deemed to have an embedded beneficial conversion feature which was limited to the net proceeds allocable to preferred stock of approximately $42.0 million. The value of the beneficial conversion feature, at issuance, was
initially recorded as a reduction of the carrying amount of the Series D preferred stock and accretes over the term of the Series D preferred stock.

The Series D preferred stock issued in the financing transaction ranks senior to all of the Companys
Common Stock in priority of dividends, rights of redemption and payment upon liquidation. The fair value ascribed to the preferred stock was based on actual cash paid by independent investors and the approximate fair value of the 53/4% Notes retired in connection with the offering. The principal terms of the preferred stock included an automatic
redemption on November 8, 2006, cumulative dividends at a rate of 8% per year, compounded on a semi-annual basis and payable in cash or additional shares of Series D preferred stock, conversion into shares of Common Stock calculated
based on the Accreted Value which is, the purchase price plus accrued dividends divided by $4.20, and preference in the return of equity in any liquidation or change of control.

The terms of the Series D preferred stock provides for a preferential return of equity to the Series D preferred stockholders, before any return of equity to the common shareholders, and also provided for the
Series D preferred stockholders to participate on a pro rata basis with the common shareholders in any remaining equity, once the preferential return has been satisfied. Under the terms of this provision, the preferential return of equity is
equal to the purchase price of the Series D preferred stock plus all dividends that would have accrued during the term of the preferred stock, even if a change in control occurs prior to the redemption date. The right to receive a preferential
return lapses if either: (i) Critical Path is sold for a price per share of Series D preferred stock, had each such share been converted into Common Stock prior to change in control of at least four times the Accreted Value, or
(ii) Critical Paths stock trades on NASDAQ for 60 days prior to the change-in-control at an average price of not less than four times the Accreted Value. As part of the Companys November 2003 private placement of the 10% Senior
Notes, the Company received shareholder approval to amend the terms of the Series D preferred stock to, among other things, amend the Series D preferred stock liquidation preference upon a liquidation and change of control, to eliminate
the participation feature, to reduce the conversion price from $4.20 to $1.50 and to reduce the amount of dividends to which the holders of Series D preferred stock are entitled.

A portion of the proceeds received for the Series D preferred stock was allocated to the warrants issued to General Atlantic and the preferred stock, based upon their relative fair market values. As a result of
this allocation, approximately $5.3 million of the proceeds were allocated to the warrant, which was recorded as a reduction of the carrying value of the Series D preferred stock. Using the Black-Scholes option pricing model, assuming a
four-year term, 200% volatility, a risk-free rate of 6.0% and no dividend yield, the fair market value of the warrants was $6.2 million. As part of the Companys November 2003 private placement of the 10% Senior Notes, the Company received
shareholder approval to amend the warrants to reduce the exercise price per share from $4.20 to $1.50. These warrants expired unexercised in November 2006.



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In July 2004, at a special meeting of shareholders, the
Companys shareholders approved proposals to amend and restate the certificate of determination of preferences of Series D preferred stock (the Amended Series D). As part of this amendment, the automatic redemption date was changed to
July 2008 and the dividend accrual rate was reduced to 53/4%. The dividends which had accrued on the
Series D preferred stock totaling approximately $12.2 million were recorded as a reduction to the carrying value of the Amended Series D. This amount was recorded as a reduction of the carrying amount of the Amended Series D and
accretes over the term of the Amended Series D. As of the July 2008 mandatory redemption date, the redemption price of the outstanding Series D preferred stock will be approximately $72.5 million. Additionally, the current liquidation
preference of the Amended Series D preferred stock is $22 per share, or approximately $77.5 million.

The following table sets forth the
carrying value and liquidation values of the Amended Series D preferred stock (in thousands):



|                                                                        |  |   |       
|----------------------------------------------------------------------- |  | - | ------
|Beginning balance Series D preferred stock at December 31, 2006         |  | $ | 62,814
|Add accrued dividends                                                   |  |   | 2,541 
|Add amortization and accretion                                          |  |   | 1,990 
|                                                                        |  |   |       
|Ending balance Series D preferred stock at September 30, 2007           |  | $ | 67,345
|                                                                        |  |   |       
|Liquidation value of the Series D preferred stock at September 30, 2007 |  | $ | 77,452
|                                                                        |  |   |       

Series E Redeemable Convertible Preferred Stock

During the three months ended September 30, 2004, the Company issued a total of approximately
55.9 million shares of Series E Redeemable Convertible Preferred Stock (Series E preferred stock). In July 2004, the Company issued approximately 30.6 million shares of Series E preferred stock to convert $45.5 million of
the 10% Senior Notes plus accrued interest, approximately 21.9 million shares of Series E preferred stock to convert $32.8 million of the 53/4% Notes and approximately 0.8 million shares of Series E preferred stock to convert certain shares of Series D preferred stock into Series E preferred stock. In August 2004, the
Company issued approximately 2.6 million shares of Series E preferred stock in connection with its rights offering from which the Company received gross proceeds of approximately $4.0 million.

The Series E preferred stock ranks senior to all preferred and common stock of the Company in priority of
dividends, rights of redemption and payment upon liquidation of the Company. The principal terms of the Series E preferred stock include an automatic redemption on July 9, 2008, cumulative dividends at a rate of 53/4% per year, dividends are not paid in cash but are added to the value of the Series E preferred stock on
June 30 and December 31 each year, and conversion into shares of common stock calculated based on the quotient of the Series E accreted value divided by the Series E conversion price, $1.50.

At issuance, the total amount of costs associated with converting the Companys debt into Series E preferred stock and costs associated with the rights
offering, totaling approximately $4.6 million, accrete over the term of the Series E preferred stock. Additionally, the conversion of the $45.5 million 10% Senior Notes into the Series E preferred stock was deemed to have a beneficial
conversion feature totaling approximately $16.3 million. The value of the beneficial conversion feature, at issuance, was initially recorded as a reduction of the carrying amount of the Series E preferred stock and will accrete over the
term of the Series E preferred stock. As of the July 2008 mandatory redemption date, the redemption prices of the outstanding Series E preferred stock will be approximately $89.2 million. Additionally, the current liquidation preference of the
Series E preferred stock is approximately $86.0 million. The carrying value of the Series E preferred stock is as follows (in thousands):



|                                                                |  |   |        |  
|--------------------------------------------------------------- |  | - | ------ | -
|Beginning balance Series E preferred stock at December 31, 2006 |  | $ | 71,592 |  
|Add accrued dividends                                           |  |   | 3,146  |  
|Add amortization and accretion                                  |  |   | 3,554  |  
|Less converted to common stock                                  |  |   | (816   | )
|                                                                |  |   |        |  
|Ending balance Series E preferred stock at September 30, 2007   |  | $ | 77,476 |  
|                                                                |  |   |        |  

Series F Redeemable Convertible Preferred Stock

In December 2004, the Companys Board of Directors authorized the issuance of up to 0.5 million shares of
Series F Redeemable Convertible Preferred Stock (Series F preferred stock). The Series F preferred stock will rank equally with the Series E preferred stock, and will rank senior to all other capital stock with respect to rights
on liquidation, dissolution and winding up of the Company. The Series F preferred stock will accrue dividends at a simple annual rate of 53/4% of the purchase price of $14.00 per share (equivalent to $1.40 per share on a common equivalent basis), whether or not declared by the board of directors. Dividends in respect of the Series F
preferred stock will not be paid in cash but will be added to the value of the Series F preferred stock and will be taken into account for purposes of determining the liquidation and change in control preference, conversion rate and voting
rights.

The Company must declare or pay dividends on the Series F preferred stock when the Company declares or pay dividends to the holders of
common stock. Holders of Series F preferred stock, if and when outstanding, are entitled to notice of all shareholders meetings and are entitled to vote on all matters submitted to the Shareholders for a vote, voting together with the
holders of the common stock and all other classes of capital stock entitled to vote, voting as a single class (except where a separate vote is required



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##### Table of Contents

by the Companys amended and restated articles of incorporation, its bylaws or California law). The holders of Series F preferred stock will be
entitled to vote as a separate class on any amendment to the terms or authorized number of shares of Series F preferred stock, the issuance of any equity security ranking senior to the Series F preferred stock and the redemption of or the
payment of a dividend in respect of any junior security. At any time, holders of Series F preferred stock may elect to convert their Series F preferred stock into shares of common stock. Each share of Series F preferred Stock is
currently convertible into ten shares of common stock. After three years from the date the Series E preferred stock is first issued, the Company may call for redemption of the Series F preferred stock under certain circumstances. On the
fourth anniversary of the date the Series E preferred stock is first issued, the Company must call for redemption of the Series F preferred stock.

At September 30, 2007, no shares of Series F preferred stock have been issued or were outstanding. Warrants to purchase 0.4 million shares of Series F preferred stock issued in connection with the issuance of the 13.9%
Notes, were outstanding as of September 30, 2007.

MBCP Peerlogic

In November 2003, the Company issued 188,587 shares of Series D preferred stock to MBCP Peerlogic (MBCP Shares) related to the settlement of certain litigation, resulting in a charge of $3.8 million.
Additionally, 69,149 of these shares were automatically convertible into Series E preferred stock to the extent such preferred stock was issued in the future. In July 2004, the Company received shareholder approval to issue shares of
Series E preferred stock, and the Company exchanged 86,232 shares of Series D preferred stock (including accrued dividends) held by the various named plaintiff shareholders comprising MBCP Peerlogic for 829,873 shares of Series E
preferred stock. The exchange of Series D for Series E preferred stock did not result in any charge to the Company.

Dividends and Accretion
on Redeemable Preferred Stock

Dividends and accretion on redeemable preferred stock represents the accrued dividends and accretion of the beneficial
conversion features of the Companys outstanding Series D and E preferred stock as well as the accretion to the redemption value of the outstanding Series D preferred stock. The following table sets forth the dividends and accretion
on redeemable preferred stock for the periods indicated:



|                                                                           |  |                                 |       |                                |   |       |  |      |        |  |   |       
|-------------------------------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ------ |  | - | ------
|                                                                           |  | Three months endedSeptember 30, |       | Nine months endedSeptember 30,
|                                                                           |  | 2007                            |       | 2006                           |   | 2007  |  | 2006
|                                                                           |  | (in thousands)                 
|Accrued dividends                                                          |  | $                               | 1,889 |                                | $ | 1,900 |  | $    | 5,687  |  | $ | 5,700 
|Accretion to the redemption value and of the beneficial conversion feature |  |                                 | 1,821 |                                |   | 1,651 |  |      | 5,470  |  |   | 4,818 
|                                                                           |  |                                 |       |                                |   |       |  |      |        |  |   |       
|                                                                           |  | $                               | 3,710 |                                | $ | 3,551 |  | $    | 11,157 |  | $ | 10,518
|                                                                           |  |                                 |       |                                |   |       |  |      |        |  |   |       

Note 5Commitments and Contingencies

Leases

The Company leases office space and equipment under noncancelable operating leases with various expiration
dates through 2014. Rent expense during the three and nine months ended September 30, 2007, totaled $0.5 million and $1.6 million, respectively. Rent expense during the three and nine months ended September 30, 2006, totaled $0.6 million
and $2.0 million, respectively. Future minimum lease payments under noncancelable operating leases are as follows:



|                             |  |                 |      
|---------------------------- |  | --------------- | -----
|                             |  | Operatingleases
|Year ending December 31,     |  |                 |      
|2007                         |  | $               | 735  
|2008                         |  |                 | 1,756
|2009                         |  |                 | 1383 
|2010                         |  |                 | 1209 
|2011                         |  |                 | 1128 
|Thereafter                   |  |                 | 1691 
|                             |  |                 |      
|Total minimum lease payments |  | $               | 7,902
|                             |  |                 |      



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Other Contractual Obligations

The Company has other contractual obligations which total $1.0 million at September 30, 2007. These obligations are primarily associated with the future purchase of equipment and software, the maintenance of hardware and software
products being utilized within engineering and hosted operations, and the management of data center operations and network infrastructure storage for the Companys hosted operations. These obligations are expected to be completed over the next
2 years, including $0.6 million in the remainder of 2007.

San Francisco Offices

On June 28, 2006, the Company entered into a Sublease Agreement (the Sublease) to sublease from Babcock & Brown 15,000 square feet of the existing headquarters facilities at 2 Harrison Street. The
sublease with Babcock & Brown has a two-year term and monthly rent of approximately $39,000. In November 2006, the square footage the Company occupied of the sub leased premises was reduced by approximately 9,000 square feet and the monthly
rent was also reduced to approximately $21,000 per month in accordance with the terms of the Sublease. On November 1, 2007, the Company notified Babcock & Brown that it was terminating the sublease as of December 31, 2007 and would be vacating
the subleased premises at that time.

Service Level Agreements

Certain net revenues are derived from contractual relationships that typically have one to three year terms. Certain agreements require minimum performance standards regarding the availability, response time, and days of storage of hosted
use net newsgroup services. If these standards are not met, such contracts are subject to termination and the Company could be subject to monetary penalties.

Litigation and Investigations

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

Action in the Superior Court of San Diego. In April 2006, the Company was added as a named
defendant in a lawsuit previously filed by a former shareholder of Extricity, Inc. against current and former officers and directors of Peregrine Systems, Inc., Peregrines former accountants, some of Peregrines customers, including us
and various other unnamed defendants. In February 2007, the plaintiff filed a third amended complaint, which for the first time contains certain allegations and claims raised against the Company. The complaint alleges that
certain of the named defendants including the Company, as Peregrines customers, engaged in fraudulent transactions with Peregrine that were not accounted for by Peregrine in conformity with U.S. GAAP and that this substantially inflated the
value of Peregrine securities issued as consideration in Extricitys merger with Peregrine. The Company filed a demurrer to all claims, however, the court found the plaintiffs allegations to be sufficient for the pleading stage, subject
to further factual discovery. The Company has recorded a $0.2 million liability against this claim as of September 30, 2007. In October, the Company began settlement discussions with the plaintiff and entered into a settlement agreement on
October 8, 2007. Under the agreement, the Company will make payments totaling significantly less than its expected costs for pursuing the next phase of litigation. Upon full payment by December 31, 2007, the complaint and all claims
against the Company will be dismissed with prejudice.

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

A final settlement approval hearing on the proposed issuer settlement was held on April 24, 2006, and the district court took the matter under submission. Meanwhile
the consolidated case against the underwriters proceeded. On October 13, 2004, the district court had certified a class in the underwriters proceeding. On December 5, 2006, however, the Second Circuit reversed, holding that a class
could not be certified. The plaintiffs petitioned the Second Circuit for rehearing of the Second Circuits decision, however, on April 6, 2007, the Second Circuit denied the petition for rehearing. At a status conference on April 23,
2007, the district court suggested that the issuers settlement could not be approved in its present form, given the Second Circuits ruling. On June 25, 2007 the district court issued an order terminating the settlement agreement.
The plaintiffs are due to submit amended complaints and the issue of a new class definition for certification will be heard in the fall. In the meantime, the issuer defendants, including the Company, are working to reinstate the settlement agreement
with the plaintiffs on substantially the same terms. The Company has not recorded a liability against this claim as of September 30, 2007.



13



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##### Table of Contents

Derivative Action in Western District of Washington. On July 17, 2007, the Company received a letter
demanding on behalf of alleged Company stockholder Vanessa Simmonds that the Companys board of directors prosecute a claim against the Companys IPO underwriters, in addition to certain unnamed directors, key officers and certain other
shareholders who allegedly engaged in short-swing trading during certain periods in 1999 and 2000 in violation of the Securities Exchange Act of 1934, section 13(d) and Rule 13d-5. The board declined to prosecute the claim on the grounds that it did
not seem to have any merit and, even if it did, it would be time-barred and unlikely to result in any benefit to the Company and its stockholders. The Company has learned that on October 3, 2007 the plaintiff filed a complaint for recovery of
short-swing profits under Section 16(b) of the Exchange Act against BancBoston Robertson Stephens, Inc. and JP Morgan Chase & Co. Although the Company has not been served to date, the complaint purports to name the Company as a
nominal defendant. No damages are alleged against or sought from the Company, and the Company has not recorded a liability against this claim as of September 30, 2007.

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

Indemnifications. The Company provides general indemnification provisions in its license agreements. In these agreements, the Company generally states that it will defend or settle, at its own expense, any claim against the customer
by a third-party asserting a patent, copyright, trademark, trade secret or proprietary right violation related to any products that the Company has licensed to the customer. The Company agrees to indemnify its customers against any loss, expense or
liability, including reasonable attorneys fees, from any damages alleged against the customer by a third-party in its course of using products sold by the Company. The Company has not received any claims under this indemnification and does not
know of any instances in which such a claim may be brought against the Company in the future. Additionally, in connection with the sale of a portion of the Companys hosted messaging assets to Tucows.com, the Company agreed to indemnify
Tucows.com and its affiliates for all losses (limited to the amount of the purchase price) incurred by them in connection with certain breaches of covenants, representations and warranties the Company made to Tucows.com relating to the sufficiency
of title to the assets being transferred; that the Company had requisite authority and power to enter into and perform its obligations under the purchase agreement; and that the Company had filed tax returns and timely paid all taxes relating to the
income or operations of the hosted business prior to the transfer.

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

Note 6Geographic Information

Information regarding revenues attributable to the Companys primary geographic regions is as follows:



|              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|              |  | Three months endedSeptember 30, |        | Nine months endedSeptember 30,
|              |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|              |  | (in thousands)                  |        | (in thousands)                
|Net revenues  |  |                                 |        |                                |   |        |  |      |        |  |   |       
|United States |  | $                               | 1,885  |                                | $ | 2,679  |  | $    | 6,798  |  | $ | 8,078 
|Europe        |  |                                 | 9,076  |                                |   | 7,849  |  |      | 27,901 |  |   | 25,098
|Latin America |  |                                 | 86     |                                |   | 67     |  |      | 368    |  |   | 215   
|Asia Pacific  |  |                                 | 176    |                                |   | 257    |  |      | 519    |  |   | 499   
|              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|              |  | $                               | 11,223 |                                | $ | 10,852 |  | $    | 35,586 |  | $ | 33,890
|              |  |                                 |        |                                |   |        |  |      |        |  |   |       

During each of the three and nine months ended September 30, 2007 and 2006, the Company did not have any
customers that accounted for more than 10% of its revenues. The following table sets forth the customers that accounted for more than 10% of the Companys accounts receivable at September 30, 2007 and 2006.



|                                                   |  |                  |   |  |      |  
|-------------------------------------------------- |  | ---------------- | - |  | ---- | -
|                                                   |  | At September 30, |  
|                                                   |  | 2007             |   |  | 2006 |  
|As a percent of net accounts receivable Customer A |  | 5.3              | % |  | 12.9 | %



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Information regarding long-lived assets attributable to the Companys primary geographic regions is as follows:



|                       |  |                      |       |                     |   |      
|---------------------- |  | -------------------- | ----- | ------------------- | - | -----
|                       |  | At September 30,2007 |       | At December 31,2006
|                       |  | (in thousands)      
|Net long-lived assets: |  |                      |       |                     |   |      
|United States          |  | $                    | 1,059 |                     | $ | 1,282
|Other (a)              |  |                      | 1,266 |                     |   | 1,330
|                       |  |                      |       |                     |   |      
|                       |  | $                    | 2,325 |                     | $ | 2,612
|                       |  |                      |       |                     |   |      



|(a) | Included at September 30, 2007, are long-lived assets in both Canada and Ireland that account for 5% and 44%, respectively, of the Companys total long-lived assets and
included at December 31, 2006, are long-lived assets in both Canada and Ireland that account for 11% and 33%, respectively, of the Companys total long-lived assets.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The long-lived assets in the table above represent the Companys total property and equipment presented on a geographic basis at each period end. For each of the
periods presented, the Company did not have any other material long-lived assets to present on a geographic basis. Goodwill is excluded from this analysis.

Note 7Stock-Based Compensation

The Company adopted SFAS No. 123R (revised in 2004), Share-based payment, on January 1,
2006. SFAS 123R requires the measurement and recognition of compensation expense, using a fair-value based method, for all share-based awards made to the Companys employees and directors, including grants of stock options, restricted stock and
other stock-based plans. The Company recognizes the stock compensation expense over the requisite service period of the individual grants, which generally equals the vesting period.

In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, which provided guidance on the adoption of SFAS123R as it relates to certain SEC rules and regulations. The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123R.



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##### Table of Contents

Valuation of stock options granted

The Company utilized the Black-Scholes valuation model to estimate the fair value of stock options granted and stock-based compensation expense recognized in the second quarter and first nine months of 2007 and 2006.
The Company used the following weighted-average assumptions:



|                          |  |                                 |   |  |                                |   |  |          |   |  |          |  
|------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | -------- | - |  | -------- | -
|                          |  | Three months endedSeptember 30, |   |  | Nine months endedSeptember 30, |  
|                          |  | 2007                            |   |  | 2006                           |   |  | 2007     |   |  | 2006     |  
|Risk free interest rate   |  | 4.2                             | % |  | 4.6                            | % |  | 4.2%-4.9 | % |  | 4.6-5.1  | %
|Expected lives (in years) |  | 4.75                            |   |  | 4.75                           |   |  | 4.75     |   |  | 4.0-4.75 |  
|Dividend yield            |  | 0.0                             | % |  | 0.0                            | % |  | 0.0      | % |  | 0.0      | %
|Expected volatility       |  | 123                             | % |  | 132                            | % |  | 123      | % |  | 132-137  | %

The risk-free interest rate was derived from the U.S. treasury zero-coupon rate in effect at the end of the
quarter in which the stock option was granted, utilizing the yield offered by an instrument with a maturity approximating the expected life of the option. The expected life assumptions utilize the simplified method provided under SAB
107, which allows companies with traditional service-based option grants to use an expected life assumption equal to the midpoint between the vesting period and contractual term of the options. The dividend yield of zero is based on the fact that
the Company has never paid cash dividends and has no present intention to pay cash dividends. The expected volatility assumption is based upon the historical volatility of our common stock.

Stock-based compensation expense

The following table details
stock-based compensation expense, related to the Companys stock-based awards, on a functional basis as reported in the Companys Consolidated Statement of Operations for the three and nine months ended September 30, 2007 and 2006.



|                                                                        |  |                                 |    |                                |   |      |  |      |     |  |   |    
|----------------------------------------------------------------------- |  | ------------------------------- | -- | ------------------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                                                        |  | Three months endedSeptember 30, |    | Nine months endedSeptember 30,
|                                                                        |  | 2007                            |    | 2006                           |   | 2007 |  | 2006
|                                                                        |  | (in thousands)                 
|Stock-based compensation expense reported in cost of net revenues:      |  |                                 |    |                                |   |      |  |      |     |  |   |    
|Hosted services                                                         |  | $                               |   |                                | $ | 1    |  | $    |    |  | $ | 10 
|Professional services                                                   |  |                                 | 4  |                                |   | 6    |  |      | 10  |  |   | 50 
|Maintenance and support                                                 |  |                                 | 2  |                                |   | 2    |  |      | 5   |  |   | 14 
|                                                                        |  |                                 |    |                                |   |      |  |      |     |  |   |    
|Total stock-based compensation expense reported in cost of net revenues |  |                                 | 6  |                                |   | 9    |  |      | 15  |  |   | 74 
|                                                                        |  |                                 |    |                                |   |      |  |      |     |  |   |    
|Stock-based compensation expense reported in operating expenses:        |  |                                 |    |                                |   |      |  |      |     |  |   |    
|Sales and marketing                                                     |  |                                 | 4  |                                |   | 8    |  |      | 8   |  |   | 41 
|Research and development                                                |  |                                 | 7  |                                |   | 9    |  |      | 19  |  |   | 65 
|General and administrative                                              |  |                                 | 28 |                                |   | 90   |  |      | 147 |  |   | 370
|                                                                        |  |                                 |    |                                |   |      |  |      |     |  |   |    
|Total stock-based compensation expense reported in operating expenses   |  |                                 | 39 |                                |   | 107  |  |      | 174 |  |   | 476
|                                                                        |  |                                 |    |                                |   |      |  |      |     |  |   |    
|Total stock-based compensation expenses                                 |  | $                               | 45 |                                | $ | 116  |  | $    | 189 |  | $ | 550
|                                                                        |  |                                 |    |                                |   |      |  |      |     |  |   |    



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##### Table of Contents

Stock-based compensation expense recognized in the Consolidated Statement of Operations for the third quarter and first
nine months of 2007 and 2006 was calculated based upon awards ultimately expected to vest and has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant, and revised, if necessary, in subsequent
periods if actual forfeitures differ from estimates.

The value of the portion of the stock award that is ultimately expected to vest is recognized as
expense on a straight-line basis over the requisite service periods. Including the unvested portion of the fair value of the June 2006 option exchange, total stock-based compensation of stock options granted but not yet vested, as of
September 30, 2007, was approximately $0.1 million, which is expected to be recognized as expense over the future weighted average vesting period of 1.1 years.

Stock Plan Activity

Stock options

The Company grants stock options through its 1998 Stock Option Plan and the 1999 Non statutory Stock Option Plan, respectively (together, the Option Plans and each a Plan). The 1998 Plan grants
options to purchase shares of common stock to employees, officers, directors and consultants, with an increase annually on January 1 of each year by an amount equal to 2% of the total number of shares of the Companys Common Stock
authorized for issuance at the end of the most recently concluded fiscal year. The 1999 Plan provides for the granting of options to purchase shares of common stock to non-executive officer employees or the initial employment grant for executive
officers. The 1998 Plan is a shareholder approved plan and allows for options to be granted as either incentive stock options (ISOs) or nonqualified stock options (NSOs). Options granted under the 1999 Plan may only be nonqualified stock options
(NSOs). ISOs may be granted only to Company employees, including officers and employee directors. NSOs may be granted to Company employees, non-employee directors and consultants. The 1998 Plan expires on December 31, 2007. Accordingly, the Company
will not be able to grant additional options under the 1998 Plan after that time unless a new plan is approved by shareholders.

Stock options granted
generally expire seven years from the date of grant and vest over four years. The Company has no stock option awards with market or performance conditions.

The following table summarizes activity under all stock option plans for the nine month period ended September 30, 2007 (in thousands, except for per share amounts):



|                                |  |                            |   |  |                    |   |  |                                       |     
|------------------------------- |  | -------------------------- | - |  | ------------------ | - |  | ------------------------------------- | ----
|                                |  | Shares Available for Grant |   |  | Number Outstanding |   |  | WeightedAverageExercisePrice perShare
|Balance at December 31, 2006    |  | 17,782                     |   |  | 9,125              |   |  | $                                     | 1.96
|Additional shares authorized    |  | 4,000                      |   |  |                   |   |  |                                       |     
|Options granted                 |  | (419                       | ) |  | 419                |   |  |                                       | 0.09
|Options exercised               |  |                           |   |  |                   |   |  |                                       |    
|Options forfeited               |  | 1,820                      |   |  | (1,820             | ) |  |                                       | 4.16
|                                |  |                            |   |  |                    |   |  |                                       |     
|Balance at September 30, 2007   |  | 23,183                     |   |  | 7,724              |   |  | $                                     | 1.37
|                                |  |                            |   |  |                    |   |  |                                       |     
|Exercisable, September 30, 2007 |  |                            |   |  | 5,849              |   |  | $                                     | 1.76
|                                |  |                            |   |  |                    |   |  |                                       |     

Based on the assumptions utilized in the Black-Scholes valuation model as discussed above, the weighted-average
fair value of options granted under the stock option plans for the three months ended September 30, 2007 and 2006 was approximately $$0.02 and $0.04, respectively.

The Company issues new shares of common stock upon exercise of stock options. During the nine months ended September 30, 2007 and 2006, zero and 921 stock options were exercised, respectively. The stock options
exercised during the nine months ended September 30, 2006, had an insignificant aggregate intrinsic value. The aggregate intrinsic value represents the difference between the option exercise price and the closing stock price on the date of
exercise for each option exercised during the period.

Stock options outstanding as well as vested stock options at September 30, 2007 and 2006 had no
aggregate intrinsic value. The aggregate intrinsic value, for purposes of this calculation, represents, on a pretax basis, the difference between the Companys closing stock price as of the end of the third quarter of 2007 and 2006,
respectively, and the option exercise price, multiplied by the number of options outstanding or exercisable. Stock options with exercise prices which are greater than the closing quarter end stock price are excluded from this calculation.



17



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##### Table of Contents

The following table summarizes information about stock options outstanding at September 30, 2007 (options in
thousands):



|                         |  |                    |  |                                             |  |                               |       |                    |       |                               |   |      
|------------------------ |  | ------------------ |  | ------------------------------------------- |  | ----------------------------- | ----- | ------------------ | ----- | ----------------------------- | - | -----
|                         |  |                    |  | Options Outstanding                         |  | Options Exercisable          
|Range of Exercise Prices |  | Number Outstanding |  | Weighted Average Remaining Contractual Life |  | WeightedAverageExercise Price |       | Number Exercisable |       | WeightedAverageExercise Price
|$ 0.10 - $ 0.19          |  | 505                |  | 6.65                                        |  | $                             | 0.11  |                    | 62    |                               | $ | 0.15 
|$ 0.20 - $ 0.20          |  | 6,627              |  | 5.69                                        |  |                               | 0.20  |                    | 5,225 |                               |   | 0.20 
|$ 0.21 - $ 0.75          |  | 249                |  | 6.90                                        |  |                               | 0.48  |                    | 219   |                               |   | 0.51 
|$ 0.76 - $ 2.00          |  | 178                |  | 6.27                                        |  |                               | 1.56  |                    | 178   |                               |   | 1.56 
|$ 2.01 - $ 5.00          |  | 74                 |  | 4.50                                        |  |                               | 3.65  |                    | 74    |                               |   | 3.65 
|$ 5.01 - $ 10.30         |  | 91                 |  | 2.90                                        |  |                               | 94.55 |                    | 91    |                               |   | 94.55
|                         |  |                    |  |                                             |  |                               |       |                    |       |                               |   |      
|                         |  | 7,724              |  | 5.79                                        |  | $                             | 1.37  |                    | 5,849 |                               | $ | 1.76 
|                         |  |                    |  |                                             |  |                               |       |                    |       |                               |   |      

As of September 30, 2006, there were 9,796,000 options outstanding and 6,204,000 options exercisable.

Restricted stock and other stock-based plans

The
Company has granted shares of restricted stock and restricted stock units to certain key employees and executive officers through its 1998 Plan. The Company did not issue any shares of restricted stock or restricted stock units during the nine month
period ended September 30, 2007.

The restricted stock gives employees certain ownership rights, including the right to vote on shareholder matters;
whereas, restricted stock units do not convey any voting rights, but present the holder with the right to receive shares of Critical Path common stock as the underlying units vest. The restricted stock and restricted stock units vest 25 percent
every 6 months over a term of 2 years, with any unvested shares/units forfeited if a recipient terminates their employment with the Company.

The following
table reflects the activity associated with shares of unvested restricted stock and restricted stock units during the nine months ended September 30,2007 (in thousands):



|                                                 |  |        |   |  |                                      |     
|------------------------------------------------ |  | ------ | - |  | ------------------------------------ | ----
|                                                 |  | Shares |   |  | Weighted AverageGrantDate Fair Value
|Unvested restricted shares at December 31, 2006  |  | 546    |   |  | $                                    | 1.21
|Granted                                          |  |       |   |  |                                      |    
|Vested                                           |  | (280   | ) |  |                                      | 1.31
|Forfeited                                        |  |       |   |  |                                      |    
|                                                 |  |        |   |  |                                      |     
|Unvested restricted shares at September 30, 2007 |  | 266    |   |  | $                                    | 1.12
|                                                 |  |        |   |  |                                      |     

The fair value of restricted stock and restricted stock units which vested during the nine month period ended
September 30, 2007 totaled approximately $28,000.

As of September 30, 2007, there was approximately $30,000 in total unrecognized compensation
cost associated with the unvested shares of restricted stock and restricted stock units. The cost is expected to be recognized over the future weighted average vesting period of 0.75 years.



18



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##### Table of Contents

Note 8Strategic Restructuring

The following tables summarize strategic restructuring costs incurred by the Company.



|                                |  |                    |    |                                                      |   |      |       |  |   |      |  
|------------------------------- |  | ------------------ | -- | ---------------------------------------------------- | - | ---- | ----- |  | - | ---- | -
|                                |  | Workforcereduction |    | Facility andoperationsconsolidation andother charges |   |      | Total | 
|                                |  | (in thousands)     |   
|Liability at December 31, 2006  |  | $                  | 25 |                                                      | $ | 46   |       |  | $ | 71   |  
|Total gross charges             |  |                    |   |                                                      |   | 194  |       |  |   | 194  |  
|Cash payments                   |  |                    |   |                                                      |   | (240 | )     |  |   | (240 | )
|                                |  |                    |    |                                                      |   |      |       |  |   |      |  
|Liability at September 30, 2007 |  | $                  | 25 |                                                      | $ |     |       |  | $ | 25   |  
|                                |  |                    |    |                                                      |   |      |       |  |   |      |  

The Company recorded restructuring expenses for the three and nine months ended September 30, 2007 primarily
related to the closure of an office in the United Kingdom and Santa Monica, California as well as the transition of the U.S. accounting operations to Ireland.

Note 9Net Loss Per Share Attributed to Common Shares

Net loss per share is calculated as follows:



|                                                                                                 |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                 |  | Three months endedSeptember 30, |         |   | Nine months endedSeptember 30, |  
|                                                                                                 |  | 2007                            |         |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|                                                                                                 |  | (in thousands)                  |         |   | (in thousands)                 |  
|Net loss attributable to common shareholders                                                     |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                                                         |  | $                               | (7,803  | ) |                                | $ | (5,595 | )    |  | $ | (20,597 | ) |  | $ | (19,146 | )
|Accrued dividends and accretion on redeemable preferred stock                                    |  |                                 | (3,710  | ) |                                |   | (3,551 | )    |  |   | (11,157 | ) |  |   | (10,518 | )
|                                                                                                 |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss attributable to common shareholders                                                     |  | $                               | (11,513 | ) |                                | $ | (9,146 | )    |  | $ | (31,754 | ) |  | $ | (29,664 | )
|                                                                                                 |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding                                                              |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding                                                              |  |                                 | 37,725  |   |                                |   | 37,696 |      |  |   | 37,503  |   |  |   | 37,521  |  
|Weighted average shares subject to repurchase agreements                                         |  |                                 | (350    | ) |                                |   | (1,122 | )    |  |   | (546    | ) |  |   | (1,232  | )
|Weighted average shares held in escrow related to acquisitions                                   |  |                                 |        |   |                                |   | (41    | )    |  |   |        |   |  |   | (41     | )
|                                                                                                 |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Shares used in the computation of basic and diluted net loss attributable to common shareholders |  |                                 | 37,375  |   |                                |   | 36,533 |      |  |   | 36,957  |   |  |   | 36,248  |  
|                                                                                                 |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share attributable to common shareholders                         |  | $                               | (0.31   | ) |                                | $ | (0.25  | )    |  | $ | (0.86   | ) |  | $ | (0.82   | )
|                                                                                                 |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  

At September 30, 2007 and 2006, there were 115.8 million and 114.7 million, respectively, potential
common shares that were excluded from the determination of diluted net loss per share, as the effect of such shares on a weighted average basis is anti-dilutive. The weighted average exercise prices of the potential common shares excluded from the
determination of diluted net loss per share at June 30, 2007 and 2006 were $2.69 and $2.93, respectively.

Note 10Comprehensive Loss

The following table sets forth the Companys comprehensive loss for the periods indicated:



|                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                             |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                             |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|                                             |  | (in thousands)                  |        |   | (in thousands)                 |  
|Net loss attributable to common shareholders |  | $                               | (7,803 | ) |                                | $ | (5,595 | )    |  | $ | (20,597 | ) |  | $ | (19,146 | )
|Foreign currency translation adjustments     |  |                                 | 1,431  |   |                                |   | (258   | )    |  |   | 1,787   |   |  |   | 563     |  
|                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Comprehensive loss                           |  | $                               | (6,372 | ) |                                | $ | (5,853 | )    |  | $ | (18,810 | ) |  | $ | (18,583 | )
|                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

There were no tax effects allocated to any components of other comprehensive loss during the three and nine months
ended September 30, 2007 and 2006.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This Quarterly Report on Form 10-Q and the following disclosure contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, as amended and in effect from time to time. The words anticipates, expects, intends, plans, believes, seek, proposed, and estimate and similar
expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements regarding our ability to operate in the future, our ability to obtain funding, the adequacy and accessibility
of funds to meet anticipated operating and capital needs, our future strategic, operational and financial plans, possible financing, strategic or business combination transactions, including (without limitation) the proposed going-private
transaction, anticipated or projected revenues for our overall business or specific parts of our business, expenses and operational growth, markets and potential customers for our products and services, the continued seasonality of our business,
development and timing of release of new and upgraded products and service offerings, plans related to license terms, sales strategies and global sales efforts, the anticipated benefits of our relationships with strategic partners, growth of our
competition, our ability to compete, investments in product development, our litigation strategy, use of future revenues, the features, benefits and performance of our current and future products and services, plans to reduce operating costs through
continued expense management, the effect of the repayment of debt, the significance of non-cash charges we may incur related to stock-based compensation, and our ability to improve our internal control over financial reporting. 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, failure to meet sales and revenue forecasts, our management of expenses and restructuring activities, failure to agree on the terms of or to consummate the proposed going-private transaction, failure to obtain additional
financing or to restructure our currently outstanding debt and preferred stock, on favorable terms or at all, inability to fund any cash deficits in our domestic operations with cash from abroad, the effect of the conversion of our preferred stock,
the liquidation preference of our preferred stock, the accrual of dividends for our preferred stock, risks associated with our internal controls over financial reporting and our ability to address any material weaknesses in our internal controls
over financial reporting, difficulties of forecasting future results due to our evolving business strategy, the emerging nature of the market for our products and services, turnover within and integration of senior management, board of directors,
members and other key personnel, difficulties in our strategic plans to exit certain products and services offerings, failure to expand our sales and marketing activities, potential difficulties associated with strategic relationships, general
economic conditions in markets in which we do business, risks associated with our international operations, inability to predict future trading prices of our common stock which have fluctuated significantly in the past, foreign currency
fluctuations, unplanned system interruptions and capacity constraints, software defects, and those discussed in Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors 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 excludes subsidiaries.

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

Overview

We deliver software and services that enable the rapid deployment of highly scalable value-added solutions for messaging and identity management. Our
messaging and identity management solutions help organizations expand the range of digital communications services they provide while helping to reduce overall costs. These solutions also provide integrated access to a broad range of communication
and collaboration applications from wireless devices, web browsers, desktop clients, and voice systems. Our identity management solutions are designed to reduce burdens on helpdesks, simplify the deployment of key security infrastructure, enable
compliance with new regulatory mandates, and help reduce the cost and effort of deploying applications and services to distributed organizations, mobile users, suppliers, and customers.

The target markets for our messaging and identity management solutions include wireless carriers and telecommunications providers, broadband companies and service providers, government and postal agencies and
enterprises. We generate most of our revenues from telecommunications providers and from large enterprises. We believe wireless carriers, Internet service providers, or ISPs, and fixed-line service providers purchase our products and services
primarily to offer new services to their subscribers. While they may also purchase our products and services to lower their cost of operating existing services or infrastructure, their spending is often tied to the level of investment they are
willing to make on new revenue-generating services. Large enterprises typically buy our products and services to reduce their costs of operations particularly for handling distributed workforces or consolidations of multiple organizations, improve
the security of their infrastructure, facilitate compliance with new regulatory mandates, and to enable new applications to be deployed for their employees or users.



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As previously announced, we recently received a proposal from the General Atlantic Investors and the Cheung Kong
Investors to take the Company private by acquiring all of the outstanding shares of the Companys common stock. We formed a special committee to evaluate the proposal and the special committee determined to proceed with negotiating the terms of
a potential transaction. However, no assurance can be given that a definitive agreement relating to this going private transaction will be executed, or if executed that any such transaction will be consummated. See the discussion below under the
heading Risk Factors.

We generate revenues from four primary sources:

Software license sales. Our Memova®Messaging
applications are primarily sold as a perpetual license on a per-user basis, one for each person who might access the capabilities provided by the software. Revenue from our Memova®
Anti-Abuse (anti-spam and anti-virus) application is generally recognized over a term of twelve months. Our Memova® Mobile applications, a newly released set of solutions, have recently
been sold primarily as a perpetual license on a per-user basis, however, we also intend to license the Memova Mobile application on a subscription type basis. Our identity management software is usually sold as a perpetual license, on a per user
basis, according to the number of data elements and different business systems being managed. We believe that revenue from our Memova applications, for example the Memova Mobile application that we launched in the first quarter of 2005, is an
important source of future revenues and we have made significant investments in the development and enhancements of such applications; however, revenues from Memova Mobile have to date, been immaterial.

Hosted services. Our hosted service is comprised of our usenet newsgroup hosting service which we call Supernews.

Professional services. We offer a range of different services designed to help our customers make more effective use of our products and services. Our licensed
messaging and identity management software often require integration with customers existing infrastructure or customization to provide special features or capabilities. In addition, our consultants offer expertise and experience in designing
and delivering new services that our customers can use to supplement their own resources.

Maintenance and support services. We offer a variety of
software support and maintenance plans that enable customers of our licensed software to receive expedited technical support and access to new releases of our software. Most customers initially subscribe to these services when purchasing our
software and then renew their subscriptions on a regular basis.

We believe that wireless carriers and telecommunication providers are increasingly seeking
to offer more differentiated services and diversify into new markets. In addition, enterprises and government agencies are faced with similar needs to deliver a broader range of information services while reducing the costs of operating such
services and ensuring that privacy and security are maintained. We believe this provides a growth opportunity for the messaging and directory infrastructure market. However, the growth of this market and our business is also faced with many
challenges, including the emerging nature of the market, the demand for licensed solutions for messaging and identity management products and outsourced messaging services, rapid technological change and competition.

Restructuring Initiatives

We have operated at a loss since our
inception and as of September 30, 2007, we had an accumulated deficit of approximately $2.3 billion, which includes a $1.3 billion charge for impairment of goodwill and other long-lived assets that we recorded in fiscal year 2000. We have
undertaken numerous restructuring initiatives in an effort to align our operating structure not only to the business and economic environments through which we have operated but also in response to our changing business in an effort to generate net
income. Our restructuring activities in 2006 and 2005 were as follows:



| |  |  | During 2006, we recorded restructure charges totaling $1.3 million, of which, $0.3 million in connection with the sale of the Hosted Assets, $0.6 million related to
the reorganization of our sales force, $0.2 million related to the transitioning of our U.S. based accounting operations to Dublin, Ireland and $0.2 million related to certain facility consolidation costs. These restructure charges are
primarily related to facility consolidation costs and employee severance benefits.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2005, we recorded restructuring charges totaling $2.2 million, of which, $1.3 million was related to the relocation of our headquarters facility and the
balance related to consolidation of data centers and the elimination of certain employee positions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In November 2007, we implemented a
restructure plan whereby we plan to eliminate approximately 14% of our total workforce, primarily in North America, by February 2008 and downsize our office locations in San Francisco, California and Toronto, Canada. We estimate that these actions
will eliminate approximately $3.6 million of costs from our operations during 2008 at a total cost of approximately $1.3 million. While we have not yet calculated the restructure charge associated with these actions, we believe that our results for
the three months and fiscal year ended December 31, 2007 will be negatively affected by such charge.

In addition to these formal restructuring
initiatives, we have sought to aggressively manage our cost structure, identifying incremental savings where possible. We intend to continue to aggressively manage our expenses while maintaining strong service levels to our customers.

Liquidity and Capital Resources

We have operated at a loss since
inception and our history of losses from operations and cash flow deficits, in combination with our cash balance, raise concerns about our ability to fund our operations. We have focused on capital financing initiatives in order to maintain current
and planned operations. Our primary sources of capital have come from both debt and equity financings that we have completed over the past several years and the sale of the Hosted Assets in January 2006. In 2003 and 2004, we secured additional



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funds through several rounds of financing that involved the sale of senior secured convertible notes all of which converted into Series E preferred stock in
2004. In the third quarter of 2004, we completed a rights offering, and, in the fourth quarter of 2004 resulting in aggregate proceeds to the Company of approximately $4.0 million, we secured and drew $11.0 million from an $18.0 million round of
13.9% debt financing and in March 2005, we drew down the remaining $7.0 million. We are not required to make any payments of principal or interest under this $18.0 million debt financing until maturity in June 2008, at which time all principal and
interest will become due. In January 2006, we sold our Hosted Assets for $6.3 million, and in 2006 we received from amounts held in escrow $1.1 million in connection with the satisfaction of certain post-closing conditions related to the sale.
Additionally, in January 2007 we received $0.1 million, the last of the amounts held in escrow as all post-closing conditions related to the sale of the Hosted Assets had been satisfied.

Our principal sources of liquidity include our cash and cash equivalents. As of September 30, 2007, we had cash and cash equivalents available for operations totaling $11.3 million, of which $8.6 million was
located in accounts outside the United States and is not readily available for our domestic operations. Accordingly, at September 30, 2007, our readily available cash resources in the United States were $2.7 million. Additionally, as of
September 30, 2007, we had cash collateralized letters of credit totaling approximately $0.2 million which is recorded as restricted cash on our balance sheet and is not readily available for our operations.

If we are unable to significantly increase our revenues, reduce the amount of cash used by our operating activities and generate positive cash flow from our operating
activities, we will need to undertake additional restructuring initiatives to continue our operations. We believe that our existing capital resources are not sufficient to fund our current operations beyond the second quarter of 2008. Additionally,
as we approach the June 2008 maturity of the 13.9% Notes, we will need to restructure our debt to delay the maturity date or seek additional financing in order to pay the 13.9% Notes. As of September 30, 2007, the outstanding principal and
interest on these notes was $25.6 million. We also will need to restructure our outstanding preferred stock in order to delay the redemption of these preferred shares beyond their current redemption date in July 2008 otherwise. If the redemption
date is not extended, in July 2008 we will also be required to redeem our outstanding shares of our Series D and Series E preferred stock to the extent the payment of cash to redeem shares is permitted by applicable law at that time. Based on the
currently outstanding number of shares of Series D and Series E preferred stock, we would be required to pay an aggregate of $161.7 million in July 2008. The holders of a majority of our outstanding preferred stock are also the holders of a majority
of our 13.9% Notes. We may be unable to agree on a restructuring of the 13.9% Notes or the Series D and Series E preferred stock with the holders of these existing commitments. Moreover, we must obtain the consent from the holders of two-thirds in
principal amount of the outstanding 13.9% Notes and the preferred stockholder in order to incur additional indebtedness. Even if the holders of the 13.9% Notes and the Series D and Series E preferred stock consent to the incurrence of additional
indebtedness, such financing may not be available in sufficient amounts or on terms acceptable to us. We do not believe additional equity financing on terms reasonably acceptable to us is currently available. Additionally, our common stock now
trades in the over-the-counter market on the OTC Bulletin Board owned by the Nasdaq Stock Market, Inc., which was established for securities that do not meet the listing requirements of the Nasdaq Global Market or the Nasdaq Capital Market. We
believe our listing on the OTC Bulletin Board, and our low stock price, greatly impair our ability to raise additional capital through equity or debt financing. If our efforts to significantly increase revenues are unsuccessful, we will reduce the
amount of cash used by our operating activities, liquidate assets, implement restructuring initiatives, which may include the previously announced proposal to go private currently under consideration by a special committee of our Board of Directors,
seek the protection of applicable bankruptcy laws or some combination of the foregoing. See discussion of liquidity in our Risk Factors.

We
continually evaluate potential acquisitions of, or investments in, other businesses, products and technologies, and may in the future utilize our cash resources or may require additional equity or debt financing to accomplish any acquisitions or
investments. These alternatives could increase liquidity through the infusion of investment capital by third-party investors or decrease liquidity as a result of our seeking to fund expansion into these markets. Such expansions might also cause an
increase in capital expenditures and operating expenses. For the long-term, we believe future improvements in our operating activities and additional financing will be necessary to provide the liquidity and capital resources sufficient to support
our business. Additionally, in the past, we have elected to divest or discontinue certain business operations through termination, sale or other disposition. For example, in January 2006, we sold substantially all of the assets relating to our
hosted messaging business. Furthermore, we may choose to divest certain business operations based on our managements perception of their strategic value to our business, even if such operations have been profitable historically. Decisions to
eliminate or limit certain business operations have involved in the past, and could in the future involve, the expenditure of capital, consumption of management resources, realization of losses, transition and wind-up expenses, further reduction in
workforce, facility consolidation and the elimination of revenues along with associated costs, any of which could cause our operating results to decline and may fail to yield the expected benefits.

The following table sets forth our net losses attributable to common shareholders and the cash used by our operating activities for the periods indicated:



|                                                |  |                                 |        |   |        |   |        |                                |  |   |                |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |     |  
|----------------------------------------------- |  | ------------------------------- | ------ | - | ------ | - | ------ | ------------------------------ |  | - | -------------- | - |  | ---- | - |  | ---- | ------- | - | - | - | ------- | - |  | - | ------ | - |  | --- | -
|                                                |  | Three months endedSeptember 30, |        |   | Change |   |        | Nine months endedSeptember 30, |  |   | Change         |  
|                                                |  | 2007                            |        |   | 2006   |   |        | $                              |  |   | %              |   |  | 2007 |   |  | 2006 |         |   | $ |   |         | % | 
|                                                |  | (in thousands)                  |        |   |        |   |        |                                |  |   | (in thousands) |   |  |      |   |  |      |        
|Net loss attributable to common shareholders    |  | $                               | (7,803 | ) |        | $ | (5,595 | )                              |  | $ | (2,208         | ) |  | 39   | % |  | $    | (20,597 | ) |   | $ | (19,146 | ) |  | $ | (1,451 | ) |  | 8   | %
|Cash provided by (used in) operating activities |  |                                 | 2,660  |   |        |   | (998   | )                              |  |   | 3,658          |   |  | -367 | % |  |      | (3,118  | ) |   |   | (4,321  | ) |  |   | 1,203  |   |  | -28 | %



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Cash and cash equivalents

The following table sets forth our cash and cash equivalents balances as of the dates indicated:



|                          |  |                       |        |                      |   |        |   |   |        |   |  |     |  
|------------------------- |  | --------------------- | ------ | -------------------- | - | ------ | - | - | ------ | - |  | --- | -
|                          |  | At September 30, 2007 |        | At December 31, 2006 |   | Change |  
|                          |  |                       |        | $                    |   |        | % |  
|                          |  | (in thousands)        |        |                      |   |       
|Cash and cash equivalents |  | $                     | 11,341 |                      | $ | 14,542 |   | $ | (3,201 | ) |  | -22 | %

Total cash and cash equivalents decreased during the nine months ended September 30, 2007 primarily as a
result of the cash used by our operating and investing activities as set forth in the table below (in thousands):



|                                                      |  |   |        |  
|----------------------------------------------------- |  | - | ------ | -
|Beginning balance at December 31, 2006                |  | $ | 14,542 |  
|Net cash used by operating activities                 |  |   | (3,118 | )
|Net cash used by investing activities                 |  |   | (994   | )
|Net cash used by financing activities                 |  |   | (16    | )
|                                                      |  |   |        |  
|Net decrease in cash and cash equivalents             |  |   | (4,128 | )
|Effect of exchange rates on cash and cash equivalents |  |   | 927    |  
|                                                      |  |   |        |  
|Ending balance at September 30, 2007                  |  | $ | 11,341 |  
|                                                      |  |   |        |  

Net cash used in operating activities. Our operating activities used cash during the nine months ended
September 30, 2007. This cash was used to support our net loss of $9.4 million which, when adjusted for non-cash items such as: an increase in our provision for doubtful accounts of $0.2 million, depreciation of $1.4 million, a $0.2 million
gain due to the decrease in the fair value of embedded derivative liabilities, amortization of stock-based expenses of $0.2 million, amortization of debt issuance costs of $0.1 million and accrued interest and accretion on our 13.9% Notes of $3.2
million; totaled $4.9 million. To offset the adjusted net loss, cash was provided by our operating activities in connection with a $1.8 million net change in assets and liabilities. This change is primarily due to a $1.6 million increase in
deferred revenue and a $0.9 million increase in income and other tax liabilities partially offset by a $1.2 million decrease in accrued liabilities.

Our
primary source of operating cash flow is the collection of accounts receivable from our customers and the timing of payments to our vendors and service providers. We measure the effectiveness of our collections efforts by an analysis of the average
number of days our accounts receivable are outstanding, or DSOs. The following table sets forth our accounts receivable balances and DSOs as of the dates indicated:



|                         |  |                                      |        |                   |   |        |  |   |     |  |    |  
|------------------------ |  | ------------------------------------ | ------ | ----------------- | - | ------ |  | - | --- |  | -- | -
|                         |  | September 30, 2007                   |        | December 31, 2006 |   | Change | 
|                         |  |                                      |        | $                 |   | %      | 
|                         |  | (dollars in thousands; DSOs in days) |        |                   |  
|Accounts receivable, net |  | $                                    | 10,794 |                   | $ | 10,283 |  | $ | 511 |  | 5  | %
|DSOs                     |  |                                      | 87     |                   |   | 74     |  |   | 13  |  | 17 | %

Accounts receivable balances and DSOs increased primarily due to an increased proportion of accounts receivable
from a particular region whose customers typically have 90 to 120 day payment terms, as is customary in such region, and certain customers in Europe stretching their payment terms.

Our operating activities used cash during the nine months ended September 30, 2006. This cash was used to support our net loss of $8.6 million which, when adjusted for non-cash items such as: depreciation of $1.3
million, a $0.9 million gain due to the decrease in the fair value of embedded derivative liabilities, amortization of stock-based expenses of $0.6 million, accrued interest and accretion on our 13.9% Notes of $3.0 million as well as the gain on the
sale of the Hosted Assets of $3.0 million; totaled $7.5 million. Additionally, cash was provided by our operating activities in connection with a $2.4 million decrease in accounts receivable primarily as a result of improved collections performance,
a $2.0 million increase in deferred revenue, primarily a result of maintenance and third-party software billings for which the related revenue will be recognized ratably over the related service period, an increase in our accrued compensation and
benefits of $1.5 million offset partially by decrease of $3.5 million in our accrued liabilities and an increase of $0.4 million in other assets.

A number
of non-cash items, such as depreciation and amortization, stock-based expenses, deferred interest on debt and certain restructuring charges have been charged to expense and impacted our net results during the three and nine months ended
September 30, 2007 and 2006. To the extent these non-cash items increase or decrease in amount and increase or decrease our future operating results, there will be no corresponding impact on our cash flows. Our operating cash flows will be
impacted in the future based on our operating results, our ability to collect our accounts receivable on a timely basis, and the timing of payments to our vendors for accounts payable.

Net cash (used in) provided by investing activities. Our investing activities used $1.0 million of cash during the nine months ended September 30, 2007 primarily as a result of purchases of equipment
totaling $1.1 million used to support our hosted usenet newsgroup service infrastructure and research and development efforts partially offset by $0.1 million received in connection with the sale of the Hosted Assets. During the nine months ended
September 30, 2006, our investing activities provided $4.4 million of cash primarily as a result of cash proceeds totaling $5.5 million from the sale of the Hosted Assets. The cash provided from the proceeds of the sale was



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partially offset by purchases of equipment totaling $1.1 million primarily used to support our remaining hosted newsgroup service infrastructure and research
and development efforts. We believe we will be required to continue to make investments in capital equipment during 2007 and in 2008 and we expect to fund these purchases through the use of our available cash resources. We do not believe leasing
arrangements on terms we find reasonably acceptable are currently available.

Net cash used in financing activities. Our financing activities used
$16,000 and $49,000 of cash during the nine months ended September 30, 2007 and 2006, respectively, in connection with certain leased equipment.

We
face restrictions on our ability to use cash held outside of the United States for purposes other than the operation of each of our respective foreign subsidiaries that hold that cash. For example, our ability to use cash held in a given European
subsidiary for any reason other than the operation of this subsidiary may result in certain tax liabilities and may be subject to local laws that could prevent the transfer of cash from Europe to any other foreign or domestic account. Additionally,
we are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, contracts with vendors, and working capital, as a significant portion or our worldwide operations have a functional currency other than the
United States dollar. 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.

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

Contractual Obligations and Commitments

The table below sets forth our significant cash obligations and commitments as of September 30, 2007.



|                                   |  |                |          |                         |      |       |      |   |         |  |      |       |            |   |       |  |   |        |  |   |      
|---------------------------------- |  | -------------- | -------- | ----------------------- | ---- | ----- | ---- | - | ------- |  | ---- | ----- | ---------- | - | ----- |  | - | ------ |  | - | -----
|                                   |  | Total          |          | Year ended December 31,
|                                   |  |                | 2007 (a) |                         | 2008 |       | 2009 |   | 2010    |  | 2011 |       | Thereafter
|                                   |  | (in thousands)
|Redeemable preferred stock (b)     |  | $              | 161,651  |                         | $    |      |      | $ | 161,651 |  | $    |      |            | $ |      |  | $ |       |  | $ |     
|13.9% Notes (c)                    |  |                | 28,681   |                         |      |      |      |   | 28,681  |  |      |      |            |   |      |  |   |       |  |   |     
|Operating lease obligations        |  |                | 7,902    |                         |      | 735   |      |   | 1,756   |  |      | 1,383 |            |   | 1,209 |  |   | 1,128  |  |   | 1,692
|Other purchase obligations (d)     |  |                | 995      |                         |      | 555   |      |   | 440     |  |      |      |            |   |      |  |   |       |  |   |     
|                                   |  |                |          |                         |      |       |      |   |         |  |      |       |            |   |       |  |   |        |  |   |      
|Total Contractual Cash Obligations |  | $              | 199,229  |                         | $    | 1,290 |      | $ | 192,528 |  | $    | 1,383 |            | $ | 1,209 |  | $ | 41,128 |  | $ | 1,692
|                                   |  |                |          |                         |      |       |      |   |         |  |      |       |            |   |       |  |   |        |  |   |      



|(a) | Amounts for remaining three months ending December 31, 2007.
|--- | ------------------------------------------------------------



|(b) | Includes dividends totaling $30.5 million (see also Note 4Redeemable Preferred Stock in the Notes to Consolidated Financial Statements) due in July 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Includes interest totaling $10.7 million due in June 2008.
|--- | ----------------------------------------------------------



|(d) | Represents certain contractual obligations related to royalty obligations incurred in connection with sales of third-party software products, the future purchase of maintenance
related to hardware and software products being utilized within engineering and hosted usenet newsgroup operations, the management of data center operations and network infrastructure storage for our hosted usenet newsgroup operations and the use of
third-party developers.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Results of Operations

In view of the rapidly evolving nature of our business, prior acquisitions, organizational restructuring, and limited operating history, we believe that period over period comparisons of revenues and operating results, including gross
profit margin and operating expenses as a percentage of total net revenues, are not meaningful and should not be relied upon as indications of future performance. We do not believe that our historical fluctuations in revenues, expenses, or personnel
are indicative of future results.



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The following table sets forth our results of operations for the three and nine months ended September 30, 2007 and
2006.



|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|------------------------------------------------------------------------ |  | ---------------------------------------- | ------ | - | ------ | - | ------ | ------------------------------ |  | - | ------ | - |  | ---- | - |  | ---- | ------- | - | - | - | ------- | - |  | - | ------ | - |  | ---- | -
|                                                                         |  | Three Months EndedSeptember 30,          |        |   | Change |   |        | Nine Months EndedSeptember 30, |  |   | Change |  
|                                                                         |  | 2007                                     |        |   | 2006   |   |        | $                              |  |   | %      |   |  | 2007 |   |  | 2006 |         |   | $ |   |         | % | 
|                                                                         |  | (in thousands, except per share amounts) |       
|NET REVENUE                                                              |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|Software licensing                                                       |  | $                                        | 3,157  |   |        | $ | 2,688  |                                |  | $ | 469    |   |  | 17   | % |  | $    | 11,158  |   |   | $ | 9,097   |   |  | $ | 2,061  |   |  | 23   | %
|Hosted services                                                          |  |                                          | 932    |   |        |   | 1,220  |                                |  |   | (288   | ) |  | -24  | % |  |      | 3,441   |   |   |   | 3,609   |   |  |   | (168   | ) |  | -5   | %
|Professional services                                                    |  |                                          | 2,353  |   |        |   | 2,257  |                                |  |   | 96     |   |  | 4    | % |  |      | 7,176   |   |   |   | 7,660   |   |  |   | (484   | ) |  | -6   | %
|Maintenance and support                                                  |  |                                          | 4,781  |   |        |   | 4,687  |                                |  |   | 94     |   |  | 2    | % |  |      | 13,811  |   |   |   | 13,524  |   |  |   | 287    |   |  | 2    | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|Total net revenue                                                        |  |                                          | 11,223 |   |        |   | 10,852 |                                |  |   | 371    |   |  | 3    | % |  |      | 35,586  |   |   |   | 33,890  |   |  |   | 1,696  |   |  | 5    | %
|COST OF NET REVENUE                                                      |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|Software licensing                                                       |  |                                          | 1,203  |   |        |   | 1,105  |                                |  |   | 98     |   |  | 9    | % |  |      | 3,672   |   |   |   | 3,470   |   |  |   | 202    |   |  | 6    | %
|Hosted services                                                          |  |                                          | 756    |   |        |   | 740    |                                |  |   | 16     |   |  | 2    | % |  |      | 2,236   |   |   |   | 2,275   |   |  |   | (39    | ) |  | -2   | %
|Professional services                                                    |  |                                          | 1,784  |   |        |   | 1,943  |                                |  |   | (159   | ) |  | -8   | % |  |      | 5,798   |   |   |   | 6,139   |   |  |   | (341   | ) |  | -6   | %
|Maintenance and support                                                  |  |                                          | 1,409  |   |        |   | 1,303  |                                |  |   | 106    |   |  | 8    | % |  |      | 4,193   |   |   |   | 3,820   |   |  |   | 373    |   |  | 10   | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|Total cost of net revenue                                                |  |                                          | 5,152  |   |        |   | 5,091  |                                |  |   | 61     |   |  | 1    | % |  |      | 15,899  |   |   |   | 15,704  |   |  |   | 195    |   |  | 1    | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|GROSS PROFIT                                                             |  |                                          | 6,071  |   |        |   | 5,761  |                                |  |   | 310    |   |  | 5    | % |  |      | 19,687  |   |   |   | 18,186  |   |  |   | 1,501  |   |  | 8    | %
|OPERATING EXPENSES                                                       |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|Selling and marketing                                                    |  |                                          | 3,001  |   |        |   | 2,728  |                                |  |   | 273    |   |  | 10   | % |  |      | 9,257   |   |   |   | 9,544   |   |  |   | (287   | ) |  | -3   | %
|Research and development                                                 |  |                                          | 2,356  |   |        |   | 2,375  |                                |  |   | (19    | ) |  | -1   | % |  |      | 7,075   |   |   |   | 7,219   |   |  |   | (144   | ) |  | -2   | %
|General and administrative                                               |  |                                          | 2,595  |   |        |   | 2,850  |                                |  |   | (255   | ) |  | -9   | % |  |      | 8,316   |   |   |   | 9,140   |   |  |   | (824   | ) |  | -9   | %
|Restructuring expense                                                    |  |                                          | 65     |   |        |   | 137    |                                |  |   | (72    | ) |  | -53  | % |  |      | 194     |   |   |   | 1,178   |   |  |   | (984   | ) |  | -84  | %
|Gain on sale of assets                                                   |  |                                          |       |   |        |   | (1,007 | )                              |  |   | 1,007  |   |  | -100 | % |  |      | (129    | ) |   |   | (2,978  | ) |  |   | 2,849  |   |  | -96  | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|Total operating expenses                                                 |  |                                          | 8,017  |   |        |   | 7,083  |                                |  |   | 934    |   |  | 13   | % |  |      | 24,713  |   |   |   | 24,103  |   |  |   | 610    |   |  | 3    | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|OPERATING LOSS                                                           |  |                                          | (1,946 | ) |        |   | (1,322 | )                              |  |   | (624   | ) |  | 47   | % |  |      | (5,026  | ) |   |   | (5,917  | ) |  |   | 891    |   |  | -15  | %
|Other income (expense), net                                              |  |                                          | (1,033 | ) |        |   | 469    |                                |  |   | (1,502 | ) |  | -320 | % |  |      | (974    | ) |   |   | 547     |   |  |   | (1,521 | ) |  | -278 | %
|Interest income (expense), net                                           |  |                                          | (1,058 | ) |        |   | (911   | )                              |  |   | (147   | ) |  | 16   | % |  |      | (3,120  | ) |   |   | (2,664  | ) |  |   | (456   | ) |  | 17   | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|Loss before provision for income taxes                                   |  |                                          | (4,037 | ) |        |   | (1,764 | )                              |  |   | (2,273 | ) |  | 129  | % |  |      | (9,120  | ) |   |   | (8,034  | ) |  |   | (1,086 | ) |  | 14   | %
|Provision for income taxes                                               |  |                                          | (56    | ) |        |   | (280   | )                              |  |   | 224    |   |  | -80  | % |  |      | (320    | ) |   |   | (594    | ) |  |   | 274    |   |  | -46  | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|NET LOSS                                                                 |  |                                          | (4,093 | ) |        |   | (2,044 | )                              |  |   | (2,049 | ) |  | 100  | % |  |      | (9,440  | ) |   |   | (8,628  | ) |  |   | (812   | ) |  | 9    | %
|Accretion on redeemable preferred stock                                  |  |                                          | (3,710 | ) |        |   | (3,551 | )                              |  |   | (159   | ) |  | 4    | % |  |      | (11,157 | ) |   |   | (10,518 | ) |  |   | (639   | ) |  | 6    | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                             |  | $                                        | (7,803 | ) |        | $ | (5,595 | )                              |  | $ | (2,208 | ) |  | 39   | % |  | $    | (20,597 | ) |   | $ | (19,146 | ) |  | $ | (1,451 | ) |  | 8    | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|Basic and diluted net loss per share                                     |  | $                                        | (0.11  | ) |        | $ | (0.06  | )                              |  | $ | (0.05  | ) |  | 96   | % |  | $    | (0.26   | ) |   | $ | (0.24   | ) |  | $ | (0.02  | ) |  | 7    | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|Basic and diluted net loss per share attributable to common shareholders |  | $                                        | (0.21  | ) |        | $ | (0.15  | )                              |  | $ | (0.06  | ) |  | 36   | % |  | $    | (0.56   | ) |   | $ | (0.53   | ) |  | $ | (0.03  | ) |  | 6    | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  
|Shares used in the basic and diluted per share calculations              |  |                                          | 37,375 |   |        |   | 36,553 |                                |  |   | 822    |   |  | 2    | % |  |      | 36,957  |   |   |   | 36,248  |   |  |   | 709    |   |  | 2    | %
|                                                                         |  |                                          |        |   |        |   |        |                                |  |   |        |   |  |      |   |  |      |         |   |   |   |         |   |  |   |        |   |  |      |  

NET REVENUES

For the
three months ended September 30, 2007, total net revenues increased primarily as a result of increased software license, professional services and maintenance and support revenues as well as the benefit from the increase in the value of foreign
currencies, particularly the Euro, against the U.S. dollar partially offset by reduced hosted services revenue. For the nine months ended September 30, 2007, total net revenues increased primarily as a result of increased software license and
maintenance support revenues as well as the benefit from the increase in the value of foreign currencies, particularly the Euro, against the U.S. dollar partially offset by reduced hosted services and professional services revenues.



| |  |  | Software licensing. Software license revenues increased during the three months ended September 30, 2007 as compared to the same period in the prior
year primarily due an increase in the volume of licenses for our Memova Messaging and identity management (marketed as a component of Memova Messaging) software platforms, as well as increased revenue from a license for Memova Mobile offset by
decrease of revenue recognized from our Memova Anti-Abuse product.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Software license revenues increased during the nine
months ended September 30, 2007 as compared to the same period in the prior year primarily due an increase in the volume of licenses for Memova Messaging and identity management (marketed as a component of Memova Messaging) software platforms,
as well as increased revenue from Memova Mobile, increased revenue recognized from our Memova Anti-Abuse product and increased revenue from our third-party license sales.



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| |  |  | Hosted services. Hosted services revenues decreased during the three months and nine months ended September 30, 2007 as compared to the same periods in
the prior year primarily due to the termination of service by some of our hosted usenet newsgroup customers. The revenue decrease from terminations for the nine months ended September 30, 2007 is partially offset by an early contract buyout
during the three months ended March 31, 2007 related to one customers termination of service.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Professional services. Professional services revenues increased slightly during the three months ended September 30, 2007 as compared to the same
periods in the prior year primarily a result of increased amount of revenue from the sale of previously developed professional service solutions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Professional services revenues decreased during the nine months ended September 30, 2007 as compared to the same periods in the prior year primarily a result of fewer engagements



| |  |  | Maintenance and support. Maintenance and support revenues increased slightly during the three and nine months ended September 30, 2007 as compared to
the same periods in the prior year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table sets forth our total revenues by region for the three and nine months ended
September 30, 2007.



|                       |  |                                  |        |  |        |   |  |                                 |        |  |        |   |  |      |       |   |      |     |   |   |   |        |   |     |   |  |   |        |  |     |   |  |   |        |   |  |     |  
|---------------------- |  | -------------------------------- | ------ |  | ------ | - |  | ------------------------------- | ------ |  | ------ | - |  | ---- | ----- | - | ---- | --- | - | - | - | ------ | - | --- | - |  | - | ------ |  | --- | - |  | - | ------ | - |  | --- | -
|                       |  | Three months ended September 30, |        |  | Change |   |  | Nine months ended September 30, |        |  | Change |  
|                       |  | 2007                             |        |  | 2006   |   |  | $                               |        |  | %      |   |  | 2007 |       |   | 2006 |     |   | $ |   |        | % |    
|                       |  |                                  |        |  |        |   |  |                                 |        |  |        |  
|North America          |  | $                                | 1,885  |  | 17     | % |  | $                               | 2,679  |  | 25     | % |  | $    | (794  | ) |      | -30 | % |   | $ | 6,798  |   | 19  | % |  | $ | 8,078  |  | 24  | % |  | $ | (1,280 | ) |  | -16 | %
|Europe                 |  |                                  | 9,076  |  | 81     | % |  |                                 | 7,849  |  | 72     | % |  |      | 1,227 |   |      | 16  | % |   |   | 27,901 |   | 78  | % |  |   | 25,098 |  | 74  | % |  |   | 2,803  |   |  | 11  | %
|Latin America          |  |                                  | 86     |  | 1      | % |  |                                 | 67     |  | 1      | % |  |      | 19    |   |      | 29  | % |   |   | 368    |   | 1   | % |  |   | 215    |  | 1   | % |  |   | 153    |   |  | 71  | %
|Asia Pacific           |  |                                  | 176    |  | 2      | % |  |                                 | 257    |  | 2      | % |  |      | (81   | ) |      | -32 | % |   |   | 519    |   | 1   | % |  |   | 499    |  | 1   | % |  |   | 20     |   |  | 4   | %
|                       |  |                                  |        |  |        |   |  |                                 |        |  |        |   |  |      |       |   |      |     |   |   |   |        |   |     |   |  |   |        |  |     |   |  |   |        |   |  |     |  
|Subtotal international |  |                                  | 9,338  |  | 83     | % |  |                                 | 8,173  |  | 75     | % |  |      | 1,165 |   |      | 14  | % |   |   | 28,788 |   | 81  | % |  |   | 25,812 |  | 76  | % |  |   | 2,976  |   |  | 12  | %
|                       |  |                                  |        |  |        |   |  |                                 |        |  |        |   |  |      |       |   |      |     |   |   |   |        |   |     |   |  |   |        |  |     |   |  |   |        |   |  |     |  
|                       |  | $                                | 11,223 |  | 100    | % |  | $                               | 10,852 |  | 100    | % |  | $    | 371   |   |      | 3   | % |   | $ | 35,586 |   | 100 | % |  | $ | 33,890 |  | 100 | % |  | $ | 1,696  |   |  | 5   | %
|                       |  |                                  |        |  |        |   |  |                                 |        |  |        |   |  |      |       |   |      |     |   |   |   |        |   |     |   |  |   |        |  |     |   |  |   |        |   |  |     |  

International revenues increased in total and as a proportion of total revenue for the three months and nine
months ended September 30, 2007 as compared to the same period in the prior year primarily due to an increase in the volume of licenses for our messaging and identity management software platforms in Europe as well as increased revenue from a
license for Memova Mobile in Europe and increased revenue recognized from our Memova Anti-Abuse product in Europe.

COST OF NET REVENUES AND GROSS MARGIN

Cost of net revenues increased during the three months ended September 30, 2007 as compared to the same period in the prior year primarily due to
increased software licensing and maintenance and support costs partially offset by decreased professional services costs and increased for the nine months ended September 30, 2007 as compared to the same period in the prior year primarily due
to increased maintenance and support and software licensing costs partially offset by reduced professional services and hosted services costs.



| |  |  | Software licensing. Software license cost of revenues consists primarily of royalties that we pay to third-parties for the resale of their product or related
to third-party technologies incorporated in our products, Memova Mobile and Memova Anti-Abuse in particular .Software license cost of revenues increased during the three months ended September 30, 2007 as compared to the same period in the
prior year primarily as a result of higher Memova Anti-Abuse costs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Software license cost of revenues increased during
the nine months ended September 30, 2007 as compared to the same period in the prior year primarily due to increased royalty costs associated with the third-party products we resell as well as increased royalty costs in connection with the
increased revenues from Memova Mobile and Memova Anti-Abuse.



| |  |  | Hosted services. Hosted services cost of revenues consists primarily of costs incurred in the delivery and support of our usenet newsgroup service, including
employee related costs, depreciation expenses, Internet co-location and connection fees, hardware maintenance costs as well as other direct and allocated costs. Hosted services costs increased slightly during the three months ended
September 30, 2007 as compared to the same period in the prior year. Hosted services costs decreased during the nine months ended September 30, 2007 primarily as a result of lower facility and IT costs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | Professional services. Professional services cost of revenues consists primarily of employee related and third party contractor costs providing installation,
migration, training services and custom engineering for our licensed solutions as well as other direct and allocated indirect costs. Professional services costs decreased during the three months ended September 30, 2007 as compared to the same
period in the prior year primarily due to a $0.3 million decrease in employee costs partially offset by a $0.1 million increase in commission costs as a result of the increase in revenues. Total professional services employees decreased to an
average of 50 employees for the three months ended September 30, 2007 from an average of 55 for the same period in the prior year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Professional services costs decreased during the nine months ended September 30, 2007 as compared to the same period in the prior year primarily due to a $0.4 million decrease in employee costs and $0.1 million
decrease in depreciation costs offset by a $0.2 million increase in commission costs as a result of over achievement of commission quotas in certain regions for the three months ended March 31, 2007. Total professional services employees
decreased to an average of 51 employees for the nine months ended September 30, 2007 from an average of 56 for the same period in the prior year.



| |  |  | Maintenance and support. Maintenance and support cost of revenues consists primarily of employee related and third party contractor costs related to the
customer support functions for our licensed solutions as well as other direct and allocated indirect costs. Maintenance and support costs increased during the three and nine months ended September 30, 2007 as compared to the same period in the
prior year primarily due to increased labor and facility and IT costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our total gross margin, which is gross profit divided by total
net revenue, increased to 54% during the three months ended September 30, 2007, as compared to 53% during the same period in the prior year. This increase is primarily due to increased software license revenues, lower employee costs in
professional services group partially offset by higher labor and facility and IT costs in support and maintenance. Our total gross margin increased to 55% during the nine months ended September 30, 2007, as compared to 54% during the same
period in the prior year. This increase is primarily due to a increased software license revenues, lower hosted costs due to lower facility and IT costs as well as lower employee costs in professional services group partially offset by increased
labor and facility and IT costs in support and maintenance.

OPERATING EXPENSES

Total operating expenses increased during the three months ended September 30, 2007 as compared to the same periods in the prior year primarily due to reduced gain on the sale of our Hosted Assets and increased
selling and marketing costs as well as the unfavorable effect from the increase in the value of foreign currencies, particularly the Euro, against the U.S. dollar offset by reduced research and development costs, general and administrative expense
and restructuring costs. Total operating expenses increased during the nine months ended September 30, 2007 as compared to the same periods in the prior year primarily due reduced gain on the sale of our Hosted Assets as well as the unfavorable
effect from the increase in the value of foreign currencies, particularly the Euro, against the U.S. dollar offset by the reduced selling and marketing costs, research and development, general and administrative expense and restructuring costs.



| |  |  | Selling and marketing. Selling and marketing expense consists primarily of employee costs, including commissions, travel and entertainment, third party
contractor costs, advertising, public relations, other marketing related costs as well as other direct and allocated costs. Selling and marketing expenses increased during the three months ended September 30, 2007 as compared to the same period
in the prior year primarily as a result of a $0.1 million increase in employee related costs and $0.1 million increase in marketing costs. Total selling and marketing employees decreased to an average of 38 employees for the three months ended
September 30, 2007 from an average of 41 for the same period in the prior year.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Selling and marketing expenses
decreased during the nine months ended September 30, 2007 as compared to the same period in the prior year primarily as a result of a $0.1 million decrease in employee related costs, a $0.1 million decrease in recruiting costs, a $0.2 million
decrease in facility and IT related costs, and a $0.2 million decrease in depreciation costs partially offset by a $0.3 million increase in commission costs as a result of increased revenues. Total selling and marketing employees decreased to an
average of 37 employees for the nine months September 30, 2007 from an average of 44 for the same period in the prior year.



| |  |  | Research and development. Research and development expense consists primarily of employee related costs, depreciation and amortization of capital equipment
associated with research and development activities, facility related costs, third-party contractor costs as well as other direct and allocated costs. Research and development expenses decreased during the three months ended September 30, 2007
as compared to the same period in the prior year primarily as a result of a $0.2 million decrease in facility and IT costs and $0.1 million decrease in depreciation expense offset by an $0.1 million increase in employee related expenses and $0.1
million increase in third party costs. Total research and development employees decreased to an average of 67 employees for the three months ended September 30, 2007 from an average of 74 for the same period in the prior year.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research and development expenses decreased during the nine months ended September 30, 2007 as compared to the same
period in the prior year primarily as a result of a $0.4 million decrease in facility and IT costs and a $0.2 million decrease in depreciation expense offset by an $0.2 million increase in employee related expenses and $0.2 million increase in third
party costs. Total research and development employees decreased to an average of 70 employees for the nine months ended September 30, 2007 from an average of 73 for the same period in the prior year.



27



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##### Table of Contents

| |  |  | General and administrative. General and administrative expense consists primarily of employee-related costs, fees for outside professional services,
insurance and other direct and allocated indirect costs. General and administrative expenses decreased during the three months ended September 30, 2007 as compared to the same period in the prior year primarily as a result of a
$0.3 million decrease resulting from liability accrual during the three months ended September 30, 2006 for Cable and Wireless bankruptcy, a $0.1 million decrease in outside accounting fees, and a $0.1 million decrease in third-party
contractor costs offset by a $0.2 million increase in depreciation costs and $0.1 million increase in legal costs as a result of the settlement of the action in the Superior Court of San Diego. Total general and administrative employees
decreased to an average of 47 employees for the three months ended September 30, 2007 from an average of 49 for the same period in the prior year.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

General and administrative expenses decreased during the nine months ended September 30, 2007 as compared to the same period in the prior year primarily as a result of a $0.3 million decrease in employee
related costs, a $0.4 million decrease in outside accounting fees, a $0.2 million decrease in taxes and licenses which primarily resulted from an accrual during the three months ended June 30, 2006 for interest on a California sales and use tax
audit, a $0.1 million decrease in general insurance costs, a $0.3 million decrease in third-party contractor costs, $0.1 million decrease in collocation costs, $0.2 million decrease in bad debt expense, $0.3 million decrease resulting from a
liability accrual during the three months ended September 30, 2006 for the Cable and Wireless bankruptcy and a $0.2 million decrease in stock based expenses partially offset by a $0.8 million increase in legal costs and a $0.5 million
increase in depreciation costs. Total general and administrative employees decreased to an average of 47 employees for the nine months ended September 30, 2007 from an average of 52 for the same period in the prior year.



| |  |  | Restructuring expense. Restructuring expenses consist primarily of employee severance costs as well as facility and operations consolidation and lease
termination costs incurred primarily as a result of our restructuring actions. The following table provides additional information with respect to the types of restructuring charges included in our operating expenses for the periods indicated:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                       |  |                                  |    |        |   |     |                                 |   |        |   |  |      |   |      |   |     |  |   |       |  |   |        |   |  |      |  
|-------------------------------------- |  | -------------------------------- | -- | ------ | - | --- | ------------------------------- | - | ------ | - |  | ---- | - | ---- | - | --- |  | - | ----- |  | - | ------ | - |  | ---- | -
|                                       |  | Three months ended September 30, |    | Change |   |     | Nine months ended September 30, |   | Change |  
|                                       |  | 2007                             |    | 2006   |   | $   |                                 |   | %      |   |  | 2007 |   | 2006 |   | $   |  |   | %     | 
|                                       |  | (in thousands)                   |   
|Employee severance benefits            |  | $                                |   |        | $ | 28  |                                 | $ | (28    | ) |  | -100 | % |      | $ |    |  | $ | 1,010 |  | $ | (1,010 | ) |  | -100 | %
|Facility and operations consolidations |  |                                  | 65 |        |   | 109 |                                 |   | (44    | ) |  | -40  | % |      |   | 194 |  |   | 168   |  |   | 26     |   |  | 15   | %
|                                       |  |                                  |    |        |   |     |                                 |   |        |   |  |      |   |      |   |     |  |   |       |  |   |        |   |  |      |  
|                                       |  | $                                | 65 |        | $ | 137 |                                 | $ | (72    | ) |  | -53  | % |      | $ | 194 |  | $ | 1,178 |  | $ | (984   | ) |  | -84  | %
|                                       |  |                                  |    |        |   |     |                                 |   |        |   |  |      |   |      |   |     |  |   |       |  |   |        |   |  |      |  

During the three and nine months ended September 30, 2007, we recorded restructuring expense
primarily related to the closure of an office in the United Kingdom and in Santa Monica, CA as well as the transition of our U.S. accounting operations to Ireland. At September 30, 2007, we carried a remaining restructuring liability of
$25,000, the majority of which is expected to be utilized by December 31, 2007.

In November 2007, we implemented a restructure plan
whereby we plan to eliminate approximately 14% of our total workforce, primarily in North America, by February 2008 and downsize our office locations in San Francisco, California and Toronto, Canada. We estimate that these actions will eliminate
approximately $3.6 million of costs from our operations during 2008 at a total cost of approximately $1.3 million. While we have not yet calculated the restructure charge associated with these actions, we believe that our results for the three
months and fiscal year ended December 31, 2007 will be negatively affected by such charge.



| |  |  | Gain on the Sale of Hosted Assets. During the nine months ended September 30, 2007, we recorded a gain of approximately $0.1 million associated with the
sale of the Hosted Assets. The gain decreased in the three and nine months ended September 30, 2007 as compared to the same period in the prior year because the initial sale and payment was received in the three months ended March 31, 2006
and the gain during the three months ended March 31, 2007 is the last of the amounts held in escrow as all post-closing conditions related to the sale of the Hosted Assets had been satisfied.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

OTHER INCOME, NET

Other income, net consists primarily of gains and losses
on foreign exchange transactions and changes in the fair value of the embedded derivatives in the Series D preferred stock that we issued in connection with a financing transaction in December 2001 and the Series F preferred stock warrants that we
issued in connection with the 13.9% Notes financing transaction in 2004 and 2005. The following table sets forth the components of other income, net for the periods indicated.



28



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|                                                                       |  |                                  |        |   |        |   |      |                                |  |   |        |   |  |      |   |  |      |        |   |   |   |      |   |  |   |        |   |  |      |  
|---------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------ | - | ---- | ------------------------------ |  | - | ------ | - |  | ---- | - |  | ---- | ------ | - | - | - | ---- | - |  | - | ------ | - |  | ---- | -
|                                                                       |  | Three months ended September 30, |        |   | Change |   |      | Nine monthsended September 30, |  |   | Change |  
|                                                                       |  | 2007                             |        |   | 2006   |   |      | $                              |  |   | %      |   |  | 2007 |   |  | 2006 |        |   | $ |   |      | % | 
|                                                                       |  | (in thousands)                   |       
|Foreign exchange gain (loss)                                           |  | $                                | (1,077 | ) |        | $ | (143 | )                              |  | $ | (934   | ) |  | 653  | % |  | $    | (1,221 | ) |   | $ | 340  |   |  | $ | (1,561 | ) |  | -459 | %
|Gain from changes in the fair value of embedded derivative instruments |  |                                  | 20     |   |        |   | 330  |                                |  |   | (310   | ) |  | -94  | % |  |      | 162    |   |   |   | 844  |   |  |   | (682   | ) |  | -81  | %
|Other                                                                  |  |                                  | 24     |   |        |   | 282  |                                |  |   | (258   | ) |  | -91  | % |  |      | 85     |   |   |   | (637 | ) |  |   | 722    |   |  | -113 | %
|                                                                       |  |                                  |        |   |        |   |      |                                |  |   |        |   |  |      |   |  |      |        |   |   |   |      |   |  |   |        |   |  |      |  
|                                                                       |  | $                                | (1,033 | ) |        | $ | 469  |                                |  | $ | (1,502 | ) |  | -320 | % |  | $    | (974   | ) |   | $ | 547  |   |  | $ | (1,521 | ) |  | -278 | %
|                                                                       |  |                                  |        |   |        |   |      |                                |  |   |        |   |  |      |   |  |      |        |   |   |   |      |   |  |   |        |   |  |      |  

Our foreign exchange gain (loss) is primarily driven by the revaluation of our foreign entities assets and
liabilities, which are not U.S. dollar denominated. In general, as the U.S. dollar loses value against the currencies of our foreign entities, a foreign currency loss will be generated, however; as the U.S. dollar increases in value against the
currencies of our foreign entities, a foreign currency gain will be generated. The amount of the loss or gain in any period is a result of the value of the U.S. dollar against such currencies and the asset and liability balances of our foreign
entities.

In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments, we are required to adjust the carrying value of
the derivatives to their fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other income or expense. The estimated fair value of the embedded derivative at September 30, 2007 was
$0.5 million.

INTEREST EXPENSE, NET

Interest expense, net
consists primarily of interest earned on our cash and cash equivalents, interest expense and amortization of the debt discount and issuance costs related to the 13.9% Notes and interest on certain capital leases and other long-term obligations. The
following table sets forth the components of interest expense, net for the periods indicated:



|                                                 |  |                                  |        |   |        |   |      |                                 |  |   |        |   |  |      |   |  |      |        |   |   |   |        |   |  |   |      |   |  |     |  
|------------------------------------------------ |  | -------------------------------- | ------ | - | ------ | - | ---- | ------------------------------- |  | - | ------ | - |  | ---- | - |  | ---- | ------ | - | - | - | ------ | - |  | - | ---- | - |  | --- | -
|                                                 |  | Three months ended September 30, |        |   | Change |   |      | Nine months ended September 30, |  |   | Change |  
|                                                 |  | 2007                             |        |   | 2006   |   |      | $                               |  |   | %      |   |  | 2007 |   |  | 2006 |        |   | $ |   |        | % | 
|                                                 |  | (in thousands)                   |       
|Interest Income                                  |  | $                                | 139    |   |        | $ | 135  |                                 |  | $ | 4      |   |  | 3    | % |  | $    | 321    |   |   | $ | 374    |   |  | $ | (53  | ) |  | -14 | %
|13.9% Notes interest expense                     |  |                                  | (876   | ) |        |   | (764 | )                               |  |   | (112   | ) |  | 15   | % |  |      | (2,515 | ) |   |   | (2,194 | ) |  |   | (321 | ) |  | 15  | %
|Amortization of debt discount and issuance costs |  |                                  | (246   | ) |        |   | (264 | )                               |  |   | 18     |   |  | -7   | % |  |      | (727   | ) |   |   | (780   | ) |  |   | 53   |   |  | -7  | %
|Capital leases and other long-term obligations   |  |                                  | (75    | ) |        |   | (18  | )                               |  |   | (57    | ) |  | 317  | % |  |      | (199   | ) |   |   | (64    | ) |  |   | (135 | ) |  | 211 | %
|                                                 |  |                                  |        |   |        |   |      |                                 |  |   |        |   |  |      |   |  |      |        |   |   |   |        |   |  |   |      |   |  |     |  
|                                                 |  | $                                | (1,058 | ) |        | $ | (911 | )                               |  | $ | (147   | ) |  | -16  | % |  | $    | (3,120 | ) |   | $ | (2,664 | ) |  | $ | (456 | ) |  | -17 | %
|                                                 |  |                                  |        |   |        |   |      |                                 |  |   |        |   |  |      |   |  |      |        |   |   |   |        |   |  |   |      |   |  |     |  

Interest expense, net, increased primarily due to the increased interest expense related to our 13.9% Notes and
decreased interest income as a result of our decreased cash balances.

PROVISION FOR INCOME TAXES

The provision for income taxes represents the tax on the income generated by certain of our European subsidiaries operations. Since our inception, we have incurred net
operating losses for income tax purposes in the U.S. and have incurred taxes only in those states which levy taxes on a state minimum or franchise tax basis. Additionally, 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.

ACCRUED
DIVIDENDS AND ACCRETION ON REDEEMABLE PREFERRED STOCK

Dividends and accretion on redeemable preferred stock represents the accrued dividends and accretion
of the beneficial conversion features of our outstanding Series D and E preferred stock as well as the accretion to the redemption value of the outstanding Series D preferred stock (see Note 4 Redeemable Preferred Stock in the Notes to
Condensed Consolidated Financial Statements). The following table sets forth the components of the dividends and accretion on redeemable preferred stock for the periods indicated.



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|                                                                           |  |                                 |       |        |   |       |                                 |   |        |   |  |      |   |      |   |        |  |   |        |  |   |     |   |  |    |  
|-------------------------------------------------------------------------- |  | ------------------------------- | ----- | ------ | - | ----- | ------------------------------- | - | ------ | - |  | ---- | - | ---- | - | ------ |  | - | ------ |  | - | --- | - |  | -- | -
|                                                                           |  | Three monthsended September 30, |       | Change |   |       | Nine months ended September 30, |   | Change |  
|                                                                           |  | 2007                            |       | 2006   |   | $     |                                 |   | %      |   |  | 2007 |   | 2006 |   | $      |  |   | %      | 
|                                                                           |  | (in thousands)                  |      
|Accrued dividends                                                          |  | $                               | 1,889 |        | $ | 1,900 |                                 | $ | (11    | ) |  | -1   | % |      | $ | 5,687  |  | $ | 5,700  |  | $ | (13 | ) |  | 0  | %
|Accretion to the redemption value and of the beneficial conversion feature |  |                                 | 1,821 |        |   | 1,651 |                                 |   | 170    |   |  | 10   | % |      |   | 5,470  |  |   | 4,818  |  |   | 652 |   |  | 14 | %
|                                                                           |  |                                 |       |        |   |       |                                 |   |        |   |  |      |   |      |   |        |  |   |        |  |   |     |   |  |    |  
|                                                                           |  | $                               | 3,710 |        | $ | 3,551 |                                 | $ | 159    |   |  | 4    | % |      | $ | 11,157 |  | $ | 10,518 |  | $ | 639 |   |  | 6  | %
|                                                                           |  |                                 |       |        |   |       |                                 |   |        |   |  |      |   |      |   |        |  |   |        |  |   |     |   |  |    |  

Recent Accounting Pronouncements

We adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109, (FIN 48) on January 1, 2007.
FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN 48 provides
guidance on de-recognition, statement of operations classification of interest and penalties, accounting in interim periods, disclosure and transition. Our policy is to recognize interest and penalties related to uncertain tax positions in our
provision for income tax expense if warranted. After the adoption of FIN 48, our tax assets and liabilities did not differ from the assets and liabilities before adoption, therefore, we did not record any cumulative effect adjustment as of the
adoption date. In addition, consistent with the provisions of FIN 48, we classified $3.8 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet date
and we are unable to make a reasonably reliable estimate when cash settlement with a taxing authority will occur.

In February 2007, the FASB issued
Statement of Financial Accounting Standard (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115, which permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have not yet determined the impact, if any, that the
implementation of SFAS No. 159 will have on our financial position and results of operations.

In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements, which clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We have not yet determined the impact, if any, that the implementation of SFAS No. 157 will have on our financial position and results of operations.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

The
following table presents the hypothetical changes in fair value in the 13.9% Notes at September 30, 2007. The value of the instrument is sensitive to changes in interest rates. The modeling technique used measures the change in fair values
arising from hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (bps), 100 bps and 150 bps over a twelve-month time horizon. The base value represents the estimated traded fair market value of the notes.



|            |  |                                                                         |        |                           |   |                                                                         |  |   |        |  |         |        |         |   |        |  |   |        |  |   |       
|----------- |  | ----------------------------------------------------------------------- | ------ | ------------------------- | - | ----------------------------------------------------------------------- |  | - | ------ |  | ------- | ------ | ------- | - | ------ |  | - | ------ |  | - | ------
|            |  | Valuation of borrowing given aninterest rate decrease of X basis points |        | No changein interest
rate |   | Valuation of borrowing given
aninterest rate increase of X basis points
|            |  | 150 bps                                                                 |        | 100 bps                   |   | 50 bps                                                                  |  |   | 50 bps |  | 100 bps |        | 150 bps
|            |  | (in thousands)                                                         
|13.9% Notes |  | $                                                                       | 18,035 |                           | $ | 17,973                                                                  |  | $ | 17,911 |  | $       | 17,850 |         | $ | 17,789 |  | $ | 17,728 |  | $ | 17,667

As of September 30, 2007, we had cash and cash equivalents of $11.3 million and no investments in marketable
securities and our long-term obligations consisted of our $18.0 million three year, 13.9% Notes due June 2008 and certain fixed rate capital leases. Accordingly, an immediate 10% change in interest rates would not affect our long-term obligations or
our results of operations.

A significant portion of our international 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 with any certainty; however, our exposure to foreign currency exchange rate risk is primarily associated with fluctuations in the Euro. We realized a net
loss on foreign exchange of $1.1 million during the three months ended September 30, 2007. Our foreign exchange gain (loss) is primarily driven by the revaluation of our foreign entities assets and liabilities, which are not U.S. dollar
denominated. In general, as the U.S. dollar loses value against the currencies of our



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foreign entities, a foreign currency loss will be generated, however; as the U.S. dollar increases in value against the currencies of our foreign entities, a
foreign currency gain will be generated. The amount of the loss or gain in any period is a result of the value of the U.S. dollar against such currencies and the asset and liability balances of our foreign entities. To date, we have not sought to
hedge the risks associated with fluctuations in exchange rates.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934 (the Exchange Act) designed to ensure information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in United States Securities and Exchange Commission (SEC) rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our disclosure committee and management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant
to Exchange Act Rules 13a-15(b) and 15d-15(b). During this evaluation, management considered the impact any material weaknesses and other deficiencies in our internal control over financial reporting might have on our disclosure controls and
procedures. In accordance with Section 404 of the Sarbanes-Oxley Act and the rules and regulations promulgated under this section, we were required for our Annual Report on Form 10-K for the year ended December 31, 2004 to evaluate and
report on our internal control over financial reporting. In our report contained in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004, we reported the following material weaknesses related to our:



| | (1) | Lack of expertise and resources to analyze and apply generally accepted accounting principles to significant non-routine transactions;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Inadequate controls over period-end financial reporting processes;
| | --- | ------------------------------------------------------------------



| | (3) | Inadequate segregation of duties; and
| | --- | -------------------------------------



| | (4) | Inadequate controls over access to financial applications and data.
| | --- | -------------------------------------------------------------------

Because the material weaknesses identified in connection with the assessment of our internal control over financial reporting as of December 31, 2004, have not yet been remediated, our Chief Executive Officer and our Chief Financial
Officer concluded our disclosure controls and procedures were not effective as of September 30, 2007. Notwithstanding the material weaknesses described above, management believes the consolidated financial statements included in this report
fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

The certifications of our
Chief Executive Officer and our Chief Financial Officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4
contain information concerning the evaluation of our disclosure controls and procedures, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of
the matters covered by the certifications.

Change in Accelerated Filer Status

On December 21, 2005 the SEC issued Release No. 33-8644 Revisions to Accelerated Filer Definition and Accelerated Deadlines For Filing Periodic Reports. On December 15, 2006, the SEC issued
Release No. 33-8760 Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers and Newly Public Companies. In accordance with the provisions of these releases, management was not required
to, and did not, include in our Annual Report on Form 10-K for the fiscal years ending on or after December 31, 2005, an assessment of the effectiveness of our internal control over financial reporting.

Managements Remediation Initiatives

Although we have not
reported on the effectiveness of our internal control over financial reporting since our Annual Report on Form 10-K for the year ended December 31, 2004, we take our internal control over financial reporting and our system of disclosure
controls and procedures very seriously.



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Accordingly, during 2005, 2006 and the nine months ended September 30, 2007 we made the following changes to our
system of internal controls:



|(a) | In an effort to address the inadequate controls over access to financial applications and data, during the three months ended March 31, 2005, we began requiring passwords,
which are changed every 90 days, to access critical systems and financial applications.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | During the three month period ended September 30, 2005, we engaged an external third-party as our expert resource to assist us in the application of generally accepted
accounting principles to our significant non-routine accounting transactions. In addition to requiring password changes to access critical systems and financial applications to address inadequate controls over access to financial applications and
data, we implemented monthly reviews of our employees access to critical systems and financial applications and change control procedures with respect to our critical systems and financial applications.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | During the three months ended December 31, 2005, we:
|--- | ----------------------------------------------------



| |  |  | Implemented an IT security and acceptable use policy;
| | - |  | -----------------------------------------------------



| |  |  | Implemented a change management and monitoring procedures for Critical Paths corporate infrastructure;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Implemented a quarterly review process for access to critical IT systems;
| | - |  | -------------------------------------------------------------------------



| |  |  | Deployed an employee record system to track employee access and separation requests;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Upgraded firewall infrastructure to eliminate the non-supported systems;
| | - |  | ------------------------------------------------------------------------



| |  |  | Completed external vulnerability testing for key corporate offices;
| | - |  | -------------------------------------------------------------------



| |  |  | Moved critical servers to facilities where systems can be protected by universal power supply and fire suppression systems; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Completed a risk assessment of critical systems and developed risk mitigation plans for each environment.
| | - |  | ---------------------------------------------------------------------------------------------------------



|(d) | During the three months ended December 31, 2006, we transitioned our U.S. accounting operations to Dublin, Ireland, which reduces our significant accounting locations from four
at December 31, 2004 to two upon completion of the transition. Additionally, in October 2006 we completed the evaluation and selection of new core business software related to accounting and professional services. We implemented the new
accounting software in our Dublin, Ireland subsidiary during the fourth quarter of 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) | During the three months ended March 31, 2007, we implemented the new accounting software in our Turin, Italy subsidiary and during the three months ended September 30,
2007, completed the company-wide implementation of a new professional services software . We believe these actions will facilitate the application of uniform accounting controls and processes among our locations when implemented, and will be key to
the remediation of items (2) and (4) in the above section titled Evaluation of Disclosure Controls and Procedures.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
intend to continue to devote resources to the improvement of our internal control over financial reporting and our system of disclosure controls and procedures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

From time to time, we have been subject to
litigation including the pending litigation described below. Our current estimated range of liability related to some of the pending litigation below is based on claims for which we can estimate the amount and range of loss. Because of the
uncertainties related to both the amount and range of loss on the remaining pending litigation, we are unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available,
we will assess our potential liability and revise our estimates. Pending or future litigation could be costly, could cause the diversion of managements attention and could upon resolution, have a material adverse effect on our business,
results of operations, financial condition and cash flow. 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.

Action in the Superior Court of San Diego. In April 2006, we were added as a named defendant in a lawsuit previously filed by a former shareholder of Extricity,
Inc. against current and former officers and directors of Peregrine Systems, Inc., Peregrines former accountants, some of Peregrines customers, including us and various other unnamed defendants. In February 2007, the plaintiff
filed a third amended complaint, which for the first time contains certain allegations and claims raised against us. The complaint



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alleges that certain of the named defendants including us, as Peregrines customers, engaged in fraudulent transactions with Peregrine that were not
accounted for by Peregrine in conformity with U.S. GAAP and that this substantially inflated the value of Peregrine securities issued as consideration in Extricitys merger with Peregrine. We filed a demurrer to all claims, however, the court
found the plaintiffs allegations to be sufficient for the pleading stage, subject to further factual discovery. We have recorded a $0.2 million liability against this claim as of September 30, 2007. In October, we began settlement
discussions with the plaintiff and entered into a settlement agreement on October 8, 2007. Under the agreement, we will make payments totaling significantly less than our expected costs for pursuing the next phase of litigation. Upon full
payment by December 31, 2007, the complaint and all claims against us will be dismissed with prejudice.

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

A final settlement approval hearing on the proposed issuer settlement was held on April 24, 2006, and the district court took the matter under submission.
Meanwhile the consolidated case against the underwriters proceeded. On October 13, 2004, the district court had certified a class in the underwriters proceeding. On December 5, 2006, however, the Second Circuit reversed, holding that
a class could not be certified. The plaintiffs petitioned the Second Circuit for rehearing of the Second Circuits decision, however, on April 6, 2007, the Second Circuit denied the petition for rehearing. At a status conference on
April 23, 2007, the district court suggested that the issuers settlement could not be approved in its present form, given the Second Circuits ruling. On June 25, 2007 the district court issued an order terminating the
settlement agreement. The plaintiffs are due to submit amended complaints and the issue of a new class definition for certification will be heard in the fall. In the meantime, the issuer defendants, including us, are working to reinstate the
settlement agreement with the plaintiffs on substantially the same terms. We have not recorded a liability against this claim as of September 30, 2007.

Derivative Action in Western District of Washington. On July 17, 2007, the Company received a letter demanding on behalf of alleged Company stockholder Vanessa Simmonds that the Companys board of directors prosecute a
claim against the Companys IPO underwriters, in addition to certain unnamed directors, key officers and certain other shareholders who allegedly engaged in short-swing trading during certain periods in 1999 and 2000 in violation of the
Securities Exchange Act of 1934, section 13(d) and Rule 13d-5. The board declined to prosecute the claim on the grounds that it did not seem to have any merit and, even if it did, it would be time-barred and unlikely to result in any benefit to the
Company and its stockholders. The Company has learned that on October 3, 2007 the plaintiff filed a complaint for recovery of short-swing profits under Section 16(b) of the Exchange Act against BancBoston Robertson Stephens, Inc. and JP
Morgan Chase & Co. Although the Company has not been served to date, the complaint purports to name the Company as a nominal defendant. No damages are alleged against or sought from the Company, and the Company has not recorded
a liability against this claim as of September 30, 2007.

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



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Investing in our securities involves a high degree of
risk. In addition to the other information contained in this report, you should consider the following risk factors before investing in our securities.

We will need to raise additional capital, initiate other operational strategies and/or revise our existing obligations to continue our operations.

If we are unable to significantly increase our revenues, reduce the amount of cash used by our operating activities and generate positive cash flow from our operating activities, we will need to undertake additional
restructuring initiatives to continue our operations. We do not believe we have sufficient capital resources to fund our current operations beyond the



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second quarter of 2008. We face a number of challenges in operating our business and gaining new customers and maintaining existing ones, including our
ability to overcome viability questions raised by prospective customers given our current capital needs. Additionally, as we approach the June 30, 2008 maturity of the $18.0 million principal amount of our 13.9% Notes we will need to
restructure our debt to delay the maturity date or seek additional financing in order to satisfy payment of the 13.9% Notes upon maturity. We will also be required to redeem our outstanding preferred stock in July 2008, which could require us to pay
a substantial amount of cash to our holders of preferred stock to the extent permitted by law. As we approach the redemption date, we will need to modify the terms of our preferred stock to delay redemption of our preferred stock beyond their
current redemption date in July 2008. The holders of a majority of our outstanding preferred stock are also the holders of a majority of our 13.9% Notes. However, we may be unable to agree on a restructuring of the 13.9% Notes or the Series D and
Series E preferred stock with the holders of these existing commitments. Moreover, in order to incur additional indebtedness, we must obtain the consent from the holders of two-thirds in principal amount of our outstanding 13.9% Notes and our
preferred stockholders. Even if we obtain this consent, we do not believe that financing is available in sufficient amounts or on terms acceptable to us. The delisting of our common stock from the Nasdaq Global Market and our low stock price also
impairs our ability to raise additional capital. If the Companys efforts to significantly increase its revenues are unsuccessful, the Company will reduce the amount of cash used by its operating activities, liquidate assets, implement
restructuring initiatives, which may include the previously announced proposal to go private currently under consideration by a special committee of the Companys Board of Directors, seek the protection of applicable bankruptcy laws or some
combination of the foregoing.

Certain of our cash resources are not readily available for our operations.

We face restrictions on our ability to use cash that we currently hold outside of the United States for purposes other than the operation of each of our respective
foreign subsidiaries that hold such cash. For example, our ability to use cash held in a given European subsidiary for any reason other than the operation of that subsidiary may result in certain tax liabilities and are subject to local laws that
could prevent the transfer of cash from that subsidiary to any other foreign or domestic account. Additionally, we may experience occasional funding deficits in our domestic operations during the next 12 months. We would fund any such deficit with
resources from our international cash balances, however, due to the restrictions we face on our ability to use cash that we currently hold outside of the United States we may not be able to successfully fund any such deficits from our international
cash resources. At September 30, 2007, approximately $2.7 million of cash was readily available for our domestic operations and $8.6 million was held outside of the United States. Our inability to utilize cash outside of the United
States could slow our ability to operate and grow our business and reach our business objectives or impair our current operations. We may also be forced to incur certain costs, such as tax liabilities, to be able to use this cash for domestic
operations, which could cause our expenses to increase and our operating results to decline.

The debt and significant equity ownership by the General
Atlantic Investors and the Cheung Kong Investors may result in potential conflicts of interests, which could adversely affect the holders of our common stock and other investors, delay or cause a change in control and depress our stock price.

The debt and significant equity ownership by each of the General Atlantic Investors and the Cheung Kong Investors could create conflicts of interest
between these majority shareholders and our other shareholders and between the General Atlantic Investors and the Cheung Kong Investors. For example, the General Atlantic Investors and the Cheung Kong Investors may only approve a change in control
transaction that results in the payment of their liquidation preference or other terms satisfactory to them even if our other shareholders oppose the transaction, which could depress the price of our common stock or result in a transaction that
causes our shareholders to receive consideration for their shares that is less than the price they paid.

As previously announced, the General Atlantic
Investors and the Cheung Kong Investors recently submitted a proposal to take the Company private by acquiring all of the outstanding shares of our common stock. In response to the offer, we formed a special committee of independent directors to
evaluate the offer. The special committee determined to proceed with discussions with these stockholders and has been engaged in ongoing negotiations regarding this potential transaction. However, no assurance can be given that a definitive
agreement regarding this transaction will be reached or, if a definitive agreement is executed, that any such transaction will be consummated. If the transaction is consummated, the holders of outstanding stock may receive in the transaction
consideration that is less than the price they paid for our shares. Alternatively, the General Atlantic Investors and the Cheung Kong Investors may prevent or delay a corporate transaction that is favored by our other shareholders. In addition, it
is also possible that the risk that the General Atlantic Investors and the Cheung Kong Investors may disagree on approving a significant corporate transaction, for example a change in control transaction, could limit the number of potential partners
willing to pursue such a transaction with us or limit the price that investors might be willing to pay for future shares of our common stock.

The debt
and significant equity ownership by the General Atlantic Investors and the Cheung Kong Investors as well as the widely disseminated ownership of our common stock could delay, cause, or prevent a change of control or depress our stock price.

As of September 30, 2007, the General Atlantic Investors beneficially own approximately 30.0% of our outstanding securities (which represents
approximately 18.6% of the voting power) and the Cheung Kong Investors beneficially own approximately 15.7% of our outstanding securities (which represents approximately 13.2% of the voting power). As a result, the General Atlantic Investors and the
Cheung Kong Investors, although not affiliated, may have the ability, as shareholders acting together, to control the outcome of shareholder votes, including votes concerning the election of a majority of our directors, approval of merger
transactions involving us, including the going-private transaction that these investors recently proposed to us, and the sale of all or substantially all of our assets or other business combination transactions, charter and bylaw amendments and
other significant corporate actions, which could cause delay or prevent a change in control or depress our stock price.

The General Atlantic Investors and
the Cheung Kong Investors also hold a significant portion of our outstanding 13.9% Notes, which require us to obtain their consent before taking certain corporate actions (for example, incurring indebtedness or selling assets) that would not
otherwise require the consent of our shareholders. As a result, we may not be able to execute a transaction favored by management or beneficial to our other shareholders if we are notable to obtain their consent.



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In addition, a significant majority of our outstanding shares of common stock are held by a large number of stockholders
that individually own only a nominal amount of our stock. As a result, if we were to submit a non-routine significant transaction to our holders of common stock, as a separate class, for approval, we would need a very large number of stockholders to
affirmatively vote in order to approve the transaction. In these instances, because we are a California corporation, any shares that are not voted are counted as votes against the transaction. Given that our common stock is no longer trading on the
Nasdaq Global Market and the low trading price of our common stock, the value placed on the investment in our stock by these stockholders maybe minimal. As a result, we may be unable to obtain sufficient votes from the holders of our common stock to
execute a transaction that is favored by management and a majority of our stockholders that return their votes, if the separate vote of the common stockholders is required.

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

We have not achieved
profitability on a U.S. GAAP basis in any period and expect to continue to incur net losses in accordance with generally accepted accounting principles for the foreseeable future. In addition, we intend to continue to spend resources on maintaining
and strengthening our business, and this may, in the near term, cause our operating expenses to increase and our operating results to decline.

In past
quarters, we have spent heavily on technology and infrastructure development. We may continue to spend substantial financial and other resources to further develop and introduce new messaging solutions, and to improve our sales and marketing
organizations, strategic relationships and operating infrastructure. We expect that our cost of revenues, sales and marketing expenses, general and administrative expenses, operations, research and customer support expenses and depreciation and
amortization expenses could increase in absolute dollars and may increase as a percent of revenues. In future periods, we may also incur significant non-cash charges related to stock-based compensation. If revenues do not correspondingly increase,
our operating results could decline. 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. We also may never obtain sufficient revenues to exceed our cost structure and achieve profitability. In the event we are unable to improve our financial condition, current and future customers may determine not to do business with us which
would cause our revenues to further decline. If we do achieve profitability, we may not be able to sustain or increase profitability in the future.

Our
failure to continue to carefully manage expenses could require us to use substantial resources and cause our operating results to decline.

In the past,
our management of operational expenses, including the restructurings of our operations, have placed significant strain on managerial, operational and financial resources and contributed to our history of losses. In addition, we may need to improve
or replace our existing operational, customer service and financial systems, procedures and controls and incur incremental costs of compliance with legislation, such as the Sarbanes-Oxley Act of 2002. Any failure to properly manage these systems and
procedural transitions or these incremental compliance costs could impair our ability to attract and service customers, and could cause us to incur higher operating costs and delays in the execution of our business plan. If we cannot manage
restructuring activities and expenses effectively, our business and operating results could decline.

Our $18.0 million in principal amount of 13.9%
Notes and a substantial liquidation preference to the holders of our preferred stock could significantly impact the return to common equity holders.

In the event of liquidation, dissolution, winding up or change of control of Critical Path, we must repay the
principal and accrued interest of the 13. 9% Notes and satisfy the liquidation preferences of our outstanding preferred stock. As of September 30, 2007, the aggregate amount of outstanding principal and interest on our 13.9% Notes was $25.6
million. The holders of Series E preferred stock would be entitled to receive $1.50 per share of Series E preferred stock plus all accrued dividends on such shares before any proceeds from a liquidation, dissolution or winding up is paid
with respect to any other series or class of our capital stock. Accordingly, at September 30, 2007, the approximately 48.3 million shares of Series E preferred stock outstanding had an aggregate liquidation preference of
approximately $86.0 million. The aggregate amount of the preference will increase as the shares of Series E preferred stock accrue dividends based on simple interest at an annual rate of 53/4%. After all of the then outstanding shares of Series E preferred stock have received payment of their liquidation preference, the holders of the approximately 3.5 million
shares of outstanding Series D preferred stock would be entitled to receive the greater of $13.75 per share of Series D preferred stock plus all accrued dividends on such shares (which, as of September 30, 2007, would result in an
aggregate liquidation preference of approximately $69.8 million) or $22 per share (which currently would equal a liquidation preference of $77.5 million) before any proceeds from the liquidation, dissolution, winding up or change in control is paid
to holders of our common stock. Thus, as of September 30, 2007, the combined liquidation preference of our Series D and Series E preferred stock is $163.5 million. We also would be required to satisfy the liquidation preference of our
Series F Redeemable Convertible Preferred Stock (Series F preferred stock) however, as of September 30, 2007, there were no shares of Series F preferred stock outstanding, but there are outstanding warrants to purchase an



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aggregate of 0.4 million shares of Series F preferred stock. Holders of our common stock will not receive any proceeds from a liquidation, winding
up or dissolution, including from a change of control, until after the holders of our 13.9% Notes have been repaid and the liquidation preferences of our preferred stock are paid in full. Consequently, although we would likely be required under
applicable law to obtain the separate class approval of the holders of our common stock for a change of control or the sale of all or substantially all of the shares of Critical Path, it is possible that such a transaction could result in all or
substantially all of the proceeds of such transaction being distributed to the holders of our 13.9% Notes and our preferred stock.

We will be required
to redeem our outstanding preferred stock in July 2008, which could require us to pay a substantial amount of cash to our holders of preferred stock.

We will be required to redeem our outstanding shares of our Series D preferred stock, Series E preferred stock and Series F preferred stock, to the extent any Series F preferred stock is outstanding, in July 2008 to the
extent that we have cash legally available to pay for the redemption as determined in accordance with applicable law. We anticipate that we will need to modify the terms of our preferred stock to delay redemption of our preferred stock. However, we
may be unable to modify these terms or do so on new terms reasonably acceptable to us. The amount we are required to pay for these shares will be equal to the accreted value of the shares at the time of redemption. As of the redemption date in July
2008, the redemption price per share that we will be required to pay will be $20.58 per share of Series D preferred stock, $1.84 per share of Series E preferred stock and $14.00 plus any accrued dividends per share of Series F
preferred stock. If no holders of shares of our preferred stock elect to convert their shares into common stock prior to the redemption date, we would be required to pay an aggregate of $161.7 million in order to redeem the outstanding shares of
preferred stock in July 2008. If we do not meet specified criteria under applicable law that allows a corporation to use its cash to redeem outstanding shares of capital stock, we will not be allowed to redeem these shares in July 2008. If we are
legally unable to redeem all or any portion of our outstanding preferred stock on the redemption date, the redemption cost of these outstanding preferred shares will continue to increase as these shares will continue to accrue dividends until the
shares are either converted or redeemed. Any cash payments we are required to make to redeem our outstanding preferred stock could harm our ability to operate and grow our business or reach our business objectives.

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

Our preferred stock can be converted into common stock at anytime in the discretion of the holder of preferred stock. For example, during
the three months ended June 30, 2007, at the request of certain holders of our Series E preferred stock, we converted approximately 465,000 shares of Series E preferred stock into approximately 544,000 shares of common stock. As of
September 30, 2007, there were approximately 3.5 million shares of Series D preferred stock outstanding, which were convertible into approximately 46.6 million shares of common stock. In addition, we have approximately
48.3 million shares of Series E preferred stock outstanding, which are convertible as of September 30, 2007, at the option of the holders, into approximately 57.3 million shares of common stock. We also have outstanding warrants
to purchase 0.4 million shares of Series F preferred stock which, if exercised, would initially be convertible into approximately 3.9 million shares of common stock. Any conversion of our preferred stock into common stock would
increase the number of additional shares of common stock that may be sold into the market, which could substantially decrease the price of our common stock.

As the preferred stock accrues dividends, the number of shares of common stock issuable upon conversion will increase, which may increase the dilution to our holders of common stock and further decrease the price of our common stock.

Currently, shares of Series D preferred stock and shares of Series E preferred stock
accrue dividends at a rate of 53/4% per year. If the maximum amount of dividends accrue on the outstanding shares of Series D preferred
stock and Series E preferred stock prior to the automatic call for redemption date, the number of shares of common stock issuable upon conversion will increase by approximately 3.9 million shares to approximately 107.8 million shares
of common stock. Further, if we are legally unable to redeem the Series E preferred stock and our Series D preferred stock on the redemption date, the value of these preferred shares will continue to accrue dividends and be convertible
into an even greater number of shares until such time as they are converted or redeemed.

From time to time we engage in discussions with or
receive proposals from third parties relating to a potential change of control of Critical Path.

We may enter into a transaction that constitutes a
change of control of Critical Path. Any such transaction could happen at any time, could be material to our business and could take any number of forms, including, for example, a merger or a sale of all or substantially all of our assets. We will in
the future continue to evaluate potential business combinations or strategic transactions which, if consummated, may constitute a change of control and trigger the repayment of outstanding debt and liquidation preference payments described above and
result in little or no payment to the holders of our common stock.



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Our common stock is listed on the OTC Bulletin Board, and thus the liquidity of our common stock is low and our
ability to obtain future financing may be further impaired.

In November 2005, we were delisted from the Nasdaq Global Market due to noncompliance with
Marketplace Rule 4450(b)(4), which requires companies listed to have a minimum bid price of $1.00 per share, and Rule 4450(b)(3), which requires companies listed to maintain a minimum market value of publicly held securities of at least $15 million.

Our common stock now trades in the over-the-counter market on the OTC Bulletin Board owned by the Nasdaq Stock Market, Inc., which was established for
securities that do not meet the listing requirements of the Nasdaq Global Market or the Nasdaq Capital Market. The OTC Bulletin Board is generally considered less efficient than the Nasdaq Global Market. Consequently, selling our common stock is
likely more difficult because of diminished liquidity in smaller quantities of shares likely being bought and sold, transactions could be delayed, and securities analysts and news media coverage of us may be limited. These factors could result
in lower prices and larger spreads in the bid and ask prices for shares of common stock.

Our listing on the OTC Bulletin Board, and our low stock price,
greatly impair our ability to raise additional capital through equity or debt financing, and significantly increase the dilution to our current stockholders caused by any issuance of equity in financing or other transactions. Moreover, even if we
were able to raise additional financing, because the price at which we would issue shares in such transactions is generally based on the market price of our common stock, we would need to issue a greater number of shares to raise a given amount of
funding.

In addition, as our common stock is not listed on a principal national exchange, we are subject to Rule 15g-9 under the Securities and Exchange
Act of 1934, as amended. That rule imposes additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. Consequently, the rule may affect
the ability of broker-dealers to sell our common stock and affect the ability of holders to sell their shares of our common stock in the secondary market. Moreover, investors may be less interested in purchasing low-priced securities because the
brokerage commissions, as a percentage of the total transaction value, tend to be higher for such securities, and some investment funds will not invest in low-priced securities (other than those which focus on small-capitalization companies or
low-priced securities).

If we are unable to successfully compete in our product market, our ability to retain our customers and attract new customers
could decline as would our revenues.

Competition for the products we provide and services we offer is intense. Although we are not aware of any one
company that directly competes with every one of our products and services, we face a different set of competitors in each of our lines of business. The primary competitors of our messaging solutions include OpenWave Systems Inc., Sun
Microsystems Sun ONE software division (formerly iPlanet), Microsoft Corporation, Google, Inc., Comverse, Inc., Mirapoint Inc. and the IronPort Systems division of Cisco Systems, Inc., as well as a variety of smaller product suppliers. In the
market for mobile email services, we are competing in an emerging market and face new competitors as the market develops. We currently compete with Comverse, Inc., OpenWave Systems, Inc., Seven Networks, Inc. and Oz Communications, Inc. as well as
with small, local technology providers such as O3sis IT AG, Consilient, Inexbee and AxisMobile; however, we expect to encounter competition from Microsoft Corporation, Yahoo! Inc. and Google Inc. in the future as they seek to mobilize their existing
portal services. In the identity management market, we compete primarily with Sun Microsystems Sun ONE software division (formerly iPlanet), IBM Corporation, Microsoft Corporation, Novell Corporation, Siemens Corporation and Computer
Associates, as well as various small identity management application vendors. If our existing customers and other consumers prefer the products and services offered by our competitors over ours, our revenues will decline.

Competition continues to increase as current competitors increase the sophistication of their offerings, as new participants enter the market and as the market
continues to grow, becoming increasingly attractive. Many 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. Given our limited capital resources, we may be unable to spend the necessary capital to offer services comparable to our
competitors or to improve our product offering to compete effectively. For example, our hosted usenet newsgroup service may require significant capital investment in order to remain competitive. Any delay in the development or introduction of
products or services or updates, would also allow additional time for our competitors to improve their service or product offerings, and for new competitors to develop messaging and identity management products and services for our target markets.
Increased competition could result in pricing pressures, reduced operating margins and loss of market share, any of which could cause our business to suffer.

We may be unable to grow our business through effective sales and marketing, which could cause our operating results to decline.

Our
ability to increase revenues will depend on our ability to successfully recruit, train and retain experienced and effective sales and marketing personnel and for our personnel to achieve results once they are employed with us. Competition for
experienced and effective personnel in certain markets is intense and we may not be able to hire and retain personnel with relevant experience. The complexity and implementation of our messaging and identity management infrastructure products and
services require highly trained sales and marketing personnel to educate prospective customers regarding the use and benefits of our services. Current and



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prospective customers, in turn, must be able to educate their end-users. Any delays or difficulties encountered in our staffing and training efforts would
impair our ability to attract new customers and enhance our relationships with existing customers, and ultimately, grow revenues. This would also adversely impact the timing and extent of our revenues from quarter to quarter and overall or could
jeopardize sales altogether. Because we have experienced turnover in our sales force and have fewer resources than many of our competitors, our sales and marketing organizations may not be able to compete successfully against the sales and marketing
organizations of our competitors. Moreover, our competitors frequently have larger and more established sales forces calling upon potential enterprise customers with more frequency. In addition, certain of our competitors have longer and closer
relationships with the senior management of customers who decide whose technologies and solutions to deploy. If we do not successfully operate and grow our sales and marketing activities, our revenues and operating results could decline and the
price of our common stock could continue to decline.

We have identified material weaknesses in our disclosure controls and procedures and our internal
control over financial reporting, which, if not remedied effectively, could have an adverse effect on the trading price of our common stock and otherwise seriously harm our business.

Management through, in part, the documentation, testing and assessment of our internal control over financial reporting has concluded in the past that our disclosure controls and procedures and our internal control
over financial reporting had material weaknesses as of December 31, 2004. Management has not performed similar documentation, testing and assessments of our internal control over financial reporting as of December 31, 2005 or as of
December 31, 2006, because we are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. However, we take disclosure controls and procedures seriously and have taken certain actions to begin to address those
material weaknesses which were identified in connection with the assessment of our internal controls undertaken as of December 31, 2004. Our inability to remedy our material weaknesses promptly and effectively could have a material adverse
effect on our business, results of operations and financial condition, as well as impair our ability to meet our quarterly and annual reporting requirements in a timely manner. These effects could in turn adversely affect the trading price of our
common stock. Prior to the remediation of these material weaknesses, there remains risk that the transitional controls on which we currently rely will fail to be sufficiently effective, which could result in a material misstatement of our financial
position or results of operations and require a restatement. In addition, even if we are successful in strengthening our controls and procedures, such controls and procedures may not be adequate to prevent or identify irregularities or facilitate
the fair presentation of our financial statements or SEC reporting.

Failure or circumvention of our controls and procedures could seriously harm our
business.

We are making significant changes in our internal control over financial reporting and our disclosure controls and procedures. Any system of
controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances that the objectives of the system are met. In addition, the effectiveness of our remediation efforts
and of our internal controls is subject to limitations, including the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, our remediation efforts to improve our internal
control over financial reporting may not prevent all improper acts or ensure that all material information will be made known to management in a timely fashion. In addition, because substantial additional costs may be necessary to implement these
remedial measures, our limited resources may cause a further delay in the remediation of all of our material weaknesses. The failure or circumvention of our controls, policies and procedures or of our remediation efforts could have a material
adverse effect on our business, results of operations and financial condition.

Due to our evolving business strategy and the nature of the markets in
which we compete, our future revenues are difficult to predict and our quarterly operating results may fluctuate.

We cannot accurately forecast our
revenues as a result of our evolving business strategy and the emerging nature of the messaging and directory infrastructure market. Forecasting is further complicated by recent strategic and operational restructurings, such as the sale of assets
relating to our hosted messaging services, and may continue to be complicated by future restructurings. In addition, our reliance on large dollar value transactions, as well as market fluctuations, can complicate our ability to forecast accurately.
Our revenues in some past quarters fell and could continue to fall short of expectations if we experience delays or cancellations of even a small number of orders. We often offer volume-based pricing, which may affect our operating margins. A number
of factors are likely to cause fluctuations in operating results, including, but not limited to:



| |  |  | the demand for licensed solutions for messaging and identity management products;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | our ability to compete effectively with new market participants, particularly with respect to price competition, in the market for mobile email services;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attract and retain qualified personnel with industry expertise, particularly sales personnel;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attract and retain customers and maintain customer satisfaction;
| | - |  | -------------------------------------------------------------------------------



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| |  |  | the ability to upgrade, develop and maintain our systems and infrastructure and to effectively respond to the rapid technology change of the messaging and identity
management infrastructure market;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the budgeting and payment cycles of our customers and potential customers;
| | - |  | --------------------------------------------------------------------------



| |  |  | the amount and timing of operating costs and capital expenditures relating to expansion of business and infrastructure;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to quickly handle and alleviate technical difficulties or system outages;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the announcement or introduction of new or enhanced services by competitors;
| | - |  | ----------------------------------------------------------------------------



| |  |  | general economic and market conditions and their effect on our operations and the operations of our customers; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of war, terrorism and any related conflicts or similar events worldwide.
| | - |  | -----------------------------------------------------------------------------------

In addition to the factors set forth above, our financial results on a U.S. GAAP basis 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, during the three months ended September 30, 2007, we incurred stock-based compensation expense of approximately $0.2 million primarily relating to the issuance of common stock and
the grant of options and warrants to employees and non-employees. Grants of options and warrants also may be dilutive to existing shareholders.

Our
revenues and operating results have declined and could continue to decline as a result of the elimination of product or service offerings through termination, sale or other disposition. Future decisions to eliminate, revise or limit any other
offerings of a product or service would involve other factors that could cause our revenues to decline and our expenses to increase, 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.

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 or subject
to further declines.

We have in the past evaluated, and will continue to evaluate in the future, the strategic value of our business operations and,
where appropriate, invest further in certain business operations, and reduce investment in or divest other business operations.

In the past, we have
elected to divest or discontinue certain business operations through termination, sale or other disposition. For example, in January 2006, we sold substantially all of the assets relating to our hosted messaging business which contributed to a
decline in our revenues for the year ended December 31, 2006 as compared to the previous year ended December 31, 2005. Furthermore, we may choose to divest certain business operations based on our managements perception of their
strategic value to our business, even if such operations have been profitable historically. Decisions to eliminate or limit certain business operations have involved in the past, and could in the future involve, the expenditure of capital,
consumption of management resources, realization of losses, transition and wind-up expenses, further reduction in workforce, facility consolidation and the elimination of revenues along with associated costs, any of which could cause our operating
results to decline and may fail to yield the expected benefits.

A limited number of customers and markets account for a high and increasing percentage
of our revenues and if we lose a major customer, are unable to attract new customers, or the markets which we serve suffer financial difficulties, our 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. For example, for the three months ended
September 30, 2007 and for the years ended December 31, 2006 and 2005, our top ten customers accounted for approximately 46%, 41% and 35%, respectively, of our total revenues. During the three months ended September 30, 2007, we did
not have any customers which accounted for 10% or more of our total revenues. 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 significantly reduce our revenues. Our agreements with our customers typically have terms of one to three years often with automatic one-year renewals and can be terminated
without cause upon certain notice periods that vary among our agreements and range from a period of 30 to 120 days notice.

The telecommunications industry
during the three months ended September 30, 2007 and years ended December 31, 2006 and 2005, accounted for approximately 31%, 74% and 32%, respectively, of the revenues from our top ten customers. If the relative financial performance of
our customers deteriorates, it will impact our sales cycles and our 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 would reduce our current
and future revenues. Also, if we are unable to enter into agreements with new customers and develop business with our existing customers, our business will not grow and we will not generate additional revenues.



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Our sales cycle is lengthy, and any delays or cancellations in orders in a particular quarter could cause our
operating results to be below expectations, which may cause our stock price to decline.

Because we sell complex and sophisticated technology, our sales
cycle, in particular with respect to our software solutions, can be long and unpredictable, often taking between four to 18 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. Further, and particularly with regard to newer subscription based offerings, the deployment process following customer trials can add several months prior to the generation of revenue. In addition, many
factors can influence the decision to purchase our product and service offerings including budgetary constraints and decreases in capital expenditures, quarterly fluctuations in operating results of customers and potential customers, the emerging
and evolving nature of the internet-based services and wireless services markets. Furthermore, general global economic conditions, and weakness in global securities markets, continuing recessionary spending levels, and a protracted slowdown in
technology spending in particular, have further lengthened and affected our sales cycle. Such factors have led to and could continue to lead to delays and postponements in purchasing decisions and in many cases cancellations of anticipated orders.
Any delay or cancellation in sales of our products or services could cause our operating results to be lower than those projected and cause our stock price to decline.

We depend on strategic relationships with our customers and others and the loss of such relationships could cause our revenues to decline.

We depend on strategic relationships with our customers and others to expand distribution channels and opportunities and to undertake joint marketing efforts. Our ability to increase revenues depends upon aggressively
marketing our services through new and existing 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 fully exploit
our relationships, or fail to develop new strategic relationships, we could encounter increased difficulty in selling our products and services.

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

The messaging industry is characterized by rapid technological
change, changes in user and customer requirements and preferences, and the emergence of new industry standards and practices that could render our existing services, proprietary technology and systems obsolete. We must continually develop or
introduce and improve the performance, features and reliability of our services, particularly in response to competitive offerings. Our success depends, in part, on our ability to develop new functionality, technology and services that address the
increasingly sophisticated and varied needs of prospective customers. We believe that revenue from our Memova applications, for example the Memova Mobile application that we launched in the first quarter of 2005, is an important source of future
revenues and we have made significant investments in their development. However, revenues from our Memova Mobile application from initial launch in the first quarter of 2005 to date have been immaterial. 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.

We have experienced significant turnover of
senior management and our current management team has been together for a limited time, which could slow the growth of our business and cause our operating results to decline.

Throughout 2007, 2006, 2005 and 2004, we announced a series of changes in our management that included the departure of senior executives and changes in our board of directors. Most recently in August 2007, one of our
members of our board of directors resigned and was replaced with a new director, our chief executive officer resigned from that role in June 2007 but remains as chairman, two of our other executive officers departed in 2006, two of our directors
joined us in 2005 and many of the members of our current board of directors and senior executives joined us in 2004. Further, we may continue to make additional changes to our senior management team. If our new management team is unable to
accomplish our business objectives, our ability to grow our business and successfully meet operational challenges could be severely impaired. It is possible that this high turnover at our senior management levels may also continue for a variety of
reasons. The loss of the services of one or more of our key senior executive officers could also affect our ability to successfully implement our business objectives, which could slow the growth of our business and cause our operating results to
decline. For these reasons, our shareholders may lose confidence in our management team and decide to dispose of our common stock, which could cause the price of our common stock to decline.



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

The loss of the services of key personnel may create a negative perception of our
business and adversely affect our ability to achieve our business goals. 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 products or services or continue to provide a high level of customer service, which
could result in the loss of customers and revenues. In addition, volatility and declines in our stock price may also affect our ability to retain key personnel, all of whom have been granted stock-based incentive compensation. Over the past year we
have reduced our work force and eliminated jobs to balance the size of our employee base with anticipated revenue levels. Reductions in our workforce could make it difficult to motivate and retain remaining employees or attract needed new employees,
and could also affect our ability to deliver products and solutions in a timely fashion and to provide a high level of customer service and support. We do not have long-term employment agreements with any of our key personnel. In addition, we do not
maintain key person life insurance on our employees and have no plans to do so. The loss of the services of one or more of our current key personnel could make it difficult to successfully implement our business objectives.

If we are not successful in implementing strategic plans for our operations, our expenses may not be offset by our corresponding sales and our financial results could
significantly decline.

In 2004, we restructured several significant contracts, consolidated certain activities to offices in Toronto, Canada and
Dublin, Ireland from higher cost areas such as the San Francisco Bay Area, eliminated approximately 20% of employee positions and reduced use of third-party contractors. In 2005, we restructured the lease for, and relocated, our headquarter
facilities. In 2006, we completed the sale of the assets related to our hosted messaging services, terminated our headquarters facility lease, reduced the amount of space for our headquarters facility and entered into a sublease of the same
headquarter facilities, and most recently in the fourth quarter of 2006, we moved our U.S. based accounting operations from our headquarters facility to Dublin, Ireland. 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 could affect our future operations. A failure to execute successfully on such plans and to plan appropriately could cause our expenses to continue to outpace our revenues
and our financial condition to significantly decline.

We may experience a decrease in market demand due to concerns of international terrorism, war and
social and political instability.

Turmoil and war in the Middle East have increased the uncertainty in the global economy and may contribute to a
decline in the international business environment. A substantial portion of our business is derived from international sales, and a decline in the global economy could have a more severe impact on our financial results than on the results of some of
our competitors. The effects of terrorist attacks, particularly in Europe where we derive a significant portion of our revenue, and other similar events and the war in Iraq could affect demand for goods and services, including digital communications
software and services.

We currently license many third-party technologies and may need to license further technologies, which could delay and increase
the cost of product and service developments, expose us to increased risk of third-party infringement claims, and could cause our business and operating results to suffer.

We intend to continue to license certain technologies from third parties and incorporate them into our products and services, including web server technology, virus and anti-spam solutions, storage and encryption
technology and billing and customer tracking solutions. The market is evolving and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all.
Many of these suppliers are small and may not have the ability to continue to provide us with necessary technologies. To the extent we cannot license needed technologies or solutions, we may have to devote our resources to the development of such
technologies, which could delay and increase the cost of product and service developments.

We selectively incorporate or distribute with our software
solutions third-party software components licensed under so-called open source licenses. Some of these licenses contain requirements that the source code to the modifications or derivative works we create using the open source software
must be made available under the terms of a particular open source license granting licensees rights in addition to our commercial licenses. Further, if we combine our proprietary software with open source software in a certain manner, we could,
under certain of the open source licenses, be obligated to make the source code of our proprietary software available to licensees at no charge in order to have continued rights to the open source components. In addition, because technical support
is not generally available for most open source software and licensors generally do not provide warranties or controls on the origin of open source software, there is a potential for added development costs and potentially greater risk of
infringement claims than using third-party commercial software. If we are obligated to release our proprietary source code or if a third party claims we have infringed its intellectual property rights by using open source software code, our business
and financial performance could suffer.

In addition, we may fail to integrate successfully any licensed or hosted technology into our services. These
third-party in-licenses may expose us to increased risks, including risks related to the integration of new technology, potential patent and copyright infringement issues, the diversion of resources from the development of proprietary technology,
and an inability to generate revenues



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from new or existing technology sufficient to offset associated acquisition and maintenance costs. In addition, an inability to obtain or use 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 hinder our ability to retain and attract customers and cause our business and
operating results to suffer.

Unplanned system interruptions, capacity constraints and demand for storage could reduce our ability to provide services
and could harm our business reputation.

Our customers have, in the past, experienced some interruptions in our hosted services. We believe that these
interruptions will continue to occur from time to time. Our ability to retain existing customers and attract new customers will suffer and our revenues will decline 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 usenet newsgroup hosting services. We expect to experience occasional temporary capacity and storage constraints due to unanticipated sharply increased
traffic or sharply increased demand for storage, 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 ability to retain
existing customers and attract new customers could suffer dramatically and our revenues would decline.

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 our business face risks associated with privacy, confidentiality of user data and communications,
consumer protection, taxation, content, copyright, trade secrets, trademarks, antitrust, defamation and other legal issues. In particular, legal concerns with respect to communication of confidential data have affected our financial services and
health care customers due to newly enacted federal legislation. The growth of the industry and the proliferation of Internet-based messaging devices and services may prompt further legislative attention to our industry and thus invite more
regulatory control of our business. The imposition of more stringent protections or new regulations and application of laws to our business could burden our company and those with which we do business. Any decreased generalized demand for our
services or the loss of, or decrease, in business by a key partner due to regulation or the expense of compliance with any regulation, could either increase the costs associated with our business or affect revenue, either of which could cause our
financial condition or operating results to decline. Certain of our service offerings include operations subject to the Digital Millennium Copyright Act of 1998 and the European Unions recent privacy directives. Our efforts to remain in
compliance with DMCA and the EU privacy and data directives may not be sufficient. New legislation and case law may also affect our products and services and the manner in which we offer them, which could cause our revenues to decline.

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, in the United States, the
Gramm-Leach-Bliley 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. In Europe, the EU Directive on Data Protection and laws implementing it enacted by the European member states place restrictions on the collection,
use and transfer of any personal data of EU residents.

Finally, the Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC have
required changes in corporate governance practices of public companies. We are currently reviewing all of our accounting policies and practices, legal disclosure and corporate governance policies under the new legislation, including those related to
our relationships with our independent registered public accounting firm, enhanced financial disclosures, internal controls, board and board committee practices, corporate responsibility and loan practices, and intend fully to comply with such laws.
We expect these new rules and regulations to increase our general and administrative expenses and to make it more difficult for us to attract and retain qualified executive officers and qualified members of our board of directors, particularly to
serve on our various committees of the Board including, in particular, the audit committee.

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

As a provider of usenet newsgroup hosting, 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 screen the content generated by our users or their customers, and we could be exposed to liability with respect to
this content. Furthermore, some foreign governments, such as Germany, have enforced laws and regulations related to content distributed over the Internet that are more strict than those currently in place in the United States. In some instances, we
may be subject to criminal liability in connection with Internet content transmission.



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Our current 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 result in substantial out-of-pocket costs to us, or could result in the imposition of criminal penalties.

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

Our software products are inherently complex. Additionally, our product and service offerings depend on complex software, both internally developed and licensed from third parties. Complex software often contains
defects or errors in translation, particularly when first introduced or when new versions are released or localized for international markets. We may not discover software defects in our products or that affect new or current services or
enhancements until after they are deployed. Despite testing, it is possible that 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.

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

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. Our servers are vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other resources to license encryption technology and additional
technologies to protect against security breaches or to alleviate problems caused by any breach. Failure to prevent security breaches may make it difficult to retain and attract customers and cause us to spend additional resources that could cause
our operating results to decline.

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

We rely on a combination of
trademark, copyright and trade secret laws, contractual restrictions, such as confidentiality agreements and licenses, and patents to establish and protect our proprietary rights, which we view as critical to our success. Our ability to compete and
grow our business could suffer if these rights are not adequately protected. Despite the precautionary measures we take, unauthorized third parties may infringe or copy portions of our services or reverse engineer or obtain and use information that
we regard as proprietary, which could harm our competitive position and market share. In addition, we have a number of patents issued and 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 and the federal courts issue further rulings on patentability. 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, 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 at filing and in some cases until the patent is issued, applications may have been filed which relate to our
software products.



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If we do not successfully address the risks inherent in the conduct of our international operations, our revenues and
financial results could decline.

We derived 83%, 77% and 74% of our revenues from international sales in the three months ended September 30, 2007
and years ended December 31, 2006 and 2005, respectively. We intend to continue to operate in international markets and to spend significant financial and managerial resources to do so. If revenues from international operations do not exceed
the expense of establishing and maintaining these operations, our business and our ability to increase revenue and improve our operating results could 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
| | - |  | ---------------------------------------



| |  |  | significantly 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.

The use of our net operating losses (NOLs) could be limited if an ownership change occurred during the preceding three-year period.

The use of our net operating losses could be limited if an ownership change is deemed to have occurred during the preceding three-year period as a result of, for example, the issuance of Series E
preferred stock upon conversion of the 10% Notes, the amendment to the terms of the Series D preferred stock or the exercise of the subscription rights. In general, under applicable federal income tax rules, an ownership change is
considered to have occurred if the percentage of the value of our stock owned by our 5% shareholders increased by more than 50 percentage points over the lowest percentage of the value of our stock owned by such shareholders over the
preceding three-year period.

Due to the fact that a full valuation allowance has been provided for the net deferred tax asset relating to our net
operating losses, we have never analyzed whether events such as the issuance of Series E preferred stock upon conversion of the 10% notes, the amendment to the terms of the Series D preferred stock or the exercise of the subscription
rights in the rights offering caused us to undergo an ownership change for federal income tax purposes.

If such an ownership change were considered to
have occurred, our use of our pre-change net operating losses would generally be limited annually to the product of the long-term tax-exempt rate as of the time the ownership change occurred and the value of our company immediately before the
ownership change. The long-term tax-exempt rate as of September 2007 was 4.50%. This could increase our federal income tax liability if we generate taxable income in the future. There can be no assurance that the Internal Revenue Service would not
be able to successfully assert that we have undergone one or more ownership changes in the preceding three-year period.

Changes in accounting rules for
employee stock options could significantly impact our financial results.

Accounting policies affecting many aspects of our business, including rules
relating to employee stock option grants, have recently been revised or are under review. The FASB and other agencies have finalized changes to U.S. GAAP that require us to record a charge to earnings for employee stock option grants and other
equity incentives. We may have significant and ongoing accounting charges resulting from option grant and other equity incentive expensing that could significantly harm our net results. In addition, since we historically have used equity-related
compensation as a component of our total employee compensation program, the accounting change could make the use of equity-related compensation less attractive to us and therefore make it more difficult to attract and retain employees.



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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 three months ended September 30, 2007, the closing sale prices of our common stock on the OTC Bulletin Board ranged from $0.09 per share on July 2, 2007 to
$0.07 per share on September 28, 2007. Our stock price may further decline or fluctuate in response to any number of factors and events, such as a reduction in the liquidity of our common stock as a result of moving from the Nasdaq Global
Market to the OTC Bulletin Board, announcements related to technological innovations, intense regulatory scrutiny and new corporate and securities and other legislation, strategic and sales relationships, new product and service offerings by us or
our competitors, litigation outcomes, changes in senior management, changes in financial estimates and recommendations of securities analysts, the operating and stock price performance of other companies that investors may deem comparable, news
reports relating to trends in our markets and the market for our stock, media interest in accounting scandals and corporate governance questions, overall market conditions and domestic and international economic factors unrelated to our performance.
In addition, the stock market in general, particularly with respect to technology stocks, has experienced extreme volatility and a significant cumulative decline in recent quarters. This volatility and decline has affected many companies, including
our company, irrespective of the specific operating performance of such companies. These broad market influences and fluctuations may adversely affect the price of our stock, regardless of our operating performance or other factors.

A decline in our stock price could result in securities class action litigation against us that could divert managements attention and harm our business.

We have been in the past and may in the future be subject to shareholder lawsuits, including securities class action lawsuits. In the past, securities
class action litigation has often been brought against a company after periods of volatility in the market price of securities. In the future, we may be a target of similar litigation. Securities litigation could result in substantial costs and
divert our managements attention and resources, which in turn could harm our ability to execute our business plan.

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

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



| |  |  | authorize the issuance of preferred stock that can be created and issued by our board of directors without prior shareholder approval, commonly referred to as
blank check preferred stock, with rights senior to those of our common stock;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibit shareholder action by written consent; and
| | - |  | ---------------------------------------------------



| |  |  | establish advance notice requirements for submitting nominations for election to our board of directors and for proposing matters that can be acted upon by
shareholders at a meeting.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

In addition, the General Atlantic Investors
and the Cheung Kong Investors own a sufficient amount of our securities to be able to control the outcome of matters submitted to a vote of our shareholders, which could have the effect of discouraging or impeding an acquisition proposal.

Limitations of our director and officer liability insurance may cause us to use our capital resources, which could cause our financial results to
decline or slow our growth.

Our current director and officer liability insurance may not be adequate for the liabilities and expenses potentially
incurred in connection with future claims. To the extent liabilities, expenses or settlements exceed the limitations or are outside of the scope of coverage, our business and financial condition could materially decline. 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.



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|ITEM 5. | OTHER INFORMATION
|------- | -----------------

On November 13, 2007, the Board of Directors of
the Company unanimously appointed Mark Palomba, the Companys Chief Executive Officer, to fill a vacancy on the Board.



|ITEM 6. | EXHIBITS
|------- | --------



|      |  |                                                                                                                                                                                                                                                  
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1   |  | Amendment No. 8 to Preferred Stock Rights Agreement dated as of October 26, 2007 between the Registrant and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.9 to
the Registrants Form 8-K filed on October 31, 2007). 
|      | 
|10.1# |  | August 10, 2007 Memorandum of Amendment to Employment Agreement by and between the Registrant and Mark Palomba (incorporated by reference to Exhibit 10.2 to the Registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007).
|      | 
|10.2# |  | August 10, 2007 Memorandum of Amendment to Employment Agreement by and between the Registrant and James Clark (incorporated by reference to Exhibit 10.3 to the Registrants Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007). 
|      | 
|31.1  |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                                       
|      | 
|31.2  |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                                       
|      | 
|32.1* |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                
|      | 
|32.2* |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                



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



|* | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Managements Reports on Internal Control Over Financial
Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed filed for purpose
of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate them by reference.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE

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



CRITICAL PATH, INC.By:

/s/ James A. ClarkJames A. ClarkExecutive Vice President and Chief Financial Officer




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Exhibit Index



|      |  |                                                                                                                                                                                                                                                  
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1   |  | Amendment No. 8 to Preferred Stock Rights Agreement dated as of October 26, 2007 between the Registrant and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.9 to
the Registrants Form 8-K filed on October 31, 2007). 
|      | 
|10.1# |  | August 10, 2007 Memorandum of Amendment to Employment Agreement by and between the Registrant and Mark Palomba (incorporated by reference to Exhibit 10.2 to the Registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007).
|      | 
|10.2# |  | August 10, 2007 Memorandum of Amendment to Employment Agreement by and between the Registrant and James Clark (incorporated by reference to Exhibit 10.3 to the Registrants Quarterly Report
on Form 10-Q for the quarter ended June 30, 2007). 
|      | 
|31.1  |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                                       
|      | 
|31.2  |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                                       
|      | 
|32.1* |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                
|      | 
|32.2* |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                



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



|* | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Managements Reports on Internal Control Over Financial
Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed filed for purpose
of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate them by reference.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48