##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K/A




|                                                 |  |                                                                                             
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------
|(Mark One)                                       |  |                                                                                             
|x                                                |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
|For the fiscal year ended: December 31,
    2003
|OR                                              
|                                                
|o                                                |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from           to                     .

Commission file number: 000-25331



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CRITICAL PATH, INC.

(Exact name of Registrant as specified in its
charter)


|                                                                                               |  |                                                          
|---------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------
|California
    (State or other jurisdiction of
    incorporation or organization)              |  | 911788300
    (I.R.S. Employer
    Identification Number)
|                                                                                              
|350 The Embarcadero
    San Francisco, California
    (address of principal executive offices) |  | 94105
    (zip code)                                     

Registrants telephone number, including
area code: (415) 541-2500

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act: Common Stock,
Series C

Participating Preferred Stock Purchase
Rights


(Title of Class)




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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 o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     o

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

The aggregate market value of voting and
non-voting common stock held by non-affiliates of the Registrant
was approximately $20,027,673 as of June 30, 2003, based on
the closing price of the Common Stock as reported on the Nasdaq
National Market for that date.

There were 21,171,399 shares of the
Registrants Common Stock issued and outstanding on
March 1, 2004.



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CRITICAL PATH, INC.

INDEX




|              |  |                                                                                           |  |      |    | 
|------------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |  |                                                                                           |  | Page
|              |  |                                                                                           |  |     
|              |  | PART I                                                                                    |  |      |    | 
|Item 1.       |  | Business                                                                                  |  |      | 3  | 
|Item 2.       |  | Properties                                                                                |  |      | 19 | 
|Item 3.       |  | Legal Proceedings                                                                         |  |      | 20 | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                   |  |      | 22 | 
|              |  | PART II                                                                                   |  |      |    | 
|Item 5.       |  | Market for Registrants
    Common Equity and Related Shareholder Matters                 |  |      | 22 | 
|Item 6.       |  | Selected Financial Data                                                                   |  |      | 26 | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |      | 27 | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures About Market Risk                            |  |      | 72 | 
|Item 8.       |  | Financial Statements and
    Supplemental Data                                            |  |      | 73 | 
|Item 9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |  |      | 73 | 
|Item 9A.      |  | Controls and Procedures                                                                   |  |      | 73 | 
|              |  | PART III                                                                                  |  |      |    | 
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                    |  |      | 74 | 
|Item 11.      |  | Executive Compensation                                                                    |  |      | 78 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management                        |  |      | 82 | 
|Item 13.      |  | Certain Relationships and
    Related Party Transactions                                  |  |      | 87 | 
|Item 14.      |  | Principal Accountant Fees
    and Services                                                |  |      | 91 | 
|              |  | PART IV                                                                                   |  |      |    | 
|Item 15.      |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |  |      | 93 | 
|EXHIBIT 10.61
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 









EXPLANATORY NOTE







We are filing this Form 10-K/A (this
Amendment) to our Annual Report on Form 10-K
for the year ended December 31, 2003 (the Original
Report) to revise Part I, Item 1; Part II,
Items 5, 7 and 9A; Part III, Item 10 and Part IV,
Item 15 (solely to revise notes 1 and 10 to the
financial statements) in order to address certain comments
received from the staff of the Securities and Exchange
Commission (the SEC) in connection with its review
of the Companys Registration Statement on Form S-3
filed with the SEC on December 24, 2003, as amended, to
correct certain typographical errors in the Original Report and
to revise the audit fee amounts in Part III, Item 14.
These revisions have no effect on any of the financial data
contained in the Original Report. Thus, no changes in the
financial statements or other items of the Original Report are
necessary, except to include updated officer certifications as
Exhibits 31 and 32 to this Amendment. Except for
information relating to the resignation of William McGlashan as
our Chief Executive Officer and the appointment of Mark Ferrer
to assume this position which occurred on March 29, 2004,
this Amendment does not reflect events occurring after the
filing of the Original Report, or modify or update the
disclosures contained in the Original Report in any way other
than as described above.






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##### Table of Contents






PART I




Item 1.Business

This Annual Report 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,
including our intention to conduct a rights offering and our
ability to consummate the rights offering if undertaken, of the
rights offering and the amount of proceeds raised thereby, the
adequacy of funds to meet anticipated operating needs, the
amount of charges that we will record that will increase our net
loss attributable to common shares in connection with the
proposed issuance of our Series E preferred stock and
amendment of the terms of our Series D preferred stock, our
future strategic, operational and financial plans, possible
financing, strategic or business combination transactions,
anticipated or projected revenues, expenses and operational
growth, markets and potential customers for our products and
services, plans related to sales strategies and global sales
efforts, the anticipated benefits of our relationships with
strategic partners, growth of our competition, our ability to
compete, investments in product development, the adequacy of our
current facilities and our ability to obtain additional space,
our litigation strategy, use of future earnings, the feature,
benefits and performance of our current and future products and
services, plans to reduce operating costs through continued
expense reduction, anticipated effects of restructuring and
retirement of debt, and our belief as to our ability to
successfully emerge from the restructuring and refocusing of our
operations. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to
differ materially from those projected. Factors that might cause
future results to differ materially from those projected in the
forward-looking statements include, but are not limited to,
difficulties of forecasting future results due to our limited
operating history, failure to obtain additional financing on
favorable terms or at all, failure to meet sales and revenue
forecasts, evolving business strategy and the emerging nature of
the market for our products and services, the settlement of
litigation and the continuing SEC investigation against former
executives and directors, turnover within and integration of
senior management, board of directors members and other key
personnel, difficulties in our strategic plans to exit certain
products and services offerings, failure to expand our sales and
marketing activities, potential difficulties associated with
strategic relationships, investments and uncollected bills,
general economic conditions in markets in which 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, risks associated with an
inability to maintain continued compliance with Nasdaq National
Market listing requirements and delisting actions by such
market, and those discussed in Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Additional Factors That May Affect
Future Operating Results and elsewhere in this report.
Readers are cautioned not to place undue reliance on these
forward-looking statements. The forward-looking statements speak
only as of the date hereof. We expressly disclaim any obligation
to publicly release the results of any revisions to these
forward-looking statements to reflect events or circumstances
after the date of this filing.

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

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

Company Overview

Critical Path delivers digital communications
software and services that enable enterprises, government
agencies, wireless carriers, and Internet and wireline service
providers to rapidly deploy highly scalable

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solutions for messaging and identity management.
Built upon an open, extensible software platform, these
solutions help organizations expand the range of digital
communications services they provide while helping to reduce
overall costs. Our messaging solutions  which are
available both as licensed software and as hosted
services  provide integrated access to a broad range
of communication and collaboration applications from wireless
devices, web browsers, desktop clients, and voice systems. This
integration can provide new revenue opportunities for carriers
and service providers and help enable them to attract new
subscribers, drive more usage, and retain subscribers longer.
For enterprises and governments, our identity management
solutions are designed to help 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, deskless workers,
suppliers, and customers.


Critical Path generates revenues from four
primary sources:

Licenses for use of our software
products.Our various messaging
applications are typically licensed by telecommunications
carriers, postal and government agencies, and some highly
distributed enterprises for deployment in their data centers.
Such licenses are usually sold as a perpetual license on a
per-user basis, one for each person who might access the
capabilities provided by the software. Our identity management
software is typically licensed by large enterprises, government
agencies, and telecommunications carriers and is deployed on
site in their data centers. Our identity management software is
usually sold as a perpetual license according to the number of
data elements and different business systems being managed; our
layered applications are usually licensed per user.

Annual support and maintenance subscriptions
for our licensed software.We offer a
variety of 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 an annual basis.

Hosted service subscriptions for access to our
messaging and other digital communications
applications.We offer access to
email, personal information management, resource scheduling, and
newsgroups over the Internet and wireless networks
for enterprises, telecommunications operators, and, for certain
services, consumers. The software powering these services runs
in data centers that we jointly operate with the Hewlett-Packard
Company. Unlike with licensed software, customers of these
services do not need to install or maintain their own copies of
the software. Instead, customers pay initial setup fees and
regular monthly, quarterly or annual subscriptions for the
services they would like to be able to access.

Consulting, training, and 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 customers can use to
supplement their own resources.

We generate most of our revenues from
telecommunications operators and from large enterprises.
Wireless carriers, Internet service providers and fixed-line
service providers purchase our products and services primarily
when they are looking to offer new services to their
subscribers. While they 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 cut 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. As the Internet and wireless networks become ubiquitous,
organizations are finding more opportunities  and
need  to interact with their customers, employees and
partners electronically, from anywhere at anytime. Such
interaction requires robust management of information,
identities and communication  issues that are
addressed by our offerings.

We were incorporated in California in 1997. Our
principal executive offices are located at
350 The Embarcadero, San Francisco, California
94105-1204. Our telephone number is (415) 541-2500 and our
website is located at www.criticalpath.net. The information
contained in our website does not form any part of this Annual
Report on Form 10-K. However, we make available, free of
charge and as soon as practicable, through

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our website, our annual reports, quarterly
reports, reports on Form 8-K and any amendments to those
reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended. Our
board of directors has adopted a Code of Ethics and Business
Conduct for Officers, Employees and Directors. A copy of our
Code may be found at our website at www.criticalpath.net. We
intend to disclose any amendments to the Code or any waiver from
any provision of the Code on our website. Our Corporate
Governance Guidelines and the charters for the Audit Committee,
Compensation Committee and Nominating and Governance Committee
are also available on our website at www.criticalpath.net. The
Code of Ethics and Business Conduct, Corporate Governance
Guidelines, and the charters may also be obtained by writing to
the Corporate Secretary, Critical Path, Inc., 350 The
Embarcadero, San Francisco, CA 94105.


Critical Paths Business

Market Overview

Digital communications, email, text messaging,
collaborative calendaring, multimedia, and online document
sharing and access to applications have become mission-critical
tools in many of todays business environments. In a
growing number of enterprises, employees from corporate offices
through retail branches and factory floors receive company
communications and access key resources and information
electronically. Distributed and virtual organizations are
increasingly looking to online technologies to share information
among employees, suppliers, partners, and customers in order to
streamline operations and cut costs. Families are increasingly
staying in touch with pictures and letters, sent not on paper
but through email. Mobile phones and wireless personal data
assistants are converging, opening potential opportunities for
instant access to information and services whether someone is at
home, in the office, or half-way around the world.

Consumers and business users are beginning to see
the benefits of being able to access their key information and
applications from anywhere at anytime, whether it is by phone,
wireless device, over the web, or from a desktop computer.
However, taking advantage of the opportunities this presents can
be challenging. New approaches are enabling organizations to
keep services coordinated and manage who has access to these
services and to all of the other applications, databases and
systems required in todays information-centric
environments. We believe consumers, businesses, government
agencies, and telecommunications companies are all looking for
ways to do more with less, leverage expertise in and outside of
the organization, and to use advanced communications and
management tools to make things easier.

For wireless carriers and service providers,
these new opportunities can come at a time when existing
services are rapidly becoming commodities and heavy spending on
new infrastructure has yet to pay off. To reverse shrinking
margins, many telecommunications companies are searching for
ways to boost average revenue per user, attract and retain
subscribers, and cut deployment costs. For many, this means
moving beyond basic consumer connectivity to offer richer, more
differentiated services that take advantage of existing
networks. In addition, demand from small-to medium-sized
businesses for immediately effective communications offerings is
providing opportunities for carriers and service providers to
diversify into new markets.

We believe large enterprises are faced with
similar needs to deliver a broader range of information services
while driving down the cost of operating such services and
ensuring that privacy and security are maintained. Many
organizations are discovering that traditional groupware, which
is oriented towards concentrated workgroups of desktop users who
all need the same capabilities, lacks the scalability,
flexibility, and ease of customization and integration with
existing systems desired in todays more mobile and
distributed environment.

Providing access to information that crosses
internal as well as external organizational boundaries depends
upon having accurate, reliable information about each
users identity, preferences, and rights to access
particular resources. However, such information is usually
scattered throughout disparate data systems, making it difficult
to keep up-to-date. We believe that consolidating and
integrating this data not only makes it easier to deliver
advanced messaging and information services, but also plays a
key role in reducing costs of operations, freeing up helpdesk
and IT resources for other projects, and putting in place more
reliable data security, enforcement, and compliance procedures.

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Critical Paths Solutions and
Products

Our modular, standards-based messaging software
provides integrated, customizable services and rich applications
that are accessible from a broad range of client devices. We
design our software to integrate easily with current and future
environments in order to simplify and accelerate deployment and
to help protect investments. With high scalability and
reliability that has succeeded in demanding carrier, government
and enterprise environments around the globe, our messaging
solutions can enable organizations to take greater advantage of
existing hardware, leverage in-house and third-party
communications applications, use less storage space, and consume
fewer helpdesk and IT resources.

Our messaging solutions take advantage of our
scalable, extensible identity management technology to help
reduce costs of operations by allowing class of service data,
single sign-on passwords, personalized user preferences and
other user information to be stored in centralized profiles for
efficient use and administration. This allows service levels and
branding to be customized to the needs of particular groups of
users, new services to be added incrementally, and user
information to be integrated with third-party applications,
databases and reporting systems.

Our identity management solutions are designed to
extend these benefits of lower helpdesk costs, increased
security and easier implementation of regulatory compliance to
an organizations applications, databases, directories and
systems. Identity data  such as names, user ids,
passwords, email addresses, phone numbers, group affiliations,
roles and access rights  that are scattered throughout
disparate data systems in an organization are consolidated
according to highly customizable business rules into a
consistent, accurate profile of each user. Then, using
customer-specified policies, appropriate portions of this clean
identity data are automatically distributed to all applications
and systems that depend upon having accurate, up-to-date
information about each user. This reduces the need for manual
processes, reducing errors and delays that can add costs and
make organizations less secure.

Flexible
Deployment Options  Licensed Software and Hosted
Services

In addition to providing licensed software for
installation on customers premises, we also offer our
messaging solutions as hosted services. This is intended to give
our customers flexibility in deploying our solutions to best
suit their needs. Our licensed software and professional
consultants help customers integrate our products into their
other applications and systems and offer a wide range of options
for customization.

Our hosted services, delivered and managed in
conjunction with the Hewlett-Packard Company (HP), are designed
to enable customers to outsource implementation and operation of
advanced messaging services. This can allow information
technology staff to focus on other efforts, reduce upfront
expenses and accelerate deployments as well as provide
heightened levels of service at a predictable monthly cost. Our
hosted services can also be used as a backup for internal mail
systems, enabling rapid restoration of mission-critical email
connectivity in the event of a failure of a primary mail system.

Messaging
Solutions for Wireless Carriers and Service
Providers

Our messaging solutions  available both as
licensed software and as hosted services  can enable
carriers and service providers to market a wide breadth of
integrated messaging services to consumers as well as business
users. Our customizable messaging applications can be accessed
from a variety of devices, providing differentiation that can
help attract new subscribers, drive additional voice and data
traffic, boost average revenue per user, and increase loyalty
and retention. Extensive interfaces for integrating with
third-party applications and systems help customers protect
existing investments and allow for easier adaptation to future
needs. In addition, by providing high levels of scalability,
reliability and manageability, our messaging solutions help
carriers and service providers cut both capital and operating
costs.

Our messaging applications and services include:



| |   |                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Email
    Provides email services that are accessible via wireless
    devices, the web, and desktop email clients such as
    Microsoft® Outlook®. Proven in deployments by many
    major carriers and service providers around the world, including
    multiple operators with installations serving millions of

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | subscribers, we are recognized for scalability
    and reliability, advanced functionality and integrated
    anti-virus/anti-spam protection.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Mobile Messaging Assists wireless carriers in creating new revenue
    opportunities and higher volumes of traffic through integrated
    email, text messaging and notification services, all accessible
    via wireless, web and voice-enabled devices as well as
    standards-based desktop clients. Allows premium services to be
    delivered over SMS and WAP Push, including rich content,
    weather, sports, games and high-volume interactive voting.                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Personal Information
    Management Allows both carriers
    and service providers to deliver an integrated suite of personal
    information services including email, calendar, address book,
    alerts and file sharing via wireless, voice, web and desktop
    clients. Centralizes and synchronizes personal data across
    applications and devices to help accelerate and simplify
    deployments, drive usage and consumption of data traffic,
    increase loyalty and reduce customer churn.                                                                                                                                                                                                                                                                                                                        
|
| |  | Multimedia Messaging
    (MMS) Allows wireless carriers
    to extend their MMS infrastructure to stimulate higher
    consumption of data-intensive media, generate greater demand by
    exposing MMS media to potential new subscribers over the
    Internet, and improve quality of service. Provides key
    technology components required for multimedia messaging,
    including a highly scalable messaging server, centralized
    address book and sharable multimedia file storage.                                                                                                                                                                                                                                                                                                                                  
|
| |  | Hosted Messaging Allows carriers and service providers to offer consumer
    and business subscribers an extensive suite of messaging
    services, including email, calendaring, centralized address
    books, shared files, dynamic alerts and synchronization, with
    minimal capital expenses or deployment difficulties. Delivered
    in concert with HP, we combine our messaging technology with
    HPs experience in world-class infrastructure services to
    deliver reliable and secure messaging services that offer full
    customization of branding and selection from a wide range of
    options. Predictable monthly costs, reliability and professional
    billing, provisioning and reporting provide hassle-free
    operations that scale smoothly as the number and needs of
    subscribers grow.

Messaging
Solutions for Enterprises and Governments

Our messaging solutions for enterprises and
governments can provide a flexible, modern foundation for
delivering rich, collaborative messaging services to mobile and
distributed workforces at lower cost of ownership than
traditional groupware.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hosted Messaging Allows enterprises and governments to offer users an
    extensive suite of messaging services, including email,
    calendaring, centralized address books, shared files, dynamic
    alerts and synchronization, that co-exist and interoperate with
    existing messaging systems. This allows messaging to be extended
    quickly and easily to underserved users and to geographically
    distributed groups helping minimize capital expenses or
    deployment headaches. Delivered in concert with HP, we combine
    our messaging technology with HPs experience in
    world-class infrastructure services to deliver reliable and
    secure messaging services that offer full customization of
    branding and selection from a wide range of options. Predictable
    monthly costs, 24x7 reliability and professional billing,
    provisioning and reporting are designed to minimize the hassles
    of operations and to scale smoothly as the number and needs of
    users grow.
|
| |  | Email Continuity Our Hosted Messaging solution can also be used as a
    backup for internal email systems, providing rapid restoration
    and disaster recovery in the event of a primary systems failure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Identity Management Solutions for
    Enterprises, Governments, Carriers and Service
    Providers

Our identity management solutions assist
enterprises, governments, carriers and service providers in
reducing information technology (IT) helpdesk burdens and
operational costs, provide a foundation for robust security
infrastructure and simplify regulatory compliance. Our
technology is designed to enable customers to have systematic
control over authentication, authorization, access controls,
profile management, provisioning, and de-provisioning. In
addition, it helps ensure that users identities are kept
consistent and accurate, that

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access to systems can be quickly granted 
and just as quickly revoked  and that user profiles can be
managed and leveraged across distributed, global
infrastructures. With our solutions, customers can deploy new
applications faster and grow or reduce their user populations
without compromising service quality.


Our identity management solutions include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Data & Directory
    Integration Assists
    organizations to cut costs and improve the accuracy of
    information by consolidating critical data that are typically
    scattered throughout various business data systems into
    centralized profiles of each user. In addition, it allows
    business rules for updating this data to be established and
    enforced so that accurate, current information can be
    synchronized and distributed to all appropriate applications and
    systems. This enables applications such as whitepages
    directories to be deployed easily and reliably and for operating
    system infrastructure such as Microsofts Active Directory
    to be integrated with services from other vendors.                                                              
|
| |  | Profile Management Assists organizations to cut costs and decrease
    deployment time for new applications and services by
    centralizing the administration of user profiles containing
    identity information. Such accurate user data is crucial for
    security infrastructure such as single sign-on, public key
    infrastructure (PKI), web access control, and consistent
    personalization of applications.                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | User Provisioning Assists organizations to cut costs of administering user
    accounts and to increase information security by consolidating
    user profiles and centralizing processes for provisioning and
    de-provisioning user accounts across applications and systems.
    Allows employees, contractors, partners and customers to be
    granted access to crucial information resources  or have
    access removed  quickly and accurately.                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Password Management Assists organizations to improve security and reduce
    helpdesk calls by automating and providing self-service
    interfaces for deploying passwords for each user across multiple
    applications and systems. Administrators can update passwords
    for all of a users applications, databases and operating
    systems from a central location. Users can take advantage of
    self-service interfaces to change passwords or reset forgotten
    passwords without requiring assistance from helpdesk or IT
    personnel. Automating such labor-intensive tasks reduces errors
    and frees up helpdesk staff for other activities, leading to a
    variety of potential benefits such as cost savings, increased
    user productivity and reduced security vulnerabilities.



| |                                                            
| | -----------------------------------------------------------
| | Solutions Delivered Via an Integrated
    Software Platform

Our solutions, licensed as well as hosted, are
built upon an integrated technology base called the Critical
Path Communications Platform. It is designed for high
scalability and reliability as well as easy integration,
deployment and extensibility.

This approach provides:



| |   |                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Broad family of integrated messaging
    applicationsthat work closely
    together to share and intelligently process data for use by both
    consumers and business users.                                                                                                                                                                                         
|
| |  | Reusable identity managementarchitecture that consolidates,
    integrates and synchronizes user identity information scattered
    throughout business data systems into centralized, consistent
    profiles that streamline user account management, enable
    personalization of communications services, and simplify
    deployment of security infrastructure.
|
| |  | Anywhere, anytime mobilitythat enables applications and services
    to be accessed through a broad range of wireless, web and voice
    devices as well as with standards-based clients such as
    Microsoft Outlook.                                                                                                                                               
|
| |  | Modular, extensible designthat allows integrated solutions as
    well as individual components to be deployed incrementally to
    best meet customers needs.                                                                                                                                                                                                       
|
| |  | Open, standards-based technologythat simplifies integration with
    current and future infrastructure and third-party applications,
    minimizing deployment costs and future-proofing investments.                                                                                                                                                                 

8



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| |   |                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Carrier-class scalability with proven
    reliability.Our platform is used in
    demanding carrier, service provider, enterprise, and government
    environments domestically and internationally, including
    multiple installations that serve millions of users each.
|
| |  | Low total cost of ownership at
    scale.Our efficient use of resources,
    even in large installations allows customers to take advantage
    of their existing hardware, use less storage space, and require
    less information technology professionals time.        

Products

The components of the Critical Path
Communications Platform provide a wide range of integrated,
customizable solutions. The key parts of the platform 
multi-device access, integrated messaging applications and
centralized identity management services  are delivered
through the following products:



| |                
| | ---------------
| | Access Products

The Access components in the Critical Path
Communications Platform manage connectivity of web, wireless,
and voice devices to applications. They enable dynamic
presentation of customized user interfaces, provide connectivity
to external systems, and manage data synchronization.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Critical Path Presentation
    Server Standards-based,
    carrier-class application server that enables the delivery of
    tightly integrated collaborative applications into a highly
    customized and personalized interface. This approach can help
    service providers differentiate offerings, stimulate usage and
    provide extensibility for future services. The Presentation
    Server provides single sign-on, an integrated user interface,
    dynamic tailoring according to classes of service selected, and
    access via web, wireless and voice devices for our applications.
    In addition, it enables the integration of third-party
    applications, providing a common interface for centrally
    configuring access to virtually any communications service that
    can be presented on a web or wireless device.
|
| |  | Critical Path Short Message Service
    (SMS) Access Server
    Network-independent, feature-rich gateway between SMS text
    messaging and Simple Mail Transfer Protocol (SMTP) Internet
    email. Provides a bridge that connects the various incompatible
    SMS operator systems to create a single, common environment for
    delivering enhanced services to help drive traffic and create
    new revenue opportunities. Provides access to our email and
    address book applications from SMS phones and enables
    third-party applications to send and receive text messages for
    offering premium content and services such as weather, sports,
    games, and high-volume online voting.                                                                                                                                        
|
| |  | Critical Path SyncML
    Server Open, standards-based
    software server that enables the synchronization of contacts,
    events and tasks between wireless devices and the services
    provided by the Critical Path Personal Information Management
    (PIM) solution. The SyncML Server is integrated with Critical
    Paths carrier-grade PIM servers  the Critical Path
    Personal Address Book Server and Critical Path Calendar Server
     to provide plug-and-play functionality. With this
    product, carriers and service providers can enhance their PIM
    offering with SyncML features in order to attract and retain
    subscribers, such as mobile professionals, consumers, small
    businesses and enterprises.                                                                                                     



| |                                   
| | ----------------------------------
| | Messaging Application
    Products

Our integrated messaging applications work
together to share data in order to deliver an improved user
experience and provide intelligent processing of messages. For
example, a meeting in someones calendar can automatically
trigger an alert that is dynamically routed to the user via
email, wireless, or instant message, depending upon the time of
day, subject, or other user-configured attributes. After reading
the alert, the user can send messages to co-workers listed in
his or her personal address book, the same one used by our other
messaging applications. By providing these capabilities on an
integrated basis reduces the complexity of deployments,
simplifies on-going support and reduces the total cost of
ownership.

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Our messaging application products include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Critical Path Messaging
    Server Highly scalable and
    robust messaging subsystem, offering a wide range of access
    (web, SMTP, POP3 and IMAP4) with the ability to handle millions
    of users across a large number of domains at low operating
    costs. It can be deployed in many different configurations, from
    single-server deployments up through redundant,
    globally-distributed installations.                                                                                                                                                                                                                         
|
| |  | Critical Path Personal Address Book
    Server Centralized repository
    for all contact information used by our messaging applications
    with support for integrating with third-party applications such
    as voice dialing. Gives users continuous access to private and
    shared address information, allowing important phone numbers or
    email addresses to be quickly obtained from desktop email
    clients in the office, web browsers at home, or from wireless
    phones while on the road. Having a single place to keep contact
    information helps stimulate greater usage, improve loyalty and
    simplify deployment.
|
| |  | Critical Path Calendar
    Server Standards-based
    calendaring application that helps both basic and advanced users
    effectively manage schedules and tasks. Sophisticated
    collaboration features are designed to enable group scheduling
    and allow shared access to calendars and task lists, helping to
    stimulate higher usage, loyalty and retention. Supports
    traditional desktop synchronization, SyncML and extensible
    notification capabilities.                                                                                                                                                                  
|
| |  | Critical Path Internet File
    Server Online file storage with
    support for both private access and secure sharing for
    enterprise collaboration as well as premium carrier applications
    such as MMS Photo/ Media Albums that stimulate usage and expose
    Web-based audiences to the benefits of MMS. Provides web,
    wireless or voice interfaces as well as access via
    WebDAV-compliant desktop clients such as Microsoft Windows
    clients.                                                                                                                                                                               
|
| |  | Critical Path Notification
    Server Automatically generates
    alerts based on user-specified events in Critical Path and
    third-party applications. Routes and delivers alert messages via
    SMS, WAP Push, email, or instant messaging over AOL®,
    Yahoo!® or MSN® Instant Messaging.                                                                                                                                                                                                                                                                                                                                                 



| |                             
| | ----------------------------
| | Identity Management Products

Our identity management products organize and
manage user identity information  such as names, user ids,
passwords, email addresses, telephone numbers, group
affiliations, roles and access rights  for applications,
databases, directories and operating systems. They offer high
scalability, supporting millions of entries with a single
deployment.

Our identity management products include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Critical Path Meta-Directory
    Server Consolidates user
    identity information that is scattered among disparate data
    systems and integrates it according to highly customizable
    business rules into a consistent, accurate profile for each
    user. Then, using customer-specified policies, appropriate
    portions of this clean identity data are automatically
    distributed to all applications and systems that depend upon
    having accurate, up-to-date information about each user. This
    reduces errors and delays that drive up helpdesk costs. Our
    Meta-Directory includes a wide breadth of pre-built connectors
    and supports industry-standard languages such as Java, Perl, XML
    and SOAP, as well as key mainframe and database systems. This
    frees customers from having to learn proprietary scripting
    languages helping them to deploy identity management solutions
    more rapidly with significantly lower upfront and ongoing costs.
|
| |  | Critical Path Directory
    Server Provides a highly
    scalable, central repository for user profile information and
    other data shared by multiple systems and applications. This
    high volume LDAP directory is deployed in numerous critical
    environments, including security infrastructure for enterprise
    intranets and extranets, online banking services, Internet
    postal services, telecommunications carriers and government
    services. Optional hot-standby support provides automatic
    failover and disaster recovery.                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |   |                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Critical Path Password
    Management Provides centralized
    management and self-service administration of passwords for
    multiple applications and systems. Designed to help customers
    reduce burdens on helpdesks, increase user satisfaction and
    productivity as well as reduce vulnerability to out-of-date
    passwords.

Target Markets, Customers and Strategic
Alliances



| |                             
| | ----------------------------
| | Customers and Target Markets

We offer messaging and identity management
solutions to enterprises, wireless carriers and
telecommunications providers, broadband companies and service
providers, and government agencies and postal authorities.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enterprises
    In the face of ever-tightening budgets, enterprises are looking
    for ways to cut capital expenses and operational costs. In
    addition, as work forces become more distributed and change more
    frequently, the need to keep track of employees, contractors,
    partners and customers and to communicate with them
    electronically is growing. Our identity management offerings
    help enterprises cut helpdesk costs and strengthen security
    infrastructure (particularly for single sign-on and access
    control for Web-based portals) with solutions for data and
    directory integration, user profile management, user
    provisioning and password synchronization. In addition, Critical
    Paths hosted messaging solutions help enterprises reduce
    the cost of delivering new generations of messaging services
    while co-existing with Microsoft Exchange and other existing
    systems.                                                                                                                                                                                                                                                                                                
|
| |  | Wireless Carriers and Telecommunications
    Providers After years of
    investment in new infrastructure and spectrum licenses combined
    with falling margins for traditional offerings, wireless
    carriers are extremely focused on driving more revenue on their
    existing networks. As a result, they are looking for ways to
    deliver differentiated services that will spur consumption of
    data and voice traffic, enable new premiums to be charged,
    attract new subscribers and retain subscribers longer. We offer
    a broad range of rich, integrated messaging and collaboration
    applications  available as licensed software and hosted
    services  as well as identity management infrastructure
    that work together to share and process data. With a proven
    ability to scale up to millions of subscribers per installation
    and a dedication to open standards that provides extensibility
    and investment protection, our software enables carriers to
    deliver a wide range of customized services, such as email,
    personal information management, premium MMS and SMS services,
    and unified communications, to both consumers and business users
    from a single platform.
|
| |  | Broadband Companies and Service
    Providers Broadband providers
    such as cable, satellite and DSL operators are constantly
    looking to offer differentiated services that can take advantage
    of the high bandwidth they are providing to their subscribers.
    Our flexible messaging solutions  available both as
    licensed software and as hosted services  enable
    multimedia content to be integrated with rich messaging and
    collaboration applications designed to create premium services
    that attract new subscribers, increase loyalty and retain
    subscribers longer. We believe extensibility and ease of
    deployment of our software enables providers to reliably and
    incrementally roll out new services as their business expands.
    Our scalability handles growing subscriber bases smoothly, and
    our ability to offer the services either as licensed software or
    as hosted services gives providers the flexibility to choose the
    delivery method that best suits their business.                                                                                                                                                                                              
|
| |  | Government Agencies and Postal
    Authorities Governments and
    postal authorities are increasingly becoming providers of
    digital services, both internally for employees, contractors and
    suppliers as well as externally to citizens and residents.
    Delivering services on a national scale to highly distributed
    users depends upon having strongly-managed identities and robust
    communications. Our identity management solutions enable
    agencies to create centralized repositories of identity
    information for keeping track of which users are allowed access
    to which services, particularly for Web-based infrastructure.
    Our messaging solutions are used worldwide, particularly by
    postal authorities, to provide email for life. These
    messaging solutions, available as licensed software as well as
    hosted services, can enable                                                                                                                                                                                                                                                                                                                                                   

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| |  |                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | agencies to significantly reduce the cost of
    providing email, personal information management and
    collaboration services to users across the country and around
    the world.



| |                    
| | -------------------
| | Strategic Alliances

A key element of our sales strategy is to expand
distribution channels through strategic reseller or joint sales
relationships. These alliances can provide access to a greater
range of markets and customers by increasing the breadth of
offerings that incorporate our products and services:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Systems Integrators For many large enterprises and telecommunications
    carriers, our offerings are part of a larger solution. To
    provide the level of service required to bring together and
    implement such larger offerings, particularly for customers who
    require global coverage, we have allied with a number of systems
    integrators in the industry, including the Hewlett-Packard
    Company, Wipro, Cap Gemini Ernst & Young, Accenture,
    Bearingpoint, EDS Corporation, and Deloitte &
    Touche.
|
| |  | Solution Providers Our technology is embedded into the solutions sold by a
    variety of companies. We believe these relationships enable our
    products to address a wider range of needs and, in many cases,
    provide access for follow-on sales of our other products. Key
    strategic alliance partners in this category include LogicaCMG
    Plc, Comverse Technology, Inc., CTI Square Ltd. and
    Entrust, Inc.                                                                                                  

Information regarding customers and sales by
geographic area is included in Note 20 of Notes to
Consolidated Financial Statements  Product and Geographic
Information.

Sales and Marketing



| |                 
| | ----------------
| | Sales Strategies

Direct Sales.We
maintain a direct sales force to introduce prospective customers
and channel partners to our products and services and to work in
tandem with our business partners. Our worldwide direct sales
team is organized around our target markets in each of our key
geographic regions. Currently, we have sales staff located in
domestic offices in or near San Francisco, Dallas, Boston
and a variety of other cities throughout the United States.
Internationally we have members of our sales organization
located in Brazil, Denmark, France,
Germany, India, Ireland, Italy, Japan, the
Netherlands, Spain, Sweden, Switzerland and the United Kingdom.

Channel Sales.We
actively embrace sales alliances with specialized technology and
service firms in a variety of channels in order to increase our
presence and share in our target markets. Our flexible,
customizable solutions are well suited for these firms and
channel delivery, offering numerous opportunities for adding
value through consulting services and integration with
complementary products. We team with global System Integrators
(SIs), Independent Software Vendors (ISVs), Original Equipment
Manufacturers (OEMs) and Hardware vendors.

Marketing
Strategies.Our global marketing team
is focused on product definition, lead generation, sales support
and public relations to better equip our sales force and
companies with whom we have sales alliances and to educate our
key markets about the business value of our messaging and
identity management solutions. We intend to continue to focus on
targeted industry events, particularly in conjunction with our
strategic alliances, to promote our brand presence and acquire
customers.

Competition

We offer a broad range of solutions; we are not
aware of any one company that directly competes with every one
of our products and services. Instead, we face a different set
of competitors in each of our lines of business. Our messaging
solutions compete against offerings from Openwave Systems Inc.,
Sun Microsystems Sun ONE software division (formerly
iPlanet), Oracle Corporation, Microsoft Corporation, IBM
Corporations Lotus division and Mirapoint Inc. as well as
with a variety of smaller product suppliers. 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 as well as

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various small identity management application
vendors. In the market for outsourced hosted email services, we
compete with such corporations as EasyLink Services Corporation
(formerly Mail.com), CommTouch Corporation, USA.net and other
smaller application service providers offering hosted Microsoft
Exchange services.


While these competitors and others exist in each
of our individual lines of business, we believe our overall
solution of products and services serves as a competitive
advantage. Our products and services are designed to help
customers easily integrate our broad range of products into
their infrastructure, selecting multiple products and services
from us as their requirements demand. In addition, our ability
to deliver our messaging solutions either as licensed software
or as hosted solutions enables our customers to choose the most
efficient model for different parts of their business.

We believe that competitive factors affecting the
market for our digital communications solutions include:



| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | total cost of ownership and operation;                                                                                                                                                                                              
|
| |  | breadth of platform features and functionality;                                                                                                                                                                                     
|
| |  | ease of integration into customers existing
    applications and systems;                                                                                                                                                          
|
| |  | scalability, reliability, performance and ease of
    expansion and upgrade;                                                                                                                                                        
|
| |  | ability to extensively customize, personalize and
    tailor solutions to different classes of users across multiple
    markets;                                                                                                   
|
| |  | flexibility to enable customers to manage certain
    aspects of their systems internally and leverage outsourced
    services in other cases when resources, costs and time to market
    reasons favor an outsourced offering; and
|
| |  | perceived long-term stability of the vendor.                                                                                                                                                                                        

The relative importance of each of these factors
depends upon the specific customer environment. Although we
believe that our products and services currently compete
favorably with respect to such factors, we may not be able to
maintain our competitive position against current and potential
competitors.

We believe competition will increase as current
competitors increase the sophistication of their offerings and
as new participants enter the market. 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. 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.

Technology



| |                                          
| | -----------------------------------------
| | Critical Path Communications
    Platform

Our core expertise is in the development and
deployment of highly scalable, open systems-based messaging and
identity management software designed to ease integration with
customers existing infrastructure. Our technology, called
the Critical Path Communications Platform, provides an
extensible set of access, messaging, and identity management
services that allow us to deliver a wide range of solutions to
enterprises, government agencies and service providers from a
single technology base.

All of the components of the Critical Path
Communications Platform are designed to support mission-critical
business environments. Our high performance, scalable and
reliable servers operate in installations ranging from thousands
to millions of users. Our components include a range of tools
and software development kits (SDKs) that provide extensive
customization and easy integration with third-party

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technologies. These components can be used on a
standalone basis or together in many combinations, enabling us
to deliver very flexible solutions. The Critical Path
Communications Platform operates on Sun Microsystems
Solaris, Microsofts Windows NT/2000 and HPs
HP-UX operating systems, with additional support for various
components on IBMs AIX and Red Hats distribution of
the Linux operating systems.




| |       
| | ------
| | Access

We separate the construction and presentation of
user interfaces for each application into a separate, highly
extensible application server framework called Presentation
Server. This approach enables the creation of customized,
personalized application user interfaces to Communications
Platform components and third party technologies through a
powerful SDK. It offers mixed mode communications, so that
services can be accessed from a multitude of devices ranging
from the desktop, laptop, PDA, mobile handset or telephone using
text, voice, and video. The Presentation Server is based on Java
2 Enterprise Edition (J2EE) and Java Server Pages (JSP)
technologies, and supports Hypertext Markup Language (HTML),
Wireless Markup Language (WML), VoiceXML and a range of other
interface markup languages.

Alongside our Presentation Server is our SyncML
Server, a flexible engine for synchronizing information between
server-based applications such as our messaging applications and
client devices such as wireless phones. Both the SyncML Server
and Presentation Server are complemented by our Short Message
Service Access Server, a powerful application framework that
enables the development of premium text messaging applications
that send Short Message Service (SMS) messages. The SMS Access
Server includes an application development SDK (SMASI) that
applications can use to drive SMS traffic through all of the
major SMS Center (SMSC) operations software systems. Our SMS
Access Server also includes WAP Push support to enable next
generation wireless applications like premium Multimedia
Messaging Service (MMS) services.



| |                       
| | ----------------------
| | Messaging Applications

Our Messaging Server, a scalable,
standards-based, messaging server enables the delivery of
services from Email and Multimedia Messaging Services to Unified
Messaging and next generation voicemail services through its
powerful native IMAP mail store and SMTP relay. Its advanced
architecture allows single or multiple domains to be split over
multiple servers, distributed geographically as well as setup as
clusters. It also has support for security features including
secure-socket-layer (SSL) as well as anti-virus and anti-spam
filtering.

Built on top of our core messaging technology are
a series of applications that provide personal information
management and collaboration services. Our Personal Address Book
provides centralized storage of contact information for all
messaging applications (both from Critical Path as well as from
third parties), enabling customers to consolidate multiple
address books into a single service. Our Calendar offers
sophisticated sharing, group scheduling and availability lookup
needed by both consumers and business users. Our Internet File
Server provides global sharing of files, both for enterprise
collaboration and for extending MMS multimedia files to the web
for easy storage and sharing. Our messaging applications utilize
a centralized Notification Server to generate and dynamically
route alert messages to the user over email, text messaging or
instant messaging.



| |                    
| | -------------------
| | Identity Management

Mission critical applications often depend upon
having reliable user identity information. Our Meta-Directory
software is designed to consolidate and integrate data from
disparate systems according to highly customizable business
rules into accurate, centralized profiles of each user. This
enables user/resource provisioning, keeping information
consistent between various messaging and business systems, and
is designed to improve security, data integrity and reduce
overall administration cost. At the core of our technology is an
extensible engine for gathering data about users from a variety
of business systems, including the various components of the
Critical Path Communications Platform. Our Meta-Directory comes
with plug-in connectors for a wide range of systems
including Sybases SQL Server, Microsofts Exchange,
Lotus

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Notes, and products from Oracle Corporation,
Peoplesoft Corporation, Siebel Systems and mainframe
applications. It also connects to all of the major directory
systems on the market, including Critical Paths Directory
Server, Microsofts Active Directory, Novells
eDirectory and iPlanets Directory Server. Meta-Directory
also includes a powerful SDK that enables the development of
custom connectors using Perl, Java, XML and SOAP, freeing
customers from having to learn proprietary scripting languages.


The Critical Path Directory Server provides a
common store of user or resource information that can be
accessed via standard LDAP and X.500 protocols. The Directory
can be used to store user profiles, digital certificates from
PKI software and eBusiness systems. The Directory can be
distributed over multiple systems to provide improved
performance and ease of replication and updates. Critical
Paths Directory and Meta-Directory both incorporate
security technology like SSL for secure transport and
authentication.

In addition to our Directory and Meta-Directory
infrastructure products, we also offer a layered application
called Critical Path Password Management. This software provides
easy-to-use graphical interfaces for managing multiple passwords
from a centralized location. It helps organizations enforce
password policies and keep passwords on many different systems
up to date.

Complementing our Directory and Meta-Directory,
the Critical Path System Console provides systems management
functionality to the Critical Path Communications Platform. This
includes system start/stop, systems monitoring, and
configuration. Our Systems Console uses Sun JDMK technology and
is designed to be interoperable with SNMP standards-based
systems like HPs OpenView.



| |                 
| | ----------------
| | Hosted Messaging

We offer our messaging technology both in
licensed form for on-premise deployment and a hosted service,
managed in conjunction with our partner HP in their world-class
data centers. Our hosted messaging service offers
standards-based email service for carriers and service
providers, Web hosting companies, Web portals and corporate
enterprises providing accounts to their end-users for activities
such as trading securities, shopping or participating in online
communities. We have developed proprietary load balancing,
account provisioning and management software that complements
our proven messaging applications.

Our hosted messaging service is comprised of
multiple groups of servers and routers acting as a single,
virtual point of contact to customers for messaging services.
These systems are managed by HP, enabling us to offer customers
service level agreements, 24x7 helpdesk support, and easy
expansion around the globe.




All aspects of our hosted messaging service are,
in turn, deployed in a redundant configuration with the goal
that if any process or system goes down, another will be
available to handle customer traffic seamlessly. This behavior
is called transparent failover and is designed to
increase the availability of messaging services to the customer.
Our hosted messaging service also includes a dynamic
load-balancing system that acts as proxy servers for firewall
safety. The load balancers are configured in parallel so that if
one goes down, the load is transferred to the remaining systems.
We have created a proprietary account provisioning protocol for
account creation and maintenance. This enables account
transitioning from other services or legacy systems to be
bulk-loaded, tested, replicated and deployed on our service
automatically. This protocol addresses a critical time to market
issue by helping organizations to quickly transition to new
email systems based on standards promulgated by the Internet
Engineering Task Force, including Internet Message Access
Protocol (IMAP), Post Office Protocol version 3 (POP3) and
Simple Mail Transfer Protocol (SMTP). A quicker transition time
minimizes down-time and degradation for our customers
existing internal systems. In addition, it can be used by
customers and partners to rapidly facilitate automatic account
sign-ups from web sites.







Data Centers.Our
hardware for operating production services currently is located
in multiple data centers managed by HP. With high-speed
connections to diverse backbone providers and robust network
architecture, we aim to eliminate single points of failure, thus
reducing the likelihood that our customers will suffer downtime
as a result of network outages. Our data centers feature
redundant systems for power; raised floors providing space
between the walk surface and base floor for more easily
configurable and efficient cabling, wiring and ventilation; HVAC
temperature control systems; seismically braced racks; fire
protection; and physical security and surveillance 24 hours
a day, seven days a week.




Security.We have a
diverse set of firewall solutions that are specifically tailored
for each of our hosted services, reducing the likelihood of
security breaches. To enhance security for our network, our
staff members

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monitor the network hardware 24 hours a day,
seven days a week. Suspicious activity is reported and
investigated immediately.


Spam and Viruses.Our messaging services include Spam Blocking to help guard
against unsolicited commercial email and Virus Scanning to help
prevent the spread of Internet viruses and worms. Our message
filtering technology has been enhanced through partnerships with
Brightmail and Symantec, allowing our hosted messaging customers
to benefit from new spam and virus filters as they are created
in response to attacks worldwide.

Research and Development

Our products and services are primarily based on
systems that were internally developed or acquired through
acquisitions. We must continually improve these systems to
accommodate the level of use of our products and services. In
addition, we may add new features and functionality to our
products and services that could result in the need to develop,
license or integrate additional technologies. Our inability to
add additional software and hardware or to upgrade our
technology or network infrastructure could have adverse
consequences, which include service interruptions, impaired
quality of the users experience and the diversion of
development resources. Our failure to provide new features or
functionality to our products and services also could result in
these consequences. We may not be able to effectively upgrade
and expand our systems in a timely manner or to integrate
smoothly any newly developed or purchased technologies with our
existing systems. These difficulties could harm or limit our
ability to improve our business.

We invested $30.7 million,
$19.6 million and $19.0 million in research and
development in 2001, 2002 and 2003, respectively. In addition,
we incurred stock-based compensation expense of
$3.7 million, $1.2 million and $15,000 related to
research and development during 2001, 2002 and 2003,
respectively. We anticipate that we will continue to devote
significant resources to product development in the future as we
add new features and functionality to our products and services.
The market in which we compete is characterized by rapidly
changing technology, evolving industry standards, frequent new
service and product announcements, introductions and
enhancements and changing customer demands. Accordingly, our
future success will depend on our ability to adapt to rapidly
changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance,
features and reliability of our products and services. The
failure to adapt to such changes would harm our business. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes
could require us to undertake substantial expenditures to modify
or adapt our services or infrastructure.

Intellectual Property

We regard the protection of our trade secrets,
patents, patent applications, copyrights and trademarks as
critical to our success. We rely on a combination of statute,
common law and contractual restrictions to establish and protect
our proprietary rights and developed intellectual property in
our product and service offerings. We have entered into
proprietary information and invention assignment agreements with
our employees, contractors and consultants, and nondisclosure
agreements with customers, partners and third parties to whom we
disclose confidential and proprietary information. Despite our
efforts in this regard, former employees or third parties may
infringe or misappropriate our proprietary rights that could
harm our business. The validity, enforceability and scope of
protection of our intellectual property can be tested and in
some areas is still evolving.

We have registered and used as a trademark
Critical Path in the United States. We have also
registered and used Critical Path in a variety of
foreign countries where we have operations or do business. We
plan to continue to enforce that mark and other trademarks in
both the United States and internationally, although protection
of the marks cannot be assured.

We license our software and proprietary service
offerings and despite all efforts to protect that property and
ensure the quality of our brand and patented or copyrighted
products or processes, current or future licensees could take
actions that might harm the value of our intellectual property
portfolio, our brand or reputation.

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We have been involved in claims by third parties
of patent, copyright and trademark infringement against us in
the past. Any claim like this, regardless of the merits, could
be time consuming to defend, result in costly and distracting
litigation, cause delays in rollouts of services, products or
updates or require us to enter into licensing agreements with
third parties. Such licensing agreements may include payment of
significant royalties or may not be available to us on
commercially reasonable terms. Additionally, enforcing our
intellectual property rights could entail significant expense,
with such costs also potentially harming our results of
operations.

Employees

At December 31, 2003, we had 418 employees,
including 130 in operations, 92 in sales and marketing, 132 in
research and development and 64 in general corporate and
administration. Our future success depends, in significant part,
upon the continued service of our key technical and senior
management personnel and our continuing ability to attract and
retain highly qualified and experienced technical, sales and
managerial personnel. Competition for such personnel can be
intense, and we cannot guarantee that we can retain our key
technical and managerial employees or that we will be able to
attract, assimilate or retain other highly qualified technical,
sales and managerial personnel in the future. None of our
employees are represented by a labor union. We have not
experienced any work stoppages and consider our relations with
our employees to be good.

Government Regulation

Although there are currently a limited number of
laws and regulations directly applicable to the Internet and the
operation of commercial messaging services, it is probable that
laws and regulations will continue to be adopted with respect to
the Internet or commercial email services covering issues such
as user privacy, pricing, content, copyrights, distribution,
antitrust and characteristics and quality of products and
services. Further, the growth and development of the market for
online email may prompt calls for more stringent consumer and
copyright protection and privacy laws that may impose additional
burdens on those companies conducting business online. The
adoption of any additional laws or regulations may impair the
growth of the Internet or commercial online services, which
could, in turn, decrease the demand for our products and
services and increase our cost of doing business, or otherwise
harm our business, operating results and financial condition.
Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is
uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply
to our business or the application of existing laws and
regulations to the Internet could harm our business, operating
results and financial condition.

Certain of our service offerings include
operations subject to the Digital Millenium Copyright Act of
1998. We have expended resources and implemented processes and
controls in order to remain in compliance with DMCA, but there
can be no assurance that our efforts will be sufficient and/or
new legislation and case law will not affect the operation of
and liability associated with a portion of our services.

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

Geographic Information

A summary of domestic and international financial
data is set forth in Note 20  Product and
Geographic Information of Notes to the Consolidated Financial
Statements in Item 15, which is incorporated

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herein by reference. A discussion of factors
potentially affecting our domestic and international operations
is set forth in Managements Discussion and Analysis
of Financial Condition and Results of Operations 
Additional Factors that May Affect Future Operating
Results, in Item 7, which is incorporated herein by
reference.


Recent Developments

March 2004 Private
Placement.In March 2004, we issued
$18.5 million in principal amount of 10% senior
secured convertible notes to investment entities affiliated with
Crosslink Capital, Criterion Capital Management, Heights Capital
Management and Apex Capital. These notes are convertible into
approximately 12.3 million shares of Series E
convertible preferred stock at $1.50 per share only if we
receive shareholder approval. If we do not obtain shareholder
approval, these notes will be convertible, at the option of each
note holder, into shares of our common stock at $2.18 per
share, provided the note holder will not be able to convert its
notes into shares of common stock to the extent the note holder,
together with its affiliates, would own 9.9% or more of our
common stock after conversion.

March 2004 Debt
Extension.In March 2004, we executed
an amendment with a group of investors led by Cheung Kong Group
and its Whampoa Limited affiliates including Campina Enterprises
Limited, Cenwell Limited, Great Affluent Limited, Dragonfield
Limited and Lion Cosmos Limited (referred to collectively as the
Cheung Kong Investors), which would extend the maturity of the
$32.8 million in face value of 5 3/4% convertible
subordinated notes held by the Cheung Kong Investors from
April 1, 2005 to April 1, 2006. The extension will
only take place in the event our shareholders do not approve the
exchange of the 5 3/4% convertible subordinated notes
held by the Cheung Kong Investors for approximately
21.9 million shares of our Series E preferred stock.
In addition, in the event the maturity date is extended to
April 1, 2006, the interest rate on the
5 3/4% convertible subordinated notes held by the
Cheung Kong Investors will increase to 7 1/2% for the
period beginning April 1, 2005 and ending April 1,
2006, and we will be required to pay fees totaling
$1.5 million.

January 2004 Private
Placement.In January 2004, we issued
$15 million in principal amount of 10% senior secured
convertible notes to Permal U.S. Opportunities Limited,
Zaxis Equity Neutral, L.P., Zaxis Institutional Partners, L.P.,
Zaxis Offshore Limited, Zaxis Partners, L.P. and Passport Master
Fund, L.P. These notes are convertible into approximately
10 million shares of Series E convertible preferred
stock at $1.50 per share only if we receive shareholder
approval. If we do not obtain shareholder approval, these notes
will be convertible, at the option of each note holder, into
shares of our common stock at $1.65 per share, provided the
note holder will not be able to convert its notes into shares of
common stock to the extent the note holder, together with its
affiliates, would own 9.9% or more of our common stock after
conversion.

Rights Offering.We
have filed a preliminary proxy statement for a special meeting
and a registration statement relating to a proposed rights
offering for holders of our common stock on a record date to be
determined by our board of directors to purchase up to
$21 million of Series E preferred stock.

Management and Board
Changes.In January 2004, William S.
Cohen and Raul J. Fernandez resigned from our board of
directors, and in February 2004, Peter L.S. Currie, a partners
of General Atlantic Partners, LLC, one of our principal
shareholders, was appointed to fill a vacancy. In March 2004,
Chris Gorog resigned from our board of directors and Frost R.R.
Prioleau was appointed to fill the vacancy. In February 2004,
William M. Smartt resigned as our Executive Vice President and
Chief Financial Officer and James Clark, formerly chief
financial officer of Diversified Healthcare Services, Inc., was
hired as his successor.




At the end of March 2004, we appointed Mark
Ferrer to assume the position of Chief Executive Officer
formerly held by William McGlashan, Jr. Mr. McGlashan
continues to serve as Chairman of the Board of Directors. We
entered into an employment agreement with Mr. Ferrer
pursuant to which we agreed to pay him an annual base salary of
$375,000. Mr. Ferrer is also eligible to receive annual
bonus compensation of 50% of his base salary for achieving
performance objectives established by our board of directors (or
a committee) or as high as 150% of Mr. Ferrers base
salary for extraordinary performance as determined by the board
of directors (or a committee). Pursuant to
Mr. Ferrers employment agreement, we also agreed to
grant him options to purchase up to 1.5% of our outstanding
stock at an exercise price equal to the fair market value on




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the date of grant and shares of restricted common
stock equal to 1% of our outstanding stock, in each case on a
fully-diluted as converted to common stock basis. We also agreed
that, upon consummation or termination of our proposed rights
offering, Mr. Ferrer would receive an additional grant of
stock options and restricted stock so that Mr. Ferrer would
continue to hold options to purchase up to 1.5% of our
outstanding stock and restricted shares of common stock equal to
1% of our outstanding stock to take into account the dilutive
effect of those transactions.








In addition, the employment agreement provides
that if we terminate Mr. Ferrers employment without
cause or Mr. Ferrer becomes disabled or resigns following a
constructive termination, he will be entitled to 12 monthly
payments totaling 12 months of salary and a pro-rata amount
of his prior years bonus, if any (based on the number of
days served during the year of termination). Under these
circumstances, Mr. Ferrer will also be entitled to receive
healthcare benefits for 12 months following his termination
and any unvested stock options and restricted stock will vest as
to the amount that would have vested had Mr. Ferrer
continued to work for us for an additional 12 months. If
Mr. Ferrer is terminated within three months before or
12 months following a change of control of Critical Path,
he will be entitled to a lump sum payment equal to 1.5 times his
base salary, continued healthcare benefits for 18 months
and accelerated vesting of 12 months of stock options and
the greater of 75% or 12 months accelerated vesting of
restricted stock.







In connection with Mr. McGlashans
termination as our Chief Executive Officer and continuation as
our Chairman of the Board, our board of directors has approved,
entering into a Separation Agreement with him that amends and
restates provisions of his employment and change of control
agreements. Under his existing employment agreement,
Mr. McGlashan will receive a cash severance payment of
$405,000. We additionally agreed to pay him an annual salary of
$80,000 in connection with his continuing service to us. We also
agreed to amend Mr. McGlashans change of control
agreement to provide that Mr. McGlashan will be entitled to
the change of control benefits under this agreement if we
undergo a change of control within nine months rather than the
existing three months, following his termination as our Chief
Executive Officer and to reduce the amount of any change in
control payment by the amount of his $405,000 severance payment.







With respect to the promissory note and stock
pledge agreement in principal amount of $1.74 million that
we entered into with Mr. McGlashan in May 2002 to fund his
early exercise of options to purchase 250,000 shares of our
common stock, we agreed to permit Mr. McGlashan to repay
the loan by surrendering all of the shares of common stock
acquired by early exercise. Pursuant to the terms of the early
exercise agreement and promissory note, we applied the fair
market value of his vested shares as of April 14, 2004 and
the original purchase price of $6.96 to the unvested shares,
with an aggregate value of approximately $1.25 million,
towards the repayment of this loan. We agreed to forgive in full
the remaining $537,000 of principal and interest on the loan in
exchange for Mr. McGlashans agreeing to serve as our
Chairman of the Board; to terminate our previous commitment to
provide a loan of up to $1.5 million to purchase a
residence, which was never funded; and to provide a general
release of claims to us. As provided in
Mr. McGlashans current agreement, all of the options
held by Mr. McGlashan will have one year of accelerated
vesting. The Separation Agreement provides that the options will
be exercisable for three years following his termination.









|        |           
|------- | ----------
|Item 2. | Properties

Our corporate headquarters as well as primary
operations and development activities are located in one office
building in San Francisco, California. We currently occupy
a total of 63,467 square feet in this building, under a
lease that expires on December 31, 2006.

In addition to this principal location, we
currently occupy a 24,300 square foot building in
Dublin, Ireland under a lease expiring on July 14,
2014. We lease additional facilities in Brazil, Canada, France,
Germany, Ireland, Italy, Japan, Malaysia, Spain,
Sweden, Switzerland, the United Kingdom and certain cities in
the United States. We continually evaluate the adequacy of our
existing facilities, and we believe that the current facilities
are suitable for our needs for at least the next 12 months,
or that additional space will be available on commercially
reasonable terms, if necessary.

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|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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

Action in the Superior Court of
San Diego.On December 24,
2003, we were named in a lawsuit filed by former shareholders of
Remedy Corporation 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. The
complaint alleges that we, as Peregrines customer, engaged
in a series of fraudulent transactions with Peregrine that were
not accounted for by Peregrine in conformity with GAAP and that
this substantially inflated the value of Peregrine securities
issued as consideration in Remedys merger with Peregrine
in August 2001. The complaint alleges causes of action for fraud
and deceit, negligent misrepresentation, violations of
California Corporations Code provisions regarding sales of
securities by means of false statements or omissions, violations
of California Corporations Code provisions regarding securities
sales made on the basis of undisclosed, material inside
information, common law conspiracy to commit fraud, and common
law aiding and abetting the commission of fraud. The complaint
seeks an unspecified amount of compensatory and punitive
damages, along with rescission of the Peregrine securities
purchased in the Remedy merger, interest and attorneys fees. We
believe the claims are without merit and intend to defend
ourselves vigorously. On February 23, 2004, we filed a
demurrer and a motion to strike the complaint, both of which are
currently scheduled to be heard on April 9, 2004. Because
the litigation is at an early stage, the outcome cannot be
predicted with any certainty.

Securities Action in Northern District of
California.On April 30, 2002,
MBCP PeerLogic LLC and other named plaintiffs filed suit in the
U.S. District Court for the Southern District of
New York against us and certain of our former officers. The
plaintiff shareholders had opted out of a shareholder litigation
settlement that was approved by the U.S. District Court for
the Northern District of California. On November 25, 2003,
we entered into settlement of these claims, approved by the
United States District Court for the Northern District of
California, pursuant to which we agreed to issue
553,914 shares of common stock and 188,587 shares of
Series D preferred stock in exchange for a release of
plaintiffs claims, and recorded a charge of
$5.1 million related to the value of these issuances as
stock-based expense  general and administrative in the
fourth quarter of 2003. We also agreed to
exchange 69,149 shares of Series D preferred
stock for 733,333 shares of Series E preferred stock
if we obtain shareholder approval of the matters being submitted
to a vote of our shareholders at a special meeting. The
plaintiffs claims against us were voluntarily dismissed
with prejudice, and without costs or attorneys fees to any
party. Our counterclaims against plaintiffs were also dismissed
with prejudice, and without costs or attorneys fees to any
party.

Derivative Actions in Northern District of
California.Beginning on
February 5, 2001, Critical Path was named as a nominal
defendant in a number of derivative actions, purportedly brought
on our behalf, filed in the Superior Court of the State of
California and in the U.S. District Court for the Northern
District of California. The derivative complaints alleged that
certain of our former officers and directors breached their
fiduciary duties, engaged in abuses of control, were unjustly
enriched by sales of our common stock, engaged in insider
trading in violation of California law or published false
financial information in violation of California law. This case
was fully and finally settled in December 2003 and approved by
the Court. The settlement involved a monetary recovery by us of
$330,000.

Securities Class Action in Southern
District of New York.Beginning
on July 18, 2001, a number of securities class action
complaints were filed against us, and certain of our former
officers and directors and underwriters connected with our
initial public offering of common stock in the
U.S. District Court for the Southern District of
New York (In re Initial Public Offering Sec. Litig.). The
purported class action complaints were filed by individuals who
allege that they purchased 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

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whereby underwriters required their customers to
purchase additional shares in the aftermarket in exchange for an
allocation of IPO shares. The complaints seek an unspecified
amount in damages on behalf of persons who purchased our stock
during the specified period. Similar complaints have been filed
against 55 underwriters and more than 300 other companies and
other individuals. The over 1,000 complaints have been
consolidated into a single action. We have reached an agreement
in principle with the plaintiffs to resolve the cases. The
proposed settlement involves no monetary payment by us and no
admission of liability. However, it is subject to approval by
the Court, which has not yet occurred.


Securities and Exchange Commission
Investigation.In 2001, the Securities
and Exchange Commission investigated us and certain of our
former officers, employees and directors with respect to
non-specified accounting matters, financial reports, other
public disclosures and trading activity in our securities. The
SEC concluded its investigation of us in January 2002 and,
without admitting or denying liability, we consented to a cease
and desist order and an administrative order as to violation of
certain non-fraud provisions of the federal securities laws. The
investigation has also thus far resulted in charges being filed
against five former officers and employees. We believe that the
investigation of our former officers and employees may continue.
While we continue to fully cooperate with any requests with
respect to such investigation, we do not know the status of such
investigation.

Lease Dispute.In
July 2000, PeerLogic, Inc. signed a lease for office space
in San Francisco, California. In December 2000, Critical
Path acquired PeerLogic as a wholly owned subsidiary. After
review, we determined that local zoning laws likely prohibited a
business such as us or PeerLogic from occupying the leased
premises, and promptly sought a zoning determination from the
San Francisco Zoning Administrator to resolve the matter.
The Zoning Administrator determined that our proposed use of the
leased premises was not permitted, but the landlord appealed
this determination and prevailed before the San Francisco
Board of Appeals. In July 2002, we filed a Petition for Writ of
Mandamus with the San Francisco Superior Court, seeking
reversal of the San Francisco Board of Appeals
decision. In June 2003, the Court granted our petition and
subsequently entered a judgment and writ remanding the matter to
the San Francisco Board of Appeals and directing the Board
of Appeals to make a new determination consistent with its
judgment. The landlord subsequently appealed the Superior
Courts ruling.

In April 2002, the landlord filed suit in
San Francisco Superior Court against us alleging, among
other things, breach of the lease and tort claims related to the
lease transaction. In its complaint, the landlord sought
unspecified damages for back rent, attorneys fees, treble
damages under certain statutes, and unspecified punitive
damages. In August 2003, we filed our answer to the second
amended complaint and a cross-complaint against the landlord,
under which we seek compensatory damages and unspecified
punitive damages for the landlords failure to disclose the
zoning restrictions on the leased premises before the lease was
signed. In early February 2004, we reached an agreement in
principle with the landlord to fully and finally settle this
litigation as well as the zoning dispute described above in
exchange for $100,000 in cash and a warrant to purchase
100,000 shares of common stock at a purchase price equal to
current fair market value as of the date of settlement. However,
a final written settlement agreement has not yet been executed.
At December 31, 2003, we had accrued sufficient amounts to
cover the cost of the proposed settlement.

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

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

None.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Shareholder Matters

Our common stock has been quoted on the Nasdaq
National Market under the symbol CPTH since
March 29, 1999. The following table presents, for the
periods indicated, the high and low sales prices per share of
our common stock (as adjusted to reflect the reverse stock split
of our authorized and outstanding common stock on August 4,
2003) as reported on the Nasdaq National Market.

|                             |                                                                |      |   |      |  |  |   |      | 
|---------------------------- | -------------------------------------------------------------- | ---- | - | ---- |  |  | - | ---- | 
|                             |                                                                | High |   | Low 
|                             |                                                                |      |   |     
|Year Ended December 31, 2002 |                                                                |      |   |      |  |  |   |     
|                             | First Quarter (from January 1, 2002 to
    March 31, 2002)     |      | $ | 3.80 |  |  | $ | 2.08 | 
|                             | Second Quarter (from April 1, 2002 to
    June 30, 2002)       |      | $ | 2.50 |  |  | $ | 1.00 | 
|                             | Third Quarter (from July 1, 2002 to
    September 30, 2002)    |      | $ | 1.15 |  |  | $ | 0.56 | 
|                             | Fourth Quarter (from October 1, 2002 to
    December 31, 2002) |      | $ | 0.93 |  |  | $ | 0.41 | 
|Year Ended December 31, 2003 |                                                                |      |   |      |  |  |   |     
|                             | First Quarter (from January 1, 2003 to
    March 31, 2003)     |      | $ | 3.92 |  |  | $ | 1.96 | 
|                             | Second Quarter (from April 1, 2003 to
    June 30, 2003)       |      | $ | 4.76 |  |  | $ | 2.80 | 
|                             | Third Quarter (from July 1, 2003 to
    September 30, 2003)    |      | $ | 6.96 |  |  | $ | 2.38 | 
|                             | Fourth Quarter (from October 1, 2003 to
    December 31, 2003) |      | $ | 3.30 |  |  | $ | 1.10 | 

As of March 1, 2004, there were
approximately 1,185 holders of record of our common stock. Most
shares of our common stock are held by brokers and other
institutions on behalf of shareholders.

Dividend Policy

We have never declared or paid any dividends on
our common stock. We do not anticipate paying any cash dividends
in the foreseeable future. We currently intend to retain future
earnings, if any, to finance operations and the expansion of our
business. In addition, our credit facility prohibits declaration
of dividends absent the banks consent. Any future
determination to pay cash dividends will be at the discretion of
the board of directors and will depend upon our financial
condition, operating results, capital requirements and other
factors the board of directors deems relevant.

Recent Sales of Unregistered
Securities

In March 2004, in connection with an amendment to
the credit facility with Silicon Valley Bank to increase the
size of the credit limit to a maximum of $6.0 million and
extend the maturity date to June 30, 2005, we agreed to
issue warrants to purchase up to 100,000 shares of our
common stock to Silicon Valley Bank. These warrants were fully
exercisable upon grant, had an exercise price of $2.07 per
share and have an expiration date of March 12, 2011. The
issuance of the warrants was exempt from registration under
Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.

In March 2004, we issued $18.5 million in
principal amount of 10% senior secured convertible notes to
investment entities affiliated with Crosslink Capital, Criterion
Capital Management, Heights Capital Management and Apex Capital.
These notes are convertible into approximately 12.3 million
shares of Series E convertible preferred stock at
$1.50 per share only if we receive shareholder approval. If
we do not obtain shareholder approval, these notes will be
convertible, at the option of each note holder, into shares of
our common stock at $2.18 per share, provided the note
holder will not be able to convert its notes into shares of
common stock to the extent the note holder, together with its
affiliates, would own 9.9% or more of our common stock after
conversion. The investors were qualified institutional buyers
and the issuance of the notes

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was exempt from registration under
Section 4(2) of the Securities Act and Regulation D
promulgated thereunder. A description of our Series E
preferred stock is set forth at the end of this section.


In January 2004, we issued an aggregate of
$15 million in principal amount of 10% convertible
secured notes to Permal U.S. Opportunities Limited, Zaxis
Equity Neutral, L.P., Zaxis Institutional Partners, L.P., Zaxis
Offshore Limited, Zaxis Partners, L.P. and Passport Master Fund,
L.P. These notes are convertible into approximately
10 million shares of Series E preferred stock at
$1.50 per share only if we receive shareholder approval. If
we do not obtain shareholder approval, these notes will be
convertible, at the option of each note holder, into shares of
our common stock at $1.65 per share, provided the note
holder will not be able to convert its notes into shares of
common stock to the extent the note holder, together with its
affiliates, would own 9.9% or more of our common stock after
conversion. The investors were qualified institutional buyers
and the issuance of the notes was exempt from registration under
Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.

On November 26, 2003, in connection with the
settlement with MBCP PeerLogic LLC and other named plaintiffs we
issued 553,914 shares of common stock and
188,587 shares of Series E preferred stock in exchange
for the release of plaintiffs claims. If we obtain
shareholder approval of the matters described above and in the
paragraph below, we have agreed to convert 69,149 shares of
Series D preferred stock issued to these shareholder
plaintiffs into 733,333 shares of Series E preferred
stock. The issuance of the common stock was exempt from
registration pursuant to an order from the United States
District Court for the Northern District of California, dated
November 25, 2003, approving issuance of shares pursuant to
Section 3(a)(10) of the Securities Act. The issuance of the
Series D preferred stock was exempt from registration under
Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.

On November 18, 2003, we entered into a
definitive agreement to issue an aggregate of $10 million
in principal amount of 10% convertible secured notes to
General Atlantic Partners 74, L.P., GAP Coinvestment
Partners II, L.P., GapStar, LLC and GAPCO GmbH &
Co. K.G., (referred to collectively as the General Atlantic
Investors), and to convert the notes, plus $1 million in
accrued interest, into approximately 7.3 million shares of
our Series E preferred stock. In the same agreement, we
agreed to exchange approximately $32.8 million in face
value of our 5 3/4% convertible subordinated notes
held by a group of investors led by Cheung Kong Group and its
Whampoa Limited affiliates including Campina Enterprises
Limited, Cenwell Limited, Great Affluent Limited, Dragonfield
Limited and Lion Cosmos Limited (referred to collectively as the
Cheung Kong Investors) for approximately 21.9 million
shares of our Series E preferred stock. These notes are
convertible into Series E preferred stock at $1.50 per
share only if we receive shareholder approval. The investors
were institutional accredited investors or qualified
institutional buyers and the issuance of the notes was exempt
from registration under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.

In June 2002, in connection with the settlement
of a consolidated class action lawsuit originally filed in the
Northern District of California on February 2, 2001, we
agreed to issue warrants to purchase up to 212,500 shares
of our common stock to shareholder plaintiffs. These warrants
were fully exercisable upon grant, had an exercise price of
$40.00 per share and have an expiration date of
June 18, 2005. The issuance of these warrants was exempt
from registration pursuant to a final judgment dated
June 18, 2002 from the United States District Court for the
Northern District of California approving the issuance of the
warrants under Section 3(a)(10) of the Securities Act of
1933 as part of the settlement entered into by the parties and
based on a fairness hearing held by the court on May 23,
2002.




In each case where we have indicated that we
relied on Section 4(2) of the Securities Act and
Regulation D promulgated under that Act, our reliance was
based on the fact that (1) the issuance of the securities
did not involve a public offering, (2) there were no more
than 35 investors, (3) each investor represented to us that
it was either an accredited investor (as defined in
Regulation D) and/or that it had such knowledge and
experience in financial and business matters that it is capable
of evaluating the merits and risks of the investment and to make
an informed investment decision, (4) each investor agreed
that the securities acquired cannot be sold without registration
under the Securities Act, except in reliance upon an exemption
from that Act and applicable securities laws, (5) each
investor represented to us its intention to




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acquire the securities for investment only and
not with a view to distribution, (6) appropriate legends
were affixed to the certificates representing the securities,
(7) the offers and sales were made in compliance with
Rules 501 and 502 of Regulation D, and (8) each
investor acknowledged that it had adequate access to sufficient
information about us to make an informed investment decision.







| |                                            
| | -------------------------------------------
| | Description of Series E Preferred
    Stock

The following is a summary of the terms of our
Series E preferred stock, if approved by our shareholders
in a special meeting.

Dividends.The
shares of Series E preferred stock rank senior to all
capital stock of Critical Path with respect to the payment of
dividends. Dividends on the shares of Series E preferred
stock accrue at a simple annual rate of 5 3/4% whether or
not our board of directors declares them. Dividends in respect
of the Series E preferred stock will not be paid in cash
but will be added to the value of the Series E preferred
stock and will be taken into account for purposes of determining
the liquidation preference, conversion rate, dividends and
voting rights. We must declare or pay dividends on the
Series E preferred stock when we declare or pay dividends
to the holders of common stock. Except for dividends accruing to
the Series D preferred stock, we may make no dividends or
distribution with respect to any shares of capital stock unless
all dividends accruing to the Series E preferred stock have
already been paid.

Liquidation or Change of
Control.In the event of a liquidation
or change of control, we will pay each share of Series E
preferred stock, prior to the payment of any other equity
securities, an amount equal to the greater of the purchase price
of the Series E preferred stock plus all accrued dividends
or the value that would be paid to the holder of the number of
shares of common stock into which such shares of Series E
preferred stock are convertible immediately prior to the closing
of such liquidation or change of control. A change of control
includes, among others, any merger consolidation or other
business combination transaction in which the shareholders
owning a majority of our voting securities do not own a majority
of our voting securities of the surviving entity, any tender,
exchange or other offer whereby any person obtains a majority of
the voting securities, any proxy contest in which a majority of
the board of directors prior to such contest do not constitute a
majority of the board of directors after such contest, any sale
of all or substantially all of our assets or any other
transaction that triggers the issuance of rights pursuant to our
Shareholder Rights Plan (which issuance is not waived by the
board of directors).

Calls for
Redemption.All, but not less than
all, of the shares of Series E preferred stock may be
called for redemption, at our option, after the third
anniversary of the date shares of Series E preferred stock
are first issued if on any date the average closing price per
share of the common stock equals or exceeds four hundred percent
(400%) of the sum of the per share purchase price of the
Series E preferred stock and all accrued dividends through
the most recent dividend accrual date for any 60 consecutive
trading day period. We must provide notice of any such call for
redemption within 30 days of such period and not less than
10 nor more than 30 days prior to the date set for
redemption. The shares of Series E preferred stock must be
called for redemption on the fourth anniversary of the date
shares of Series E preferred stock are first issued. Notice
of the mandatory call for redemption must be given not less than
30 nor more than 60 days prior to the date set for
redemption. In the case of any call for redemption, we must pay
the applicable redemption price by wire transfer of immediately
available funds or check within seven days after we receive
surrendered certificates representing the shares of
Series E preferred stock called for redemption. If we do
not have sufficient funds available by law to redeem the
Series E preferred stock on the date set for the mandatory
call, the holders of shares of Series E preferred stock
will share ratably any funds available by law for redemption.
Any shares of Series E preferred stock that remain
outstanding following the mandatory redemption date will
thereafter continue to accrue dividends until redeemed. Any
additional funds available by law for redemption will be used to
redeem the balance or a portion of the balance of any shares as
soon as practicable.

Voting.Each share
of Series E preferred stock entitles its holder to vote at
any shareholders meeting, on any matter entitled to be
voted on by holders of our common stock, voting together as a
single class with other shares entitled to vote on such matters.
In order to comply with The Nasdaq Stock Markets
Marketplace Rule 4351, which prohibits issuers from
creating a new class of securities that votes at a higher rate
than an

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existing class of securities based on the
relative investment in the issuer made by the new security
holders, the voting power of the Series E preferred stock
may be impaired. The voting formula for each share of
Series E preferred stock will be the sum of $1.50 plus all
accrued dividends for such share divided by the voting
conversion amount. The voting conversion amount will be
equal to the lower of (i) $1.70, (ii) the most recent
closing bid price of the common stock as of the date the
Series E preferred stock is first issued and (iii) the
average closing bid prices for the five trading days prior to
the date the Series E preferred stock is first issued;
provided, however, the voting conversion amount will not be less
than $1.50. The voting conversion amount will be determined on
the date the Series E preferred stock is first issued and,
once determined, will remain the same (subject to adjustment for
stock splits, subdivisions, reclassifications, distributions and
similar transactions).


In addition, holders of a majority of the
outstanding shares of Series E preferred stock must approve:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Any amendment to the terms of the Series E
    preferred stock;                                                                                                                            
|
| |  | Any amendment to the number of authorized shares
    of Series E preferred stock and any issuance of shares of
    equity securities ranking senior to the Series E preferred
    stock; or
|
| |  | The redemption of any junior equity securities or
    the payment of dividends to junior equity holders.                                                                                   

Conversion.Each
share of Series E preferred stock will be convertible at
any time at the option of the holder into the number of shares
of common stock derived by dividing the purchase price of the
Series E preferred stock plus all accrued dividends from
the date of issuance through the most recent semi-annual
dividend accrual date by $1.50, subject to certain antidilution
provisions. The terms of the Series E preferred stock
contain protection against dilution if Critical Path effects a
subdivision or combination of common stock or in the event of a
reclassification, recapitalization, stock split, stock dividend
or other distribution payable in securities of Critical Path or
any other person.

25



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL
INFORMATION

(in thousands, except per share data and
footnotes)


The selected consolidated statement of operations
data during the years ended December 31, 1999, 2000, 2001,
2002 and 2003 and selected consolidated balance sheet data as of
December 31, 1999, 2000, 2001, 2002 and 2003, have been
derived from our Consolidated Financial Statements. The data set
forth below should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in
this document.

|                                                                          |                                                  |                         |          |         |   |         |            |         |   |               |          |       |   |   |          |       |   |   |         |       |  
|------------------------------------------------------------------------- | ------------------------------------------------ | ----------------------- | -------- | ------- | - | ------- | ---------- | ------- | - | ------------- | -------- | ----- | - | - | -------- | ----- | - | - | ------- | ----- | -
|                                                                          |                                                  |                        
|                                                                          |                                                  | Year Ended December 31,
|                                                                          |                                                  |                        
|                                                                          |                                                  | 1999                    |          | 2000(1) |   | 2001(2) |            | 2002(4) |   | 2003(6)(7)(8)
|                                                                          |                                                  |                         |          |         |   |         |            |         |   |              
|Consolidated Statement of Operations
    Data:                            |                                                  |                         |          |         |   |         |            |         |   |               |          |       |   |   |          |       |   |   |         |      
|Net revenues                                                              |                                                  | $                       | 16,157   |         |   | $       | 135,653    |         |   | $             | 104,173  |       |   | $ | 87,133   |       |   | $ | 72,297  |      
|Gross profit (loss)                                                       |                                                  |                         | (5,400   | )       |   |         | 13,732     |         |   |               | (18,868  | )     |   |   | 16,711   |       |   |   | 24,013  |      
|Operating expenses                                                        |                                                  |                         | (117,850 | )       |   |         | (1,831,449 | )       |   |               | (222,830 | )     |   |   | (122,105 | )     |   |   | (74,884 | )    
|                                                                          |                                                  |                         |          |         |   |         |            |         |   |               |          |       |   |   |          |       |   |   |         |      
|Loss from operations (5)                                                  |                                                  |                         | (123,250 | )       |   |         | (1,817,717 | )       |   |               | (241,698 | )     |   |   | (105,394 | )     |   |   | (50,871 | )    
|Non-operating income (expenses) (3)                                       |                                                  |                         | 6,309    |         |   |         | (28,235    | )       |   |               | 169,440  |       |   |   | (11,538  | )     |   |   | (10,406 | )    
|                                                                          |                                                  |                         |          |         |   |         |            |         |   |               |          |       |   |   |          |       |   |   |         |      
|Loss before income taxes                                                  |                                                  |                         | (116,941 | )       |   |         | (1,845,952 | )       |   |               | (72,258  | )     |   |   | (116,932 | )     |   |   | (61,277 | )    
|Provision for income taxes                                                |                                                  |                         |         |         |   |         | (6,513     | )       |   |               | (7,206   | )     |   |   | (979     | )     |   |   | (856    | )    
|                                                                          |                                                  |                         |          |         |   |         |            |         |   |               |          |       |   |   |          |       |   |   |         |      
|Net loss                                                                  |                                                  | $                       | (116,941 | )       |   | $       | (1,852,465 | )       |   | $             | (79,464  | )     |   | $ | (117,911 | )     |   | $ | (62,133 | )    
|Accretion on mandatorily redeemable preferred
    stock                   |                                                  | $                       |         |         |   | $       |           |         |   | $             | (356     | )     |   | $ | (13,904  | )     |   | $ | (12,446 | )    
|                                                                          |                                                  |                         |          |         |   |         |            |         |   |               |          |       |   |   |          |       |   |   |         |      
|Net loss attributable to common shares                                    |                                                  | $                       | (116,941 | )       |   | $       | (1,852,465 | )       |   | $             | (79,820  | )     |   | $ | (131,815 | )     |   | $ | (74,579 | )    
|                                                                          |                                                  |                         |          |         |   |         |            |         |   |               |          |       |   |   |          |       |   |   |         |      
|Net loss per share attributable to common
    Shares  basic and diluted: |                                                  |                         |          |         |   |         |            |         |   |               |          |       |   |   |          |       |   |   |         |      
|                                                                          | Net loss per share attributable to common shares |                         | $        | (15.71  | ) |         | $          | (122.68 | ) |               | $        | (4.32 | ) |   | $        | (6.78 | ) |   | $       | (3.73 | )
|                                                                          |                                                  |                         |          |         |   |         |            |         |   |               |          |       |   |   |          |       |   |   |         |      
|Weighted average shares  basic and
    Diluted                           |                                                  |                         | 7,443    |         |   |         | 15,100     |         |   |               | 18,495   |       |   |   | 19,445   |       |   |   | 20,020  |      
|                                                                          |                                                  |                         |          |         |   |         |            |         |   |               |          |       |   |   |          |       |   |   |         |      

|                                                 |  |                 |         |      |  |      |         |      |  |      |         |  |  |   |         |   |  |   |         |  
|------------------------------------------------ |  | --------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | - |  | - | ------- | -
|                                                 |  |                
|                                                 |  | At December 31,
|                                                 |  |                
|                                                 |  | 1999            |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                                                 |  |                 |         |      |  |      |         |      |  |     
|Consolidated Balance Sheet Data:                 |  |                 |         |      |  |      |         |      |  |      |         |  |  |   |         |   |  |   |         |  
|Cash, cash equivalents and marketable securities |  | $               | 75,932  |      |  | $    | 216,542 |      |  | $    | 69,165  |  |  | $ | 43,071  |   |  | $ | 18,984  |  
|Working capital                                  |  | $               | 76,060  |      |  | $    | 186,777 |      |  | $    | 57,983  |  |  | $ | 19,961  |   |  | $ | 1,876   |  
|Goodwill and other intangible assets             |  | $               | 474,297 |      |  | $    | 124,094 |      |  | $    | 48,641  |  |  | $ | 6,613   |   |  | $ | 6,613   |  
|Total assets                                     |  | $               | 673,805 |      |  | $    | 497,610 |      |  | $    | 199,952 |  |  | $ | 104,006 |   |  | $ | 67,725  |  
|Convertible subordinated notes payable           |  | $               |        |      |  | $    | 300,000 |      |  | $    | 38,360  |  |  | $ | 38,360  |   |  | $ | 38,360  |  
|Capital lease obligations, long-term
    portion |  | $               | 5,669   |      |  | $    | 4,687   |      |  | $    | 1,149   |  |  | $ | 1,332   |   |  | $ | 1,295   |  
|Mandatorily redeemable preferred stock           |  | $               |        |      |  | $    |        |      |  | $    | 5,556   |  |  | $ | 26,900  |   |  | $ | 55,301  |  
|Shareholders equity (deficit)                   |  | $               | 616,992 |      |  | $    | 113,104 |      |  | $    | 108,972 |  |  | $ | (8,554  | ) |  | $ | (77,242 | )



---



|    |                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating expenses for the year ended
    December 31, 2000, include a $1.3 billion charge
    related to impairment of intangible assets including the
    deferred costs associated with our ICQ and Qwest relationships.
    See also Note 17 of Notes to Consolidated Financial
    Statements  Impairment of Long-Lived Assets.     
|   
|(2) | Operating expenses for the year ended
    December 31, 2001, include a $26.6 million charge
    related to impairment of certain long lived assets and an
    $18.3 million charge related to costs incurred as a result
    of our strategic restructuring. See also Note 4 of Notes to
    Consolidated Financial Statements  Strategic

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##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Restructuring and Employee Severance and
    Note 17 of Notes to Consolidated Financial
    Statements  Impairment of Long-Lived Assets.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) | Non-operating income for the year ended
    December 31, 2001, includes gains of $179.3 million,
    net of applicable taxes and write downs of related debt issuance
    costs, recognized on the retirement of $261.4 million of
    face value of Critical Paths convertible subordinated
    notes. See also Note 11 of Notes to Consolidated Financial
    Statements  Convertible Subordinated Notes.                                                                                                                                                                    
|   
|(4) | Operating expenses for the year ended
    December 31, 2002, include a $3.2 million charge
    related to costs incurred as a result of restructuring actions
    we took in the second and fourth quarters of 2002. See also
    Note 4 of Notes to Consolidated Financial
    Statements  Strategic Restructuring.                                                                                                                                                                                                                                                            
|   
|(5) | Included in operating expenses in 1999, 2000 and
    2001 were goodwill amortization charges of $29.6 million,
    $341.7 million and $643,000, respectively. In accordance
    with SFAS No. 142, we ceased amortization of goodwill
    on January 1, 2002.                                                                                                                                                                                                                                                                                                                    
|   
|(6) | Operating expenses for the year ended
    December 31, 2003, include an $8.1 million charge
    related to costs incurred as a result of restructuring actions
    we took in the first through fourth quarters of 2003. This
    charge was partially offset by the first quarter 2003 reversal
    of approximately $1.2 million in restructuring expenses,
    which were accrued during 2001 and 2002, as we do not anticipate
    these amounts will be paid in the future. See also Note 4
    of Notes to Consolidated Financial
    Statements  Strategic Restructuring.
|   
|(7) | Operating expenses for the year ended
    December 31, 2003, include a $5.1 million charge
    related to the settlement of litigation in the fourth quarter of
    2003. See also Note 13 of Notes to Consolidated Financial
    Statements  Commitments and Contingencies.                                                                                                                                                                                                                                                                                                    
|   
|(8) | Non-operating expense for the year ended
    December 31, 2003 includes an extraordinary gain of
    $3.8 million related to the early release of escrow funds
    related to The docSpace Company acquisition. See also
    Note 9 of Notes to Consolidated Financial
    Statements  Related Party Transactions.                                                                                                                                                                                                                                                              






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following Management Discussion and
Analysis of Financial Condition and Results of Operations
contains forward-looking statements within the meaning of the
safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, as amended and in effect from
time to time. The words anticipates,
expects, intends, plans,
believes, seek, 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,
including our intention to conduct a rights offering and our
ability to consummate the rights offering if undertaken, of the
rights offering and the amount of proceeds raised thereby, the
adequacy of funds to meet anticipated operating needs, the
amount of charges that we will record that will increase our net
loss attributable to common shares in connection with the
proposed issuance of our Series E preferred stock and
amendment of the terms of our Series D preferred stock, our
future strategic, operational and financial plans, possible
financing, strategic or business combination transactions,
anticipated or projected revenues, expenses and operational
growth, markets and potential customers for our products and
services, plans related to sales strategies and global sales
efforts, the anticipated benefits of our relationships with
strategic partners, growth of our competition, our ability to
compete, investments in product development, the adequacy of our
current facilities and our ability to obtain additional space,
our litigation strategy, use of future earnings, the feature,
benefits and performance of our current and future products and
services, plans to reduce operating costs through continued
expense reduction, anticipated effects of restructuring and
retirement of debt, and our belief as to our ability to
successfully emerge from the restructuring and refocusing of our
operations. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to
differ materially from those projected. Factors that might cause
future results to differ materially from those projected in the
forward-looking statements include, but are not limited to,
difficulties of forecasting future results due to our limited
operating history, failure to obtain additional financing on
favorable terms or at all, failure to meet sales and revenue
forecasts, evolving business strategy and the emerging nature of
the market for our products and services, the settlement of
litigation and the continuing SEC investigation against former
executives and directors, turnover within and integration of
senior management, board of directors members and other
key

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personnel, difficulties in our strategic plans
to exit certain products and services offerings, failure to
expand our sales and marketing activities, potential
difficulties associated with strategic relationships,
investments and uncollected bills, general economic conditions
in markets in which 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, risks
associated with an inability to maintain continued compliance
with Nasdaq National Market listing requirements and delisting
actions by such market, and those discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Additional
Factors That May Affect Future Operating Results and
elsewhere in this report. Readers are cautioned not to place
undue reliance on these forward-looking statements. The
forward-looking statements speak only as of the date hereof. We
expressly disclaim any obligation to publicly release the
results of any revisions to these forward-looking statements to
reflect events or circumstances after the date of this
filing.


|                                         |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |      |     |   
|---------------------------------------- | -------------------------------------------------------- | ---------------------------------- | -------- | ------ | ------- | ---- | -------- | ---------------------- | ------- | - | ------- | ------ | ------ | - | ------- | ------- | -------- | - | ---- | ---- | --- | -- | ------ | ------- | ------- | - | --- | ---- | --- | --
|                                         |                                                          |                                    |          |        |         |      |          |                       
|                                         |                                                          |                                    |          |        |         |      |          | Change Over Prior Year
|                                         |                                                          |                                    |          |        |         |      |          |                       
|                                         |                                                          |                                    |          |        |         |     
|                                         |                                                          | Historical Amounts                 |          | 2002   |         | 2003
|                                         |                                                          |                                    |          |        |         |     
|                                         |                                                          | 2001                               |          | 2002   |         | 2003 |          | $                      |         | % |         | $      |        | %
|                                         |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |  
|                                         |                                                          |                                   
|                                         |                                                          | (In thousands, except percentages)
|Period Ended December 31,                |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|Net revenues                             |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|                                         | Software license                                         |                                    | $        | 30,960 |         |      | $        | 35,176                 |         |   | $       | 22,104 |        |   | $       | 4,216   |          |   |      | 14   | %   |    | $      | (13,072 | )       |   |     | (37  | )% 
|                                         | Hosted messaging                                         |                                    |          | 43,821 |         |      |          | 24,893                 |         |   |         | 19,444 |        |   |         | (18,928 | )        |   |      | (43  | )%  |    |        | (5,449  | )       |   |     | (22  | )% 
|                                         | Professional Services                                    |                                    |          | 12,573 |         |      |          | 11,593                 |         |   |         | 12,315 |        |   |         | (980    | )        |   |      | (8   | )%  |    |        | 722     |         |   |     | 6    | %  
|                                         | Maintenance and Support                                  |                                    |          | 16,819 |         |      |          | 15,471                 |         |   |         | 18,434 |        |   |         | (1,348  | )        |   |      | (8   | )%  |    |        | 2,963   |         |   |     | 19   | %  
|                                         |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|                                         |                                                          | Total net Revenues                 |          |        | 104,173 |      |          |                        | 87,133  |   |         |        | 72,297 |   |         |         | (17,040  | ) |      |      | (16 | )% |        |         | (14,836 | ) |     |      | (17 | )%
|                                         |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|Cost of net revenues                     |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|                                         | Software license                                         |                                    |          | 1,533  |         |      |          | 2,682                  |         |   |         | 4,068  |        |   |         | 1,149   |          |   |      | 75   | %   |    |        | 1,386   |         |   |     | 52   | %  
|                                         | Hosted messaging                                         |                                    |          | 59,124 |         |      |          | 29,303                 |         |   |         | 26,193 |        |   |         | (29,821 | )        |   |      | (50  | )%  |    |        | (3,110  | )       |   |     | (11  | )% 
|                                         | Professional Services                                    |                                    |          | 10,315 |         |      |          | 10,020                 |         |   |         | 12,203 |        |   |         | (295    | )        |   |      | (3   | )%  |    |        | 2,183   |         |   |     | 22   | %  
|                                         | Maintenance and Support                                  |                                    |          | 10,081 |         |      |          | 8,670                  |         |   |         | 5,803  |        |   |         | (1,411  | )        |   |      | (14  | )%  |    |        | (2,867  | )       |   |     | (33  | )% 
|                                         | Amortization of purchased Technology                     |                                    |          | 21,284 |         |      |          | 18,522                 |         |   |         |       |        |   |         | (2,762  | )        |   |      | (13  | )%  |    |        | (18,522 | )       |   |     | (100 | )% 
|                                         | Acquisition-related Retention bonuses                    |                                    |          |       |         |      |          |                       |         |   |         |       |        |   |         |        |          |   |      |     | %   |    |        |        |         |   |     |     | %  
|                                         | Stock-based expenses                                     |                                    |          | 4,050  |         |      |          | 1,225                  |         |   |         | 17     |        |   |         | (2,825  | )        |   |      | (70  | )%  |    |        | (1,208  | )       |   |     | (99  | )% 
|                                         | Impairment of long-lived assets                          |                                    |          | 16,654 |         |      |          |                       |         |   |         |       |        |   |         | (16,654 | )        |   |      | (100 | )%  |    |        |        |         |   |     |     | %  
|                                         |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|                                         |                                                          | Total cost of net revenues         |          |        | 123,041 |      |          |                        | 70,422  |   |         |        | 48,284 |   |         |         | (52,619  | ) |      |      | (43 | )% |        |         | (22,138 | ) |     |      | (31 | )%
|                                         |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|Gross profit (loss)                      |                                                          |                                    | (18,868  | )      |         |      | 16,711   |                        |         |   | 24,013  |        |        |   | 35,579  |         |          |   | 189  | %    |     |    | 7,302  |         |         |   | 44  | %   
|                                         |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|Operating expenses                       |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|                                         | Sales and marketing                                      |                                    |          | 53,356 |         |      |          | 43,604                 |         |   |         | 31,224 |        |   |         | (9,752  | )        |   |      | (18  | )%  |    |        | (12,380 | )       |   |     | (28  | )% 
|                                         | Research and Development                                 |                                    |          | 30,744 |         |      |          | 19,649                 |         |   |         | 19,047 |        |   |         | (11,095 | )        |   |      | (36  | )%  |    |        | (602    | )       |   |     | (3   | )% 
|                                         | General and administrative                               |                                    |          | 42,260 |         |      |          | 22,128                 |         |   |         | 12,603 |        |   |         | (20,132 | )        |   |      | (48  | )%  |    |        | (9,525  | )       |   |     | (43  | )% 
|                                         | Amortization of goodwill and other intangible
    assets |                                    |          | 32,746 |         |      |          | 24,773                 |         |   |         |       |        |   |         | (7,973  | )        |   |      | (24  | )%  |    |        | (24,773 | )       |   |     | (100 | )% 
|                                         | Acquisition-related retention bonuses                    |                                    |          | 1,381  |         |      |          | 11                     |         |   |         |       |        |   |         | (1,370  | )        |   |      | (99  | )%  |    |        | (11     | )       |   |     | (100 | )% 
|                                         | Stock-based expenses                                     |                                    |          | 34,085 |         |      |          | 8,772                  |         |   |         | 5,124  |        |   |         | (25,313 | )        |   |      | (74  | )%  |    |        | (3,648  | )       |   |     | (42  | )% 
|                                         | Restructuring and other Expenses                         |                                    |          | 18,267 |         |      |          | 3,168                  |         |   |         | 6,886  |        |   |         | (15,099 | )        |   |      | (83  | )%  |    |        | 3,718   |         |   |     | 117  | %  
|                                         | Impairment of long-lived assets                          |                                    |          | 9,991  |         |      |          |                       |         |   |         |       |        |   |         | (9,991  | )        |   |      | (100 | )%  |    |        |        |         |   |     |     | %  
|                                         |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|                                         |                                                          | Total operating Expenses           |          |        | 222,830 |      |          |                        | 122,105 |   |         |        | 74,884 |   |         |         | (100,725 | ) |      |      | (45 | )% |        |         | (47,221 | ) |     |      | (39 | )%
|                                         |                                                          |                                    |          |        |         |      |          |                        |         |   |         |        |        |   |         |         |          |   |      |      |     |    |        |         |         |   |     |     
|Loss from operations                     |                                                          |                                    | (241,698 | )      |         |      | (105,394 | )                      |         |   | (50,871 | )      |        |   | 136,304 |         |          |   | (56  | )%   |     |    | 54,523 |         |         |   | (52 | )%  
|Interest and other income (expense), net |                                                          |                                    | 5,840    |        |         |      | (5,852   | )                      |         |   | (7,619  | )      |        |   | (11,692 | )       |          |   | (200 | )%   |     |    | (1,767 | )       |         |   | 30  | %   

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|                                                              |  |                                    |         |      |  |      |          |                        |  |   |         |   |  |   |          |   |  |  |       |    |  |   |        |   |  |  |      |   
|------------------------------------------------------------- |  | ---------------------------------- | ------- | ---- |  | ---- | -------- | ---------------------- |  | - | ------- | - |  | - | -------- | - |  |  | ----- | -- |  | - | ------ | - |  |  | ---- | --
|                                                              |  |                                    |         |      |  |      |          |                       
|                                                              |  |                                    |         |      |  |      |          | Change Over Prior Year
|                                                              |  |                                    |         |      |  |      |          |                       
|                                                              |  |                                    |         |      |  |     
|                                                              |  | Historical Amounts                 |         | 2002 |  | 2003
|                                                              |  |                                    |         |      |  |     
|                                                              |  | 2001                               |         | 2002 |  | 2003 |          | $                      |  | % |         | $ |  | %
|                                                              |  |                                    |         |      |  |      |          |                        |  |   |         |   |  |  
|                                                              |  |                                   
|                                                              |  | (In thousands, except percentages)
|Interest expense                                              |  |                                    | (14,714 | )    |  |      | (2,748   | )                      |  |   | (3,336  | ) |  |   | 11,966   |   |  |  | (81   | )% |  |   | (588   | ) |  |  | 21   | % 
|Equity in net loss of joint venture                           |  |                                    | (1,866  | )    |  |      | (1,408   | )                      |  |   |        |   |  |   | 458      |   |  |  | (25   | )% |  |   | 1,408  |   |  |  | (100 | )%
|Loss on investments                                           |  |                                    | (702    | )    |  |      | (1,530   | )                      |  |   | 549     |   |  |   | (828     | ) |  |  | 118   | %  |  |   | 2,079  |   |  |  | (136 | )%
|Gain on retirement of convertible subordinated
    notes, net |  |                                    | 180,882 |      |  |      |         |                        |  |   |        |   |  |   | (180,882 | ) |  |  | (100  | )% |  |   |       |   |  |  |     | % 
|                                                              |  |                                    |         |      |  |      |          |                        |  |   |         |   |  |   |          |   |  |  |       |    |  |   |        |   |  |  |      |   
|Loss before income taxes                                      |  |                                    | (72,258 | )    |  |      | (116,932 | )                      |  |   | (61,277 | ) |  |   | (44,674  | ) |  |  | 62    | %  |  |   | 55,655 |   |  |  | 48   | % 
|Provision for income taxes                                    |  |                                    | (7,206  | )    |  |      | (979     | )                      |  |   | (856    | ) |  |   | 6,227    |   |  |  | (86   | )% |  |   | 123    |   |  |  | (13  | )%
|                                                              |  |                                    |         |      |  |      |          |                        |  |   |         |   |  |   |          |   |  |  |       |    |  |   |        |   |  |  |      |   
|Net loss                                                      |  | $                                  | (79,464 | )    |  | $    | (117,911 | )                      |  | $ | (62,133 | ) |  |   | (38,447  | ) |  |  | 48    | %  |  |   | 55,778 |   |  |  | 47   | % 
|Accretion on mandatorily redeemable preferred
    stock       |  |                                    | (356    | )    |  |      | (13,904  | )                      |  |   | (12,446 | ) |  |   | (13,548  | ) |  |  | 3,806 | %  |  |   | 1,458  |   |  |  | 10   | % 
|                                                              |  |                                    |         |      |  |      |          |                        |  |   |         |   |  |   |          |   |  |  |       |    |  |   |        |   |  |  |      |   
|Net loss attributable to common shares                        |  | $                                  | (79,820 | )    |  | $    | (131,815 | )                      |  | $ | (74,579 | ) |  | $ | (51,995  | ) |  |  | 65    | %  |  | $ | 57,236 |   |  |  | (43  | )%
|                                                              |  |                                    |         |      |  |      |          |                        |  |   |         |   |  |   |          |   |  |  |       |    |  |   |        |   |  |  |      |   

Overview

Our business.We
deliver digital communications software and services that enable
enterprises, government agencies, wireless carriers, and
Internet and wireline service providers to rapidly deploy highly
scalable solutions for messaging and identity management. Built
upon an open, extensible software platform, these solutions help
organizations expand the range of digital communications
services they provide, while helping to reduce overall costs.
Our messaging solutions, available both as licensed software and
as hosted services, provide integrated access to a broad range
of communication and collaboration applications from wireless
devices, web browsers, desktop clients, and voice systems. This
integration can provide new revenue opportunities for carriers
and service providers and enables them to attract new
subscribers, drive more usage, and retain subscribers longer.
For enterprises and governments, our solutions are designed to
reduce burdens on helpdesks, simplify the deployment of key
security infrastructure, enable easier compliance with new
regulatory mandates, and help reduce the cost and effort of
deploying modern messaging services to distributed
organizations, mobile users, deskless workers, suppliers and
customers.

Critical Path generates revenues from four
primary sources:

Licenses for use of our software
products.Our various messaging
applications are typically licensed by telecommunications
carriers, postal and government agencies, and some highly
distributed enterprises for deployment in their data centers.
Such licenses are usually sold as a perpetual license on a
per-user basis, one for each person who might access the
capabilities provided by the software. Our identity management
software is typically licensed by large enterprises, government
agencies, and telecommunications carriers and is deployed on
site in their data centers. Our identity management software is
usually sold as a perpetual license according to the number of
data elements and different business systems being managed; our
layered applications are usually licensed per user.

Annual support and maintenance subscriptions
for our licensed software.We offer a
variety of 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 an annual basis.

Hosted service subscriptions for access to our
messaging and other digital communications
applications.We offer access to
email, personal information management, resource scheduling, and
newsgroup over the Internet and wireless networks
for enterprises, telecommunications operators, and, for certain
services, consumers. The software powering these services runs
in data centers that we jointly operate with the Hewlett-Packard
Company; unlike with licensed software, customers of these
services do not need to install or maintain

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their own copies of the software. Instead,
customers pay initial setup fees and regular monthly, quarterly
or annual subscriptions for the services they would like to be
able to access.


Consulting, training, and 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 customers can use to
supplement their own resources.

We generate most of our revenues from
telecommunications operators and from large enterprises.
Wireless carriers, internet service providers and fixed-line
service providers purchase our products and services primarily
when they are looking to offer new services to their
subscribers. While they 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.



| |                          
| | -------------------------
| | Restructuring initiatives

Since our inception, we have incurred significant
losses, and as of December 31, 2003, we had an accumulated
deficit of approximately $2.2 billion, inclusive of a
$1.3 billion charge for impairment of long-lived assets
recorded in the fourth quarter of 2000. We intend to continue to
invest in sales and marketing, development of our technology and
solution offerings, and related enhancements. We may continue to
incur operating losses. See the further discussion on our
financial position in the Liquidity and Capital Resources
section of Management Discussion and Analysis of Financial
Condition and Results of Operations.

During 2001 we evaluated our various products,
services, facilities and the business plan under which we were
operating. In connection with this review, we implemented and
substantially completed a strategic restructuring plan that
involved reorganizing and refocusing Critical Paths
product and service offerings, a reduction in workforce and a
facilities and operations consolidation. Additionally, we
implemented an aggressive expense management plan to further
reduce operating costs. At the end of 2001, we had divested all
of the products and services deemed to be non-core to our
continued operations, reduced headcount by 44%, reduced the
number of facilities by 65% and implemented other cost cutting
measures, resulting in a significant reduction in overall
operating expenses.

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

In January 2003, we announced a restructuring
initiative designed to further reduce our expense levels in an
effort to achieve operating profitability assuming no or
moderate revenue growth. The plan included the consolidation of
some office locations and a global workforce reduction of
approximately 175 positions, or approximately 30% of the
workforce. The headcount reduction was partially offset by
outsourcing approximately 75 positions to lower cost service
providers. We incurred aggregate charges of approximately
$8.0 million resulting from the cost reduction plan,
inclusive of $7.0 million in cash and $1.0 million in
non-cash expenses.

In November 2003, we announced a restructuring of
certain of our facility lease obligations in an effort to reduce
our long-term cash obligations. In addition, we identified an
additional 16 positions, primarily held by management-level
employees, which were to be eliminated. Costs totaling
$1.9 million were recognized during the fourth quarter of
2003 associated with these initiatives, including
$1.4 million in lease restructuring and termination costs
and $0.5 million in severance and related headcount
reduction costs. During the fourth quarter of 2003, cash
payments totaling $1.3 million were made associated with
the facility restructuring activities and $0.4 million
related to the headcount reductions.

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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 in 2004,
while maintaining strong service levels to our customers.

In recent months, management has focused on
capital financing initiatives in order to maintain our current
and planned operations. Our history of losses from operations
and cash flow deficits, in combination with our cash balances,
raised concerns about our short-term ability to fund operations
from our existing cash at the time. Consequently, we have
secured additional funds through several rounds of financing
that involved the sale of senior secured notes convertible into
a new series of preferred stock, subject to the approval of our
shareholders. See Liquidity and Capital
Resources  Recent Financing Transactions below.
Owing to the financing activities we undertook in the fourth
quarter of 2003 and first quarter of 2004, management believes
that our cash, cash equivalents and available line of credit as
of the date of this filing will be sufficient to maintain
current and planned operations for at least the next twelve
months.

In view of the rapidly evolving nature of our
business, organizational restructuring and limited operating
history, we believe that period-to-period comparisons of
revenues and operating results, including gross profit margin
and operating expenses as a percentage of total net revenues,
are not meaningful and should not be relied upon as indications
of future performance. At December 31, 2003, we had 418
employees, as compared to 577 employees at December 31,
2002 and 562 employees at December 31, 2001. We do not
believe that our historical trends for revenues, expenses or
personnel are indicative of future results.

Critical Accounting Policies, Judgments and
Estimates

The following discussion and analysis of our
financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and
liabilities at the date of our financial statements. Actual
results may differ from these estimates under different
assumptions or conditions.

Our significant accounting policies are described
in Note 1 to the consolidated financial statements as of
and for the year ended December 31, 2003. We believe our
most critical accounting policies and estimates include the
following:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | Revenue recognition;                                                                 
|
| |  | Valuation and impairment of long-lived assets and
    identifiable intangible assets;
|
| |  | Estimating allowance for doubtful accounts and
    contingencies; and                
|
| |  | Stock-based compensation.                                                            



| |                    
| | -------------------
| | Revenue recognition

Our revenues are derived from four primary
sources: software license sales, professional services,
maintenance and support and hosted messaging services. Revenues
are recognized once the related products or services have been
delivered and collection of associated fees is considered
probable.

Software license revenues are generated from the
sale of our messaging and identity management products under
perpetual and term licenses. Software license revenues are
recognized when persuasive evidence of an arrangement exists,
delivery of the licensed software to the customer has occurred
and the collection of a fixed or determinable license fee is
considered probable. Our revenue recognition policies require
that revenues recognized from software arrangements be allocated
to each undelivered element of the arrangement based on the fair
values of the elements, such as post contract customer support,
installation, training or other services. Professional service
revenues are generated from fees primarily related to training,
installation and configuration services associated with
implementing and maintaining our license software products for
our customers. Professional service revenues are recognized in
the period in which the services are performed. Maintenance and
support service revenues are generated from fees for
post-contract customer

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support agreements associated primarily with our
software license products. Maintenance services typically
include rights to future update and upgrade product releases and
dial-up phone services and the associated fees are typically
paid up-front by the customer, deferred and recognized ratably
over the term of the support contract, which is generally one
year.


We also enter into arrangements that include
multiple products and services where the services are deemed
essential to the functionality of a delivered element, under
such circumstances we recognize the entire arrangement fee using
the percentage of completion method. Under this method,
individual contract revenues are recorded based on the
percentage relationship of the contract costs incurred as
compared to managements estimate of the total cost to
complete the contract.

We also sell our license software products
through resellers. Revenues from reseller agreements may include
a nonrefundable, advance royalty which is payable upon the
signing of the contract and license fees based on the contracted
value of our products purchased by the reseller. Additionally,
revenues from reseller agreements may include nonrefundable fees
related to software license products and related services for an
identified customer of the reseller. Guaranteed license fees
from resellers, where no right of return exists, are recognized
when persuasive evidence of an arrangement exists, delivery of
the licensed software has occurred and the collection of a fixed
or determinable license fee is considered probable.
Non-guaranteed per-copy license fees from resellers are
initially deferred and are recognized when they are reported as
sold to end-users by the reseller.

Hosted messaging revenues are generated from fees
for hosting services we offer related to our messaging and
collaboration solutions, including but not limited to email,
calendar, reserve and news groups. These are primarily based
upon monthly contractual per unit rates for the services
involved, which are recognized on a monthly basis over the term
of the contract beginning with the month in which service
delivery starts. Amounts billed or received in advance of
service delivery, including branding and set-up fees, are
initially deferred and subsequently recognized on a ratable
basis over the expected term of the relationship beginning with
the month in which service delivery starts.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Valuation and impairment of long-lived assets
    and identifiable intangible assets

Finite-lived intangible assets are presented at
cost, net of accumulated amortization. Amortization is
calculated using the straight-line method over estimated useful
lives of the assets, which has historically been between 3 and
5 years. We will record an impairment charge on
finite-lived intangibles or long-lived assets when it determines
that the carrying value of intangibles and long-lived assets may
not be recoverable. Factors considered important which could
trigger an impairment, include, but are not limited to:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | significant under performance relative to
    expected historical or projected future operating results;         
|
| |  | significant changes in the manner of our use of
    the acquired assets or the strategy for our overall business;
|
| |  | significant negative industry or economic trends;                                                                
|
| |  | significant decline in our stock price for a
    sustained period; and                                           
|
| |  | our market capitalization relative to net book
    value.                                                        

Based upon the existence of one or more of the
above indicators of impairment, we measure any impairment based
on a projected discounted cash flow method using a discount rate
determined by our management to be commensurate with the risk
inherent in our current business model.

In April 2001, we announced a restructuring plan
that involved reorganizing our product and service offerings,
including eliminating various product and service lines
associated with the following acquisitions: dotOne, Fabrik
(Connect Service), FaxNet, and Netmosphere. As a result of the
restructuring, we abandoned all of the technology associated
with the products and services and terminated all employees
originally acquired from dotOne, Fabrik, FaxNet and Netmosphere.
As a result, we determined that an impairment analysis was
required during the second quarter of 2001.

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We believed that the termination of the product
and service lines indicated that the carrying amount of
long-lived assets may not be recoverable and therefore an
impairment review was required under SFAS No. 121.
When it was determined the carrying value of intangible assets
may not be recoverable, we measured any impairment based on a
projected discounted cash flow method using a discount rate
commensurate with the risk inherent in the current business
model. As no future revenues were to be recognized from the
product and service lines that were eliminated, which
represented separate asset groupings under
SFAS No. 121, all of the remaining intangible assets
associated with the product and service lines were written off
in their entirety. As a result of the assessment, we recorded a
$14.2 million impairment charge in the second quarter of
2001.

In the fourth quarter of 2001, as a result of our
consolidation of our facilities and asset base related to our
previous restructurings, we performed an assessment of our
property and equipment balances that related to our existing
hosted messaging business line. As a result of this assessment,
we specifically identified assets that it determined were not
going to be utilized in the ongoing business and took an
impairment charge related to these assets. As a result of this
assessment, we recorded an additional impairment charge of
$12.4 million in the fourth quarter of 2001.

We classified the impairment of existing
technology and property and equipment to cost of net revenues,
and the impairment of goodwill and other intangible assets as
other operating expense. The impairment charges were allocated
to these classifications to conform to the classifications of
the amortization charges associated with these assets. The
amortization and impairment charges relating to existing
technology and the impaired property and equipment were charged
to cost of net revenues as we believe these were the only costs
that were directly related to the generation of our revenues.



| |                                                                 
| | ----------------------------------------------------------------
| | Estimating allowance for doubtful accounts and
    contingencies

The preparation of financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and contingencies at
the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. For this
reason, actual results could differ from those estimates.
Management must make estimates surrounding their ability to
collect revenues and related accounts receivable. Management
specifically analyzes accounts receivable, historical and
current economic trends, previous bad debts, customer
concentrations, credit worthiness of customers, and payment
terms of customer accounts, when evaluating adequacy of the
allowance for doubtful accounts.

Management estimates liabilities and
contingencies at the end of each period. The current financial
statement presentation reflects managements best estimates
of liabilities and pending litigation which are probable and
where the amount and range of loss can be estimated. We record
the minimum liability related to those claims where there is a
range of loss. Because of the uncertainties related to the
probability of loss and the amount and range of loss on the
pending litigation, management may not be able to make an
accurate estimate of the liability that could result from an
unfavorable outcome. As additional information becomes
available, we will continue to assess the potential exposure
related to our pending litigation and update our estimates and
related disclosures. Such future revisions in our estimates
could materially impact our financial results.



| |                         
| | ------------------------
| | Stock-based compensation

Our stock-based employee compensation plans are
described more fully in Note 16 of Notes to Consolidated
Financial Statements  Shareholders Equity (Deficit).
We account for those plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion
No. 25 and related interpretations. Stock-based employee
compensation cost is reflected in net loss, as some options
granted under those plans had an exercise price less than the
fair value of the underlying common stock on the date of grant.

We amortize stock-based compensation using the
straight-line method over the remaining vesting periods of the
related options, which is generally four years. Pro forma
information regarding net loss and net loss per share is
required. This information is required to be determined as if we
had accounted for employee stock

33



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options under the fair value method of Statement
of Financial Accounting Standards (SFAS)
No. 123, as amended by SFAS No. 148.


The fair value of options and shares issued
pursuant to the option plans at the grant date were estimated
using the Black-Scholes model. The Black-Scholes option-pricing
model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the
input of highly subjective assumptions including the expected
stock price volatility. We use projected volatility rates, which
are based upon historical volatility rates trended into future
years. Because our employee stock options have characteristics
significantly different from those of traded options, and
because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of our options.

The following table illustrates the effect on net
loss and net loss per share if we had applied the fair value
recognition provisions of SFAS No. 123, to stock-based
employee compensation.

|                                                                                     |                                                                                                                                               |                                          |         |         |   |      |          |         |   |   |          |         |  
|------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------- | ------- | - | ---- | -------- | ------- | - | - | -------- | ------- | -
|                                                                                     |                                                                                                                                               |                                         
|                                                                                     |                                                                                                                                               | Year Ended December 31,                 
|                                                                                     |                                                                                                                                               |                                         
|                                                                                     |                                                                                                                                               | 2001                                     |         | 2002    |   | 2003
|                                                                                     |                                                                                                                                               |                                          |         |         |   |     
|                                                                                     |                                                                                                                                               |                                         
|                                                                                     |                                                                                                                                               | (In thousands, except per share amounts)
|Net loss attributable to common shares  as
    Reported                             |                                                                                                                                               | $                                        | (79,820 | )       |   | $    | (131,815 | )       |   | $ | (74,579  | )      
|Add:                                                                                 |                                                                                                                                               |                                          |         |         |   |      |          |         |   |   |          |        
|                                                                                     | Unearned stock-based employee compensation
    expense included in reported net loss attributable to common
    shares                        |                                          |         | 38,165  |   |      |          | 9,997   |   |   |          | 59      |  
|Deduct                                                                               |                                                                                                                                               |                                          |         |         |   |      |          |         |   |   |          |        
|                                                                                     | Total stock-based employee compensation expense
    determined under a fair value based method for all grants, net
    of related tax effects |                                          |         | (23,901 | ) |      |          | (68,658 | ) |   |          | (26,696 | )
|                                                                                     |                                                                                                                                               |                                          |         |         |   |      |          |         |   |   |          |        
|Net loss attributable to common shares  pro
    forma                               |                                                                                                                                               | $                                        | (65,556 | )       |   | $    | (190,476 | )       |   | $ | (101,216 | )      
|                                                                                     |                                                                                                                                               |                                          |         |         |   |      |          |         |   |   |          |        
|Basic and diluted net loss per share attributable
    to common shares  as reported |                                                                                                                                               | $                                        | (4.32   | )       |   | $    | (6.78    | )       |   | $ | (3.73    | )      
|                                                                                     |                                                                                                                                               |                                          |         |         |   |      |          |         |   |   |          |        
|Basic and diluted net loss per share attributable
    to common shares  pro forma   |                                                                                                                                               | $                                        | (3.54   | )       |   | $    | (9.80    | )       |   | $ | (5.06    | )      
|                                                                                     |                                                                                                                                               |                                          |         |         |   |      |          |         |   |   |          |        

The effects of applying pro forma disclosures of
net loss and net loss per share are not likely to be
representative of the pro forma effects on net loss and net loss
per share in the future years, as the number of future shares to
be issued under these plans is not known and the assumptions
used to determine the fair value can vary significantly.

Results of Operations

The following table presents our net revenues and
selected cost of net revenues data during 2001, 2002 and 2003
and the relative composition of net revenues and the selected
cost of net revenues data as a percentage of net revenues during
2001, 2002 and 2003.

|                        |                         |                                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |    |  
|----------------------- | ----------------------- | ---------------------------------- | - | ------------------- |  | ---- | - | ------ |  | ---- | - | ------ |  |  |  | -- | - |  |  | -- | - |  |  | -- | -
|                        |                         |                                    |   |                     |  |      |   |       
|                        |                         |                                    |   | Percentage of Total
|                        |                         | Historical Amounts                 |   | Net Revenues       
|                        |                         |                                    |   |                    
|                        |                         | 2001                               |   | 2002                |  | 2003 |   | 2001   |  | 2002 |   | 2003  
|                        |                         |                                    |   |                     |  |      |   |        |  |      |   |       
|                        |                         |                                   
|                        |                         | (In thousands, except percentages)
|Year Ended December 31, |                         |                                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |   
|Net revenues            |                         |                                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |   
|                        | Software license        |                                    | $ | 30,960              |  |      | $ | 35,176 |  |      | $ | 22,104 |  |  |  | 30 | % |  |  | 40 | % |  |  | 31 | %
|                        | Hosted messaging        |                                    |   | 43,821              |  |      |   | 24,893 |  |      |   | 19,444 |  |  |  | 42 |   |  |  | 29 |   |  |  | 27 |  
|                        | Professional services   |                                    |   | 12,573              |  |      |   | 11,593 |  |      |   | 12,315 |  |  |  | 12 |   |  |  | 13 |   |  |  | 17 |  
|                        | Maintenance and support |                                    |   | 16,819              |  |      |   | 15,471 |  |      |   | 18,434 |  |  |  | 16 |   |  |  | 18 |   |  |  | 25 |  

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|                              |                         |  |   |        |  |  |   |                      |  |  |   |        |  |  |  |     |   |  |  |     |   |  |  |     |  
|----------------------------- | ----------------------- |  | - | ------ |  |  | - | -------------------- |  |  | - | ------ |  |  |  | --- | - |  |  | --- | - |  |  | --- | -
|                              |                         |  |   |        |  |  |   |                     
|                              |                         |  |   |        |  |  |   | Percentage of       
|                              |                         |  |   |        |  |  |   | Related Net Revenues
|                              |                         |  |   |        |  |  |   |                     
|Selected cost of net revenues |                         |  |   |        |  |  |   |                      |  |  |   |        |  |  |  |     |   |  |  |     |   |  |  |    
|                              | Software license        |  | $ | 1,533  |  |  | $ | 2,682                |  |  | $ | 4,068  |  |  |  | 5   | % |  |  | 8   | % |  |  | 18  | %
|                              | Hosted messaging        |  |   | 59,124 |  |  |   | 29,303               |  |  |   | 26,193 |  |  |  | 135 |   |  |  | 118 |   |  |  | 135 |  
|                              | Professional services   |  |   | 10,315 |  |  |   | 10,020               |  |  |   | 12,203 |  |  |  | 82  |   |  |  | 86  |   |  |  | 99  |  
|                              | Maintenance and support |  |   | 10,081 |  |  |   | 8,670                |  |  |   | 5,803  |  |  |  | 60  |   |  |  | 56  |   |  |  | 31  |  

Net Revenues




Software License.We
recognized $22.1 million in software license revenues
during 2003, as compared to $35.2 million in 2002 and
$31.0 million in 2001. Software license revenues in 2003
decreased $13.1 million from 2002 due primarily to the
closing of fewer transactions with customers in 2003 as compared
to 2002. This reduction in transactions was due mainly to
restructuring initiatives undertaken in early 2003 which
resulted in fewer sales executives and employees in the field
(as discussed above in Overview  Restructuring
initiatives), weak economic conditions globally and
continued economic uncertainty in the United States as a result
of turmoil and war in the Middle East and the continuing threat
of terrorist activities, which continued to delay customer
information technology spending, particularly in the
telecommunications industry, which represented 53% of our
revenues from our top 10 customers for the year ended
December 31, 2003.







Software license revenues in 2002 increased
$4.2 million from 2001 due primarily to renewed customer
confidence in Critical Path and an expansion in our license
product offerings. Uncertainty surrounding our prospects and
viability in the first half of 2001 caused a number of existing
and potential customers to delay purchasing decisions. This
uncertainty stemmed from our revision of publicly announced
financial results for the fourth quarter of 2000 and our
restatement of financial results for the third quarter of 2000,
which resulted in the termination and resignation of much of the
leadership in our sales organization and significant turnover
within our senior management group during the first half of
2001. During the second half of 2001 and first half of 2002, we
restructured our business and reorganized our management team,
which we believe resulted in increased customer confidence. In
late 2001 and throughout 2002, we expanded our product offerings
from Email server and Short Message Service (SMS) access
server products to include a number of new products and product
enhancements, including: a new email interface we call
Presentation Server; a Personal Address Book server for
management of contact data and synchronization of the data to
the computer desktop and other devices; a Notification server
providing messaging alerts based on the users personal
profile; a Calendar Server for management of personal
information, events and tasks; and an enhanced Systems Console
for improved management and monitoring of the overall messaging
platform. This increase caused by renewed customer confidence
and expansion of our license product offerings was partially
offset by our elimination of certain non-core software license
products and services during the second half of 2001 as part of
our 2001 restructuring initiatives. We recognized no software
license revenues related to non-core products and services in
2002 and 2003, as compared to approximately $2.5 million in
2001. Excluding related non-core products and services, software
license revenues were $22.1 million in 2003,
$35.2 million in 2002 and $28.5 million in 2001.







Hosted Messaging.We
recognized $19.4 million in hosted messaging revenues
during 2003, as compared to $24.9 million in 2002 and
$43.8 million in 2001. Hosted messaging revenues in 2003
decreased $5.4 million from 2002 due primarily to a net
loss in customers resulting in part from the delayed release of
our new hosted message platform and reduced volume from existing
customers. Hosted messaging revenues in 2002 decreased
$18.9 million from 2001 due primarily to our elimination of
certain non-core hosted messaging products and services in the
second half of 2001 as part of our 2001 restructuring
initiatives. In addition, during 2002, we experienced a net loss
in customers and reduced volume from existing customers, which
also contributed to the decline in hosted messaging revenues in
2002. We recognized no hosted messaging revenues related to
non-core products and services in 2002 and 2003, as compared to
approximately $13.6 million in 2001. Excluding related
non-core products and services, hosted messaging revenues were
$19.4 million in 2003, $24.9 million in 2002 and
$30.2 million in 2001.




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Professional
Services.We recognized
$12.3 million in professional services revenues during
2003, as compared to $11.6 million in 2002 and
$12.6 million in 2001. Professional services revenues in
2003 increased $722,000 from 2002 due primarily to improved
utilization of existing internal professional services resources
and additional projects associated with software license sales.
Professional services revenues in 2002 decreased $980,000 from
2001 due primarily to our elimination of certain non-core
products and services in the second half of 2001 as part of our
2001 restructuring initiatives. We recognized no professional
services revenues related to non-core products and services in
2002 and 2003, as compared to approximately $1.7 million in
2001. Excluding related non-core products and services,
professional services revenues were $12.3 million in 2003,
$11.6 million in 2002 and $10.9 million in 2001.







Maintenance and
Support.We recognized
$18.4 million in maintenance and support revenues during
2003, as compared to $15.5 million in 2002 and
$16.8 million in 2001. Maintenance and support revenues in
2003 increased $3.0 million from 2002 due primarily to
renewals of existing maintenance and support agreements and
increased revenues from maintenance and support agreements with
new and existing customers who were purchasing new software
licenses. Maintenance and support revenues in 2002 decreased
$1.3 million from 2001 due primarily to our elimination of
certain non-core products and services in the second half of
2001 as part of our 2001 restructuring initiatives. We
recognized no maintenance and support revenues related to
non-core products and services in 2002 and 2003, as compared to
approximately $3.8 million in 2001. Excluding related
non-core products and services, maintenance and support revenues
were $18.4 million in 2003, $15.5 million in 2002 and
$13.0 million in 2001.







Our international operations accounted for
approximately 62% of net revenues in 2003, 54% in 2002 and 40%
in 2001. The significant year over year increases in
international revenues as a percentage of total revenues reflect
continued strength in our European markets relative to a decline
in revenues in our United States market.






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

Software License.Cost of net software license revenues consists primarily of
product media duplication, manuals and packaging materials,
personnel and facility costs and third-party royalties. Software
license costs were $4.1 million in 2003, as compared to
$2.7 million in 2002 and $1.5 million in 2001.
Software license costs in 2003 increased by $1.4 million
from 2002 due primarily to an increase in third party costs
associated with certain license transactions that required us to
purchase third party technology to integrate with our offering.
Software license costs in 2002 increased by $1.2 million
from 2001 due primarily to an increase in software license
revenues over the same period and, to a lesser extent, an
increase in third party costs.

Hosted Messaging.Cost of net hosted messaging revenues consists primarily of
costs incurred in the delivery and support of messaging
services, including depreciation of capital equipment used in
network infrastructure, amortization of purchased
technology, Internet connection charges, accretion of
acquisition-related retention bonuses, personnel costs incurred
in operations, and other direct and allocated indirect costs.
Hosted messaging costs were $26.2 million in 2003, as
compared to $29.3 million in 2002 and $59.1 million in
2001. Hosted messaging costs in 2003 decreased by
$3.1 million from 2002 due primarily to cost savings
generated through our 2002 and 2003 restructuring initiatives,
including the reduction in employees and related overhead and
personnel costs of $859,000, the cancellation of certain outside
consulting arrangements of $960,000, the sale or exit of several
non-core services, the retirement of surplus network
infrastructure equipment and software and the consolidation of
data centers. Hosted messaging costs in 2002 decreased by
$29.8 million from 2001 due primarily to cost savings
generated through our 2001 and 2002 restructuring initiatives,
including the reduction in employees and related overhead and
personnel costs of $3.5 million, the cancellation of
certain outside consulting arrangements of $2.4 million,
the sale or exit of several non-core services, the retirement of
surplus network infrastructure equipment and software and the
consolidation of data centers of $13.1 million.
Depreciation expense related to cost of net hosted messaging
revenues totaled $26.3 million, $15.3 million and
$9.4 million during 2001, 2002 and 2003, respectively.

Professional
Services.Cost of professional
services revenues consists primarily of personnel costs
including custom engineering, installation and training services
for our licensed solutions, and other direct and

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allocated indirect costs. Professional services
costs were $12.2 million in 2003, as compared to
$10.0 million in 2002 and $10.3 million in 2001.
Professional services costs in 2003 increased by
$2.2 million from 2002 due primarily to $2.3 million
in incremental consulting and personnel costs associated with a
major European services project partially offset by cost savings
generated through our 2002 and 2003 restructuring initiatives,
including the termination of employees and the reduction in
related overhead and personnel costs. Professional services
costs in 2002 decreased by $0.3 million from 2001, due
primarily to cost savings generated through our 2001 and 2002
restructuring initiatives.


Maintenance and
Support.Cost of maintenance and
support revenues consists primarily of personnel costs related
to the customer support functions for both hosted and licensed
solutions, and other direct and allocated indirect costs.
Maintenance and support costs were $5.8 million in 2003, as
compared to $8.7 million in 2002 and $10.1 million in
2001. Maintenance and support costs in 2003 decreased by
$2.9 million from 2002 due primarily to cost savings
generated through our 2002 and 2003 restructuring initiatives,
including the termination of employees and the reduction in
related overhead and personnel costs. Maintenance and support
costs in 2002 decreased by $1.4 million from 2001 due
primarily to cost savings generated through our 2001 and 2002
restructuring initiatives.

Operations, customer support and professional
services headcount totaled 130 employees at
December 31, 2003, 182 employees at December 31,
2002 and 192 employees at December 31, 2001. Headcount
decreased year over year as a result of our 2001, 2002 and 2003
strategic restructuring initiatives.

The following table presents selected operating
expenses of Critical Path during 2001, 2002 and 2003.

|                            |                            |                                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |    |  
|--------------------------- | -------------------------- | ---------------------------------- | - | ------------------- |  | ---- | - | ------ |  | ---- | - | ------ |  |  |  | -- | - |  |  | -- | - |  |  | -- | -
|                            |                            |                                    |   |                     |  |      |   |       
|                            |                            |                                    |   | Percentage of Total
|                            |                            | Historical Amounts                 |   | Net Revenues       
|                            |                            |                                    |   |                    
|                            |                            | 2001                               |   | 2002                |  | 2003 |   | 2001   |  | 2002 |   | 2003  
|                            |                            |                                    |   |                     |  |      |   |        |  |      |   |       
|                            |                            |                                   
|                            |                            | (In thousands, except percentages)
|Year Ended December 31,     |                            |                                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |   
|Selected operating expenses |                            |                                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |   
|                            | Sales and marketing        |                                    | $ | 53,356              |  |      | $ | 43,604 |  |      | $ | 31,224 |  |  |  | 51 | % |  |  | 50 | % |  |  | 43 | %
|                            | Research and development   |                                    |   | 30,744              |  |      |   | 19,649 |  |      |   | 19,047 |  |  |  | 30 |   |  |  | 23 |   |  |  | 26 |  
|                            | General and administrative |                                    |   | 42,260              |  |      |   | 22,128 |  |      |   | 12,603 |  |  |  | 41 |   |  |  | 25 |   |  |  | 17 |  

Operating Expenses

Sales and Marketing.Sales and marketing expenses consist primarily of compensation
for sales and marketing personnel, advertising, public
relations, other promotional costs, and, to a lesser extent,
related overhead. Sales and marketing expenses were
$31.2 million in 2003, as compared to $43.6 million in
2002 and $53.4 million in 2001. Sales and marketing
expenses in 2003 decreased by $12.4 million from 2002 due
primarily to cost savings generated through our 2002 and 2003
restructuring initiatives, including the termination of
employees and reduction in related overhead and personnel costs
of approximately $7.0 million, the reduction in certain
marketing program costs of approximately $2.3 million, and
savings related to facilities consolidation of
$3.2 million. Sales and marketing expenses in 2002
decreased by $9.8 million from 2001 due primarily to cost
savings generated through our 2001 and 2002 restructuring
initiatives, including the termination of employees and
reduction in related overhead and personnel costs of
approximately $5.4 million, the reduction in certain
marketing program costs of approximately $2.8 million, and
the consolidation of facilities of $2.6 million. These cost
savings were partially offset by an increase in outside expenses
of approximately $921,000. Sales and marketing headcount totaled
92 at December 31, 2003, 144 at December 31, 2002 and
131 at December 31, 2001. Sales and marketing headcount
decreased by 52 employees in 2003 as a result of our 2002
and 2003 restructuring initiatives and increased in 2002 by 13
employees as a result of the reorganization of our sales force.

Research and
Development.Research and development
expenses consist primarily of compensation for technical staff,
payments to outside contractors, depreciation of capital
equipment associated with research and development activities,
and, to a lesser extent, related overhead. Research and
development expenses were $19.0 million in 2003, as
compared to $19.6 million in 2002 and $30.7 million in
2001. Research and

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development expenses in 2003 decreased by
$602,000 from 2002 due primarily to cost savings generated
through our 2002 and 2003 restructuring initiatives, including
the termination of employees and the reduction in related
overhead and personnel costs of approximately $1.2 million
and the consolidation of facilities of $1.0 million. These
cost savings were partially offset by an increase in outside
consulting expenses of approximately $595,000. Research and
development expenses in 2002 decreased by $11.1 million
from 2001 due primarily to cost savings generated through our
2001 and 2002 restructuring initiatives, including the
termination of employees and the reduction in related overhead
and personnel costs of approximately $5.3 million, the
cancellation of certain outside consulting arrangements of
$1.5 million, and savings of $4.6 million related to
the consolidation of facilities. Research and development
headcount totaled 132 at December 31, 2003, 163 at
December 31, 2002 and 148 at December 31, 2001.
Research and development headcount decreased by
31 employees in 2003 as a result of our 2002 and 2003
restructuring initiatives and increased by 15 employees in
2002 as a result of the reorganization of our engineering team.


General and
Administrative.General and
administrative expenses consist primarily of compensation for
personnel, fees for outside professional services, occupancy
costs and, to a lesser extent, related overhead. General and
administrative expenses were $12.6 million in 2003, as
compared to $22.1 million in 2002 and $42.3 million in
2001. General and administrative expenses in 2003 decreased by
$9.5 million from 2002 due primarily to cost savings
generated through our 2002 and 2003 restructuring initiatives,
including the termination of employees and the reduction in
related overhead and personnel costs of approximately
$2.9 million, the reduction in outside legal and litigation
fees of $1.9 million, the reduction in bad debt expenses of
$952,000, the reduction in consulting expenses of
$2.1 million, and a reduction in accounting and audit fees
of $179,000. General and administrative expenses in 2002
decreased by $20.1 million from 2001 due primarily to cost
savings generated though our 2001 and 2002 restructuring
initiatives, including the termination of employees and the
reduction in related overhead and personnel costs of
approximately $3.5 million, the reduction in outside legal
and litigation fees of $6.7 million, the reduction in bad
debt expenses of $4.3 million, the reduction in consulting
expenses of $2.0 million, and the reduction in accounting
and audit fees of $946,000. General and administrative headcount
totaled 64 at December 31, 2003, 88 at December 31,
2002, and 91 at December 31, 2001. General and
administrative headcount decreased by 24 employees in 2003
as a result of our 2002 and 2003 restructuring initiatives and
decreased in 2002 by 3 employees as a result of our 2001
and 2002 restructuring initiatives.



| |                                          
| | -----------------------------------------
| | Goodwill and Other Intangibles
    Assets

Amortization of
Goodwill.In connection with our
acquisitions completed in 1999, 2000 and 2002, all of which were
accounted for using the purchase method of accounting, we
recorded goodwill and other intangible assets associated with
assembled workforce, customer base, and existing technology.
During 2001 we recorded goodwill amortization of $643,000. In
July 2001, the Financial Accounting Standards Board issued
SFAS No. 142, Goodwill and Other Intangible Assets,
which was effective for fiscal years beginning after
December 15, 2001. SFAS No. 142 required, among
other things, the discontinuance of goodwill amortization and
the reclassification of certain existing recognized intangibles
as goodwill. In connection with the adoption of
SFAS No. 142, in January 2002, we reclassified certain
intangible assets and related amortization associated with
assembled workforce to goodwill and ceased any future
amortization of goodwill. Amortization expenses related to these
assets totaled $4.7 million during 2001 and were included
in amortization of goodwill and other intangible assets. There
was no amortization expense recorded in 2002 or 2003. See also
Note 8 of Notes to Consolidated Financial
Statements  Goodwill and Other Intangible Assets.

Amortization of Intangible
Assets.In connection with our
acquisitions completed in 1999 and 2000, all of which were
accounted for using the purchase method of accounting, we
recorded goodwill and other intangible assets, primarily for
assembled workforce, customer base and existing technology.
Additionally, we recorded intangible assets related to certain
warrants issued to strategic partners. In connection with the
adoption of SFAS No. 142, discussed above, we
reclassified certain intangible assets and related amortization
associated with assembled workforce out of intangible assets and
into goodwill. Based on the types of identifiable intangibles
assets acquired, amortization expenses of $21.3 million,
$18.5 million and zero were

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allocated to the cost of net revenues and
amortization expenses of $32.7 million, $24.8 million
and zero were allocated to operating expenses in 2001, 2002 and
2003, respectively.


In April 2001, we announced a restructuring plan
that involved reorganizing our product and service offerings,
including eliminating various product and service lines
associated with the following acquisitions: dotOne, Fabrik
(Connect Service), FaxNet, and Netmosphere. As a result of the
restructuring, we abandoned all of the technology associated
with the products and services and all employees originally
acquired from dotOne, Fabrik, FaxNet and Netmosphere were
terminated. As a result, we determined that an impairment
analysis was required during the second quarter of 2001.

We believed that the termination of the product
and service lines indicated that the carrying amount of
long-lived assets may not be recoverable and therefore an
impairment review was required under SFAS No. 121.
When it was determined the carrying value of intangible assets
may not be recoverable, we measured any impairment based on a
projected discounted cash flow method using a discount rate
commensurate with the risk inherent in the current business
model. As no future revenues were to be recognized from the
product and service lines that were eliminated, which
represented separate asset groupings under
SFAS No. 121, all of the remaining intangible assets
associated with the product and service lines were written off
in their entirety. As a result of the assessment, we recorded a
$14.2 million impairment charge in the second quarter of
2001.

In the fourth quarter of 2001, as a result of the
consolidation of our facilities and asset base related to our
previous restructurings, we performed an assessment of our
property and equipment balances that related to our existing
hosted messaging business line. As a result of this assessment,
we specifically identified assets that we determined were not
going to be utilized in the ongoing business and took an
impairment charge related to these assets. As a result of this
assessment, we recorded an additional impairment charge of
$12.4 million in the fourth quarter of 2001.

The charges related to the impairment of certain
long-lived assets recorded in 2001, included impairment charges
of $16.7 million which were allocated to the cost of net
revenues and impairment charges of $10.0 million which were
allocated to operating expenses. We classified the impairment of
existing technology and property and equipment to cost of net
revenues, and the impairment of goodwill and other intangible
assets as other operating expense. The impairment charges were
allocated to these classifications to conform to the
classifications of the amortization charges associated with
these assets. The amortization and impairment charges relating
to existing technology and the impaired property and equipment
were charged to cost of net revenues as we believes these were
the only costs that were directly related to the generation of
our revenues. See also the Critical Accounting Policies,
Judgements and Estimates, section of Managements
Discussion and Analysis and Note 8 of Notes to Consolidated
Financial Statements  Goodwill and Other Intangible Assets.

Warrants.During
1999, 2000 and 2003, we issued warrants to purchase shares of
our preferred and common stock pursuant to certain strategic
agreements. See also Note 8 of Notes to Consolidated
Financial Statements  Goodwill and Other Intangible Assets
and Note 17  Impairment of Long-Lived Assets.

In November 2003, we entered into an agreement
with one of our landlords, Equity Office Management LLC,
pursuant to which we restructured the lease covering our Santa
Monica facility. As part of the agreement, Equity Office
Management LLC agreed to reduce the square footage under lease
and the related lease obligation in exchange for $381,000 in
cash and warrants to purchase up to 25,000 shares of our
common stock. The warrants were fully vested upon issuance and
are exercisable over a five-year period beginning on
December 1, 2003, at a price of $2.49 per share.

Using the Black-Scholes option pricing model and
assuming a term of five years and expected volatility of 138%,
the fair value of the warrants on the effective date of the
agreement approximated $48,000, which was recorded in
restructuring and other expenses in the fourth quarter of 2003.

In January 1999, we entered into an agreement
with ICQ, Inc., a subsidiary of AOL Time Warner, pursuant
to which we provide email hosting services that are integrated
with ICQs instant messaging service provided to ICQs
customers. As part of the agreement, ICQ agreed to provide
us with sub-branded

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advertising in exchange for warrants to purchase
up to 2,442,766 shares of Series B preferred stock,
issuable upon attainment of each of five milestones.


As of April 9, 2000, all five milestones had
been attained and all related warrants were exercised during
2000 in two net exercises of 766,674 and 1,441,067 shares.
Using the Black-Scholes option-pricing model and assuming a term
of seven years and expected volatility of 90%, the final revised
aggregate fair value of all vested warrants was
$93.8 million, which was being amortized to advertising
expense using the straight-line method over four years.
Aggregate charges to stock-based expenses of $19.5 million
and $14.7 million were recorded to operating expenses
during 2000 and 2001, respectively, related to these warrants.
During 2002, amortization of intangible assets totaled
$14.7 million related to these warrants. The value of these
warrants was fully amortized at December 31, 2002.

In October 1999, we entered into an agreement
with Qwest Communications Corporation, a telecommunications
company, pursuant to which we agreed to provide email hosting
services to Qwests customers. As part of the agreement,
Qwest agreed to provide us with sub-branded advertising in
exchange for warrants to purchase up to 3,534,540 shares of
our common stock upon attainment of each of six milestones.

As of December 31, 2001, only the first of
the six milestones had been attained. None of the remaining
milestones were considered probable and as a result, the fair
value of the warrants relating to the shares underlying the
second through sixth milestones was not recognized. During 2001
and 2002, $4.6 million and $4.6 million, respectively,
was charged to stock-based operating expense related to the
vested warrants. The value of these warrants was fully amortized
at December 31, 2002 and accordingly no expense was
recognized related to these warrants during 2003.

In December 1999, we entered into an agreement
with Worldsport Network Ltd., the sole and exclusive provider of
Internet solutions for the General Association of International
Sports Federations (GAISF) and a majority of the
international federations it recognizes. Under the terms of the
agreement, Worldsport offers our web-based email and calendaring
services to the GAISF network and its members. As part of the
agreement, Worldsport agreed to provide us with sub-branded
advertising in exchange for warrants to purchase up to a 1.25%
equity interest in Critical Path on a fully diluted basis upon
attainment of each of five milestones based on the number of
email boxes for which Worldsport registers and provides
sub-branding. The warrants are exercisable for five years after
becoming vested. Any warrants not vested within five years of
the date of the agreement will be canceled. Worldsport ceased
operations and filed for bankruptcy during 2000 and we continue
to believe the warrants will ultimately expire unvested and
unexercised.

In December 1999, we entered into an agreement
with one of our lessors, in connection with an office lease,
pursuant to which the lessor was issued warrants to purchase up
to 25,000 shares of our common stock. The warrants may be
exercised beginning January 1, 2000 through
December 20, 2006 at a price of $90.00 per share. The
warrants vest at the beginning of each month on a straight-line
basis in the amount of 521 shares per month.

Using the Black-Scholes option pricing model and
assuming a term of six years and expected volatility of 90%, the
fair value of the warrants on the effective date of the
agreement approximated $2.0 million, which was being
amortized to general and administrative expenses using the
straight-line method over ten years beginning January 2000.
During both 2000 and 2001, approximately $200,000 was charged to
stock-based expense related to the vested warrants. In March
2002, the lease was terminated and the remaining value of
$1.6 million was recognized to stock-based expense.

In January 2000, docSpace entered into an
agreement with a major telecommunications company
(Telco) pursuant to which docSpace would provide
secure messaging services to the Telcos customers. As part
of the agreement, Telco agreed to provide marketing, publicity,
and promotional services to docSpace. As a result of the
completion of our acquisition of docSpace, we assumed warrants
that allowed Telco to purchase up to 349,123 shares of our
common stock upon attainment of each of three milestones.

Subsequent to the acquisition, we entered into
discussions with Telco to modify their relationship.
Accordingly, the vesting provisions of the proposed agreement
were modified to reflect the requirements of the new
relationship. As of December 31, 2003, none of the vesting
milestones of the original agreement had been

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attained and none of the milestones are
considered probable. Accordingly no deferred compensation
associated with the warrants has been recognized. Future changes
in the trading price of our common stock at the end of each
quarter, and at the time certain milestones are achieved, may
cause changes in the ultimate amount of the related stock-based
charges.


Acquisition-Related Retention
Bonuses.In connection with the
acquisitions of dotOne, Amplitude, Xeti, FaxNet, ISOCOR,
and docSpace, during 1999 and 2000, we established a retention
bonus program in the aggregate amount of $20.7 million to
provide incentives for certain former employees of these
companies to continue their employment with Critical Path.
Payments of bonuses to designated employees occurred on the
six-month, twelve-month or eighteen-month anniversary date of
the related acquisition, depending on the program, unless the
designated employee voluntarily terminates employment with
Critical Path prior to the respective acquisitions
applicable anniversary. A ratable share of the adjusted eligible
bonus amount has been accrued and charged to compensation
expense over the respective six, twelve or eighteen month period
commencing on the date the bonuses were granted. There were no
acquisition-related retention bonuses granted during 2001, 2002
and 2003.

As of December 31, 2001, the aggregate,
adjusted eligible bonus totaled $1.9 million, and the
ratable charge to compensation expense for the year then ended
was $1.4 million. Based on the functions of the employees
scheduled to receive acquisition bonuses in 2001, this amount
was charged to operating expenses. During 2002, the charges to
compensation related to acquisition bonuses were insignificant
and there were no related charges in 2003. Additionally, as of
December 31, 2002 and 2003, no acquisition bonuses remained.

Stock-Based
Expenses.Stock-based expenses totaled
$38.2 million, $10.0 million and $85,000 in 2001, 2002
and 2003, respectively, associated with stock options granted to
employees and consultants. Based on the functions of the
employees and consultants participating in the related option
grants, during 2001, 2002 and 2003, expenses of
$4.1 million, $1.2 million and $17,000, respectively,
were allocated to cost of net revenues and expenses of
$34.1 million, $8.8 million and $68,000, respectively,
were allocated to operating expenses. See also the Critical
Accounting Policies, Judgments and Estimates, Section of
Managements Discussion and Analysis and Note 16 of
Notes to Consolidated Financial Statements 
Shareholders Equity (Deficit).

During 2001, 2002 and 2003, we incurred
stock-based charges of approximately $1.7 million, $17,000
and $181,000, respectively, in connection with certain severance
agreements for terminated employees and consulting arrangements.
These charges were included in operating expenses based on the
functions of the related employees and consultants.

In connection with the settlement of a class
action lawsuit, we agreed to issue warrants to purchase up to
850,000 shares of our common stock at $10.00 per
share, and recorded a charge of $697,000 to general and
administrative expense related to the fair value of these
warrants.

In November 2003, in connection with a
court-approved settlement of claims by certain former
shareholders of PeerLogic, Inc., we agreed to issue
553,914 shares of common stock and 188,587 shares of
Series D preferred stock, and recorded stock-based
compensation expense of $5.1 million related to the fair
value of the issued stock. We also agreed to
exchange 69,149 shares of Series D preferred
stock for 733,333 shares of Series E preferred stock
if we obtain shareholder approval of the matters being submitted
to a vote of our shareholders at a special meeting.

All unearned compensation balances related to the
1998, 1999 and 2001 grants were fully amortized as of
December 31, 2003.

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| |                                           
| | ------------------------------------------
| | Strategic Restructurings (in
    millions)

The following tables summarize strategic
restructuring costs we incurred during the three years ended
December 31, 2003:

|                                                            |       |                |   |         |  |         |      |            |  |             |      |                |   |   |      |      |   |   |   |   |  |   |     |     | 
|----------------------------------------------------------- | ----- | -------------- | - | ------- |  | ------- | ---- | ---------- |  | ----------- | ---- | -------------- | - | - | ---- | ---- | - | - | - | - |  | - | --- | --- | 
|                                                            |       | Liabilities at |   |         |  |         |      | Cash       |  |             |      | Liabilities at
|                                                            |       | December 31,   |   | Total   |  | Noncash |      | Receipts   |  |             |      | December 31,  
|Year ended December 31, 2001                                |       | 2000           |   | Charges |  | Charges |      | (Payments) |  | Adjustments |      | 2001          
|                                                            |       |                |   |         |  |         |      |            |  |             |      |               
|Workforce reduction                                         |       | $              |  |         |  | $       | 10.3 |            |  | $           | (1.3 | )              |   | $ | (8.9 | )    |   | $ |  |   |  | $ | 0.1 |    
|Facility and operations consolidation and other
    charges |       |                |  |         |  |         | 9.0  |            |  |             | (5.5 | )              |   |   | (1.6 | )    |   |   |  |   |  |   | 1.9 |    
|Non-core product and service sales and
    divestitures     |       |                |  |         |  |         | (1.0 | )          |  |             | (1.1 | )              |   |   | 2.3  |      |   |   |  |   |  |   | 0.2 |    
|                                                            |       |                |   |         |  |         |      |            |  |             |      |                |   |   |      |      |   |   |   |   |  |   |     |    
|                                                            | Total |                | $ |        |  |         | $    | 18.3       |  |             | $    | (7.9           | ) |   | $    | (8.2 | ) |   | $ |  |  |   | $   | 2.2 | 

|                                                            |       |                |     |         |  |         |     |            |  |             |      |                |   |   |      |      |   |   |   |   |  |   |     |     | 
|----------------------------------------------------------- | ----- | -------------- | --- | ------- |  | ------- | --- | ---------- |  | ----------- | ---- | -------------- | - | - | ---- | ---- | - | - | - | - |  | - | --- | --- | 
|                                                            |       | Liabilities at |     |         |  |         |     | Cash       |  |             |      | Liabilities at
|                                                            |       | December 31,   |     | Total   |  | Noncash |     | Receipts   |  |             |      | December 31,  
|Year ended December 31, 2002                                |       | 2001           |     | Charges |  | Charges |     | (Payments) |  | Adjustments |      | 2002          
|                                                            |       |                |     |         |  |         |     |            |  |             |      |               
|Workforce reduction                                         |       | $              | 0.1 |         |  | $       | 2.1 |            |  | $           |     |                |   | $ | (1.0 | )    |   | $ |  |   |  | $ | 1.2 |    
|Facility and operations consolidation and other
    charges |       |                | 1.9 |         |  |         | 1.1 |            |  |             | (0.4 | )              |   |   | (1.5 | )    |   |   |  |   |  |   | 1.1 |    
|Non-core product and service sales and
    divestitures     |       |                | 0.2 |         |  |         |    |            |  |             |     |                |   |   | 0.1  |      |   |   |  |   |  |   | 0.3 |    
|                                                            |       |                |     |         |  |         |     |            |  |             |      |                |   |   |      |      |   |   |   |   |  |   |     |    
|                                                            | Total |                | $   | 2.2     |  |         | $   | 3.2        |  |             | $    | (0.4           | ) |   | $    | (2.4 | ) |   | $ |  |  |   | $   | 2.6 | 

|                                                            |       |                |     |         |  |         |     |            |  |             |      |                |   |   |      |      |   |   |      |      |   |   |     |     | 
|----------------------------------------------------------- | ----- | -------------- | --- | ------- |  | ------- | --- | ---------- |  | ----------- | ---- | -------------- | - | - | ---- | ---- | - | - | ---- | ---- | - | - | --- | --- | 
|                                                            |       | Liabilities at |     |         |  |         |     | Cash       |  |             |      | Liabilities at
|                                                            |       | December 31,   |     | Total   |  | Noncash |     | Receipts   |  |             |      | December 31,  
|Year ended December 31, 2003                                |       | 2002           |     | Charges |  | Charges |     | (Payments) |  | Adjustments |      | 2003          
|                                                            |       |                |     |         |  |         |     |            |  |             |      |               
|Workforce reduction                                         |       | $              | 1.2 |         |  | $       | 6.0 |            |  | $           | (0.2 | )              |   | $ | (6.2 | )    |   | $ | (0.6 | )    |   | $ | 0.2 |    
|Facility and operations consolidation and other
    charges |       |                | 1.1 |         |  |         | 1.8 |            |  |             | (0.3 | )              |   |   | (1.7 | )    |   |   | (0.3 | )    |   |   | 0.6 |    
|Non-core product and service sales and
    divestitures     |       |                | 0.3 |         |  |         | 0.3 |            |  |             |     |                |   |   | (0.3 | )    |   |   | (0.3 | )    |   |   |    |    
|                                                            |       |                |     |         |  |         |     |            |  |             |      |                |   |   |      |      |   |   |      |      |   |   |     |    
|                                                            | Total |                | $   | 2.6     |  |         | $   | 8.1        |  |             | $    | (0.5           | ) |   | $    | (8.2 | ) |   | $    | (1.2 | ) |   | $   | 0.8 | 

In April 2001, we announced a strategic
restructuring plan that involved reorganizing and refocusing our
product and service offerings, a workforce reduction, and a
facilities and operations consolidation. Additionally, we
implemented an aggressive expense management plan to further
reduce operating costs while maintaining strong customer
service. We completed this restructuring plan in 2001, including
the divestiture of all products and services deemed to be
non-core products and services to our continued operations, a
44% reduction in headcount, a 65% reduction in the number of
facilities and the implementation of other cost cutting
measures, resulting in a significant reduction in overall
operating expenses. The non-core products and services comprised
approximately 21% of total revenues in the year ended
December 31, 2001.

During 2001, we sold or discontinued all of our
non-core products and services and as a result of these
transactions recognized a net gain of $1.0 million for the
year ended December 31, 2001. We reduced headcount from
1,011 employees at March 31, 2001 to 562 employees at
December 31, 2001. Charges related to the headcount
reduction consisted primarily of the payment of severance and
fringe benefits, and aggregated approximately $10.3 million
during 2001. In connection with these restructuring actions, we
reduced the number of facilities we occupied from 77 at
March 31, 2001 to 27 at December 31, 2001. Lease
termination and facility consolidation related charges consisted
primarily of lease termination costs, future lease payments and
related fees, and aggregated approximately $9.0 million
during 2001.

The initiatives contemplated under these
restructurings were completed during 2003, and during the first
quarter of 2003, we reversed approximately $1.2 million in
restructuring expenses, which were originally

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accrued in 2001 and 2002 associated with the
restructuring initiatives discussed above, as we determined
these amounts will not be paid in the future. The reversal of
these expenses is reflected in the Adjustments
column of the Strategic Restructuring table presented above.


In May 2002, the board of directors approved a
restructuring plan to further reduce our expense levels
consistent with the then current business climate. In connection
with the plan, a restructuring charge of $1.5 million was
recognized in the second quarter of 2002. This charge was
comprised of approximately $1.2 million in severance and
related costs associated with the elimination of approximately
39 positions and $300,000 in facilities lease termination costs.
The balance of the accrual at December 31, 2003, of
approximately $0.4 million is expected to be utilized by
the end of 2004.

In January 2003, we announced a restructuring
initiative designed to further reduce our expense levels in an
effort to achieve operating profitability assuming no or
moderate revenue growth. The plan includes the consolidation of
some office locations and a global workforce reduction of
approximately 175 positions, or approximately 30% of the
workforce. The headcount reduction was partially offset by
outsourcing approximately 75 positions to lower cost service
providers. We incurred aggregate charges of approximately
$8.0 million resulting from the cost reduction plan,
inclusive of $7.0 million in cash and $1.0 million in
non-cash expenses. Included in this plan were approximately
$1.7 million in charges incurred in the fourth quarter of
2002, comprised of approximately $0.7 million in severance
and related costs and $1.0 million in facilities lease
termination costs. During 2003, cash payments totaling
$6.5 million were made related to the restructuring. At
December 31, 2003, the balance of the accrual was
approximately $0.2 million and is expected to be utilized
by the end of the second quarter of 2004.

More recently, in November 2003, we announced
that we were restructuring certain of our facility lease
obligations in an effort to reduce our long-term cash
obligations. In addition, we identified an additional 16
positions, primarily held by management-level employees, which
were to be eliminated. Costs totaling $1.8 million were
recognized during the fourth quarter of 2003 associated with
these initiatives, including $1.3 million in lease
restructuring and termination costs and $0.5 million in
severance and related headcount reduction costs. During the
fourth quarter of 2003, cash payments totaling $1.2 million
were made associated with the facility restructuring activities
and $0.4 million related to the headcount reductions. The
remaining accrual of $0.2 million associated with this
restructuring is expected to be utilized by the end of the first
quarter of 2004. In addition, we expect to incur a total of
approximately $1.0 million in the first six months of 2004
related to headcount reductions under this or other cost
reduction initiatives.



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

Interest and other income (expense), net consists
primarily of interest earnings on cash, cash equivalents and
short-term investments as well as net gains (losses) on foreign
exchange transactions and changes in the fair value of the
liquidation preference on the Series D preferred stock. We
completed private placements of equity securities in April 1998,
September 1998 and January 1999, and we completed public
offerings of common stock in April 1999 and June 1999. In
addition, on March 30, 2000, we issued $300.0 million
of five-year, 5 3/4% Convertible Subordinated Notes
due on April 1, 2005. During 2001, 2002 and 2003 we earned
$4.6 million, $1.5 million and $0.4 million,
respectively, in interest income related to interest income on
cash, cash equivalents and short-term investments. During 2001,
we used $48.7 million to retire a substantial portion of
our convertible subordinated notes. A significant amount of cash
was used to fund our operating activities during 2001, 2002 and
2003, contributing to a significant decrease in interest income
in 2002 and 2003. During 2001, we recognized a net gain from
foreign currency transactions associated with our international
operations of $947,000, and net losses of $817,000 and $440,000
in 2002 and 2003, respectively. Based on the current
international markets, we expect that fluctuations in foreign
currencies could have a significant impact on our operating
results in 2004.

In connection with the financing transaction
closed in December 2001, the Series D preferred stock was
deemed to have an embedded derivative. In accordance with the
provisions of SFAS No. 133, Accounting for Derivative
Instruments, we are required to adjust the carrying value of the
preference to its fair value at each balance sheet date and
recognize any change since the prior balance sheet date as a
component of other

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income or expense. The estimated fair value of
the liquidation preference had increased to $24.8 million
and $12.6 million and $5.2 million at
December 31, 2003, 2002 and 2001, respectively, resulting
in a net charge to other expense of $12.2 million in 2003,
$7.4 million in 2002 and $5.2 million in 2001.




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

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

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



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

Depreciation expense primarily relates to the
expensing, over the estimated useful lives, of capital equipment
used in network infrastructure and for our hosted messaging
services, leasehold improvements and equipment used in our
general operations. Depreciation expense totaled
$43.0 million, $27.2 million and $16.3 million
during 2001, 2002 and 2003, respectively. Included in these
amounts was depreciation expense related to cost of net hosted
messaging revenues, which totaled $26.3 million,
$15.3 million and $9.4 million during 2001, 2002 and
2003, respectively. The remaining depreciation expense related
to capital expenditures incurred for general operations of our
business and has been allocated to cost of net revenues and
operating expense, as appropriate. Depreciation expense
decreased year over year due primarily to the write-down and
completion of depreciation on equipment related to our hosted
messaging operations, partially offset by capital expenditures
related to our network infrastructure.



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

Interest expense consists primarily of interest
expense and amortization of issuance costs related to our
5 3/4% Convertible Subordinated Notes issued in March 2000
and interest on certain capital leases. We incurred
approximately $13.0 million, $2.2 million and
$2.2 million in interest expense on the Convertible
Subordinated Notes, and approximately $1.6 million,
$275,000 and $275,000 related to amortization of debt issuance
costs in 2001, 2002 and 2003, respectively.



| |                                                 
| | ------------------------------------------------
| | Equity in Net Loss of Japanese Joint
    Venture

In June 2000, we established a joint venture,
Critical Path Pacific, Inc. with Mitsui and Co., Ltd., NTT
Communications Corporation and NEC Corporation to deliver
advanced Internet messaging solutions to businesses in Asia. We
invested $7.5 million and held a 40% ownership interest in
the joint venture. This investment was accounted for using the
equity method. We recorded equity in net loss of joint venture
of approximately $1.9 million, $1.4 million and zero
during 2001, 2002 and 2003, respectively.

On June 6, 2002, we acquired the remaining
60% ownership interest in Critical Path Pacific, Inc. for
$3.0 million in cash and the assumption of
$2.6 million in business restructuring and capital lease
obligations and changed the name to Critical Path
Japan, Inc. The excess of the purchase price of
$5.6 million over the fair value of the acquired net
assets, primarily working capital and fixed assets, of
$4.6 million was recorded as goodwill. In accordance with
SFAS No. 142, this goodwill asset of approximately
$1.0 million will not be amortized; however, we will test
this asset for impairment on an annual basis, or more frequently
if events or

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circumstances indicate that the asset might be
impaired. We began including the financial results of Critical
Path Japan in our own consolidated results subsequent to the
acquisition date. As a result, the second quarter of 2002
represented the last quarter in which we used the equity method
to account for our ownership interest in Critical Path Pacific.




| |                           
| | --------------------------
| | (Gain) Loss on Investments

During 2001 and 2002, we determined that certain
of our investments in public and private companies were other
than temporarily impaired and recorded write downs of $702,000
and $1.5 million, respectively.

During 2003, we executed sales of our remaining
public and private investments. As a result, as of
December 31, 2003, we did not carry any investments on our
balance sheet. The sale of our investments during 2003 resulted
in a net gain of $549,000, which was comprised of
$2.4 million in aggregate cash proceeds, the recognition of
$1.5 million in unrealized losses and the elimination of
$357,000 in assets held as equity investments. See also
Note 6 of Notes to Consolidated Financial Statements 
Investments.



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

No current provision or benefit for
U.S. federal or state income taxes has been recorded as we
have incurred net operating losses for income tax purposes since
our inception. No 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. We recognized a
provision for foreign income taxes of $7.2 million,
$979,000 and $856,000 during 2001, 2002 and 2003, respectively,
as certain of our European operations generated income taxable
in certain European jurisdictions.



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




In September 2002, we entered into a
$15.0 million one-year line of credit with Silicon Valley
Bank, to be utilized for working capital and general corporate
operations. The credit facility was amended on March 25,
2003 and again on July 18, 2003, as a result of
non-compliance with the financial covenants of the facility. We
regained compliance with the covenants in the credit facility
upon execution of the line of credit agreement on July 18,
2003 and extended the maturity of the credit facility to
January 30, 2004. In December 2003 we did not comply with a
certain financial covenant and it subsequently received a letter
from Silicon Valley Bank on December 17, 2003 waiving such
covenant violation. The credit facility is collateralized by all
of our personal property, including intellectual property, and
borrowings under the current agreement bear a variable interest
rate of Prime plus 2.0%, which has ranged from 5.25% to 6.25%,
and is subject to certain covenants. Interest is paid each month
with principal due at maturity. Commitment fees related to the
credit facility included an initial commitment fee of 0.50%, or
$75,000, and additional commitment fees of $35,000 for each
amendment. The facility carries an additional fee based on
unused credit of 0.45% payable at the end of each quarterly
period in arrears and an early termination fee of 1.0% of the
total credit facility through maturity. During the first quarter
of 2003, we drew down $4.9 million against the line of
credit and repaid $2.5 million during the fourth quarter of
2003. As of December 31, 2003, a $2.4 million balance
remained outstanding. Additionally, during the year, we reduced
letters of credit held under the credit facility from
$3.0 million at December 31, 2002 to $2.7 million
at December 31, 2003. All associated interest and fees are
included as a component of interest expense.







On January 30, 2004, we executed an
amendment with Silicon Valley Bank, which reduced the size of
the credit line to a maximum of $5.0 million and extended
the maturity date to October 31, 2004. Subsequently, on
March 12, 2004 we executed an additional amendment with
Silicon Valley Bank, which increased the size of the credit line
to a maximum of $6.0 million and extended the maturity date
to June 30, 2005. Additionally, the line of credit calls
for a minimum cash balance at Silicon Valley Bank of
$3.0 million. We do not classify this as restricted cash as
it is legally unrestricted. The credit facility continues to be
collateralized by all of our personal property, including
intellectual property, and borrowings under the current
agreement bear a variable interest rate of between Prime plus
1.5% and Prime plus 3.0%, which has historically ranged from
5.25% to 6.25%, and is subject to covenants. Interest is paid
each month with




45



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principal due at maturity. Initial commitment
fees of $20,000 and $100,000 were charged related to the January
and March amendments, respectively. Additionally, the facility
carries an expedite fee of $50,000, an unused facility fee of
either 0.45% or 2.00%, based upon the level of cash balances
held at the bank, payable at the end of each quarterly period in
arrears, and an early termination fee of $50,000 if the facility
is canceled prior to August 1, 2004. In connection with the
March 2004 amendment to the credit facility, we agreed to issue
warrants to purchase up to 100,000 shares of our common stock to
Silicon Valley Bank. These warrants were fully exercisable upon
grant, had an exercise price of $2.07 per share and have an
expiration date of March 12, 2011.




| |                                          
| | -----------------------------------------
| | 5 3/4% Convertible Subordinated
    Notes

In March 2000, we issued $300.0 million of
five-year, 5 3/4% Convertible Subordinated Notes due
April 2005 to qualified institutional buyers in reliance on
Rule 144A under the Securities Act of 1933. We incurred
approximately $10.8 million in debt issuance costs,
consisting primarily of underwriting discount and legal and
other professional fees. These costs have been capitalized and
will be recognized as a component of interest expense on a
straight-line basis, which approximates the effective interest
method, over the five-year term of the Notes. Interest is
payable on April 1 and October 1 of each year. As of
December 31, 2002 and 2003, there was approximately
$556,000 in accrued interest payable. These Notes are
subordinated in right of payment to all senior debt of Critical
Path and effectively subordinated to all existing and future
debt and other liabilities of Critical Paths subsidiaries.

During 2001, we retired $261.4 million of
face value of these notes, which resulted in a gain on
retirement of $179.3 million, inclusive of
$6.8 million in write downs of related debt issuance costs.
We used cash of $48.7 million and a portion of the
subordinated notes were retired through the issuance of the
preferred stock in the financing transaction completed in
December 2001. See also Note 15 of Notes to Consolidated
Financial Statements  Financing Transactions and
Preferred Stock. As of December 31, 2002 and 2003, the
total balance outstanding was $38.4 million. These Notes
are carried at cost and had an approximate fair value at
December 31, 2002 and 2003 of $32.4 million and
$35.8 million, respectively.

In March 2004, we executed an amendment with a
group of investors led by Cheung Kong Group and its Whampoa
Limited affiliates including Campina Enterprises Limited,
Cenwell Limited, Great Affluent Limited, Dragonfield Limited and
Lion Cosmos Limited (referred to collectively as the Cheung Kong
Investors) which would extend the maturity of the
$32.8 million in face value of 5 3/4% convertible
subordinated notes held by the Cheung Kong Investors from
April 1, 2005 to April 1, 2006. The extension will
only take place in the event our shareholders do not approve the
exchange of the 5 3/4% convertible subordinated notes held
by the Cheung Kong Investors for approximately 21.9 million
shares of our Series E preferred stock. In addition, in the
event the maturity date is extended to April 1, 2006, the
interest rate on the 5 3/4% convertible subordinated notes
held by the Cheung Kong Investors will increase to 7 1/2%
for the period beginning April 1, 2005 and ending
April 1, 2006, and we will be required to pay fees totaling
$1.5 million.



| |                                         
| | ----------------------------------------
| | 10% Senior Secured Convertible
    Notes

In November 2003, we issued in a private
placement $10 million in 10% senior secured
convertible notes to General Atlantic Partners 74, L.P., GAP
Coinvestment Partners II, L.P., GapStar, LLC and GAPCO
GmbH & Co. K.G. (referred to collectively as the
General Atlantic Investors). These notes have the following
carrying value at December 31, 2003:

|                                                  |                                                            |              |       |        | 
|------------------------------------------------- | ---------------------------------------------------------- | ------------ | ----- | ------ | 
|                                                  |                                                            | December 31,
|                                                  |                                                            | 2003        
|                                                  |                                                            |             
|10% Senior Secured Convertible Notes              |                                                            | $            | 9,250 |       
|Amount allocated to derivative instrument         |                                                            |              | 750   |       
|Accretion on 10% Senior Secured Convertible Notes |                                                            |              | 16    |       
|                                                  |                                                            |              |       |       
|                                                  | Carrying value of 10% Senior Secured Convertible
    Notes |              | $     | 10,016 | 
|                                                  |                                                            |              |       |       

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At issuance, the senior secured convertible note
issued to the General Atlantic Investors was deemed to have an
embedded derivative, related to the acceleration of any unearned
interest upon conversion prior to the first anniversary of its
issue date. The fair value of this derivative, which was fixed
at $750,000 at issuance, was recorded as a reduction in the
carrying amount of the senior secured convertible note and will
accrete over the initial year of the notes four year term.

As part of our November 2003 private placement of
10% Senior Secured Convertible Notes, we agreed to seek
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. See also the 10% Senior
Secured Convertible Notes discussion below.

Upon shareholder approval, the $10 million
in principal amount of senior secured convertible notes held by
the General Atlantic Investors, plus interest, will convert into
7.3 million shares of Series E preferred stock at
$1.50 per share. As a result, interest expense of
approximately $5.7 million will be recognized as of the
date of conversion resulting from the beneficial conversion
feature included in the Series E preferred stock. Interest
expense of $100,000 was accrued on the debt during 2003 and
remained payable as of December 31, 2003.

In January 2004, we issued $15 million in
principal amount of 10% senior secured convertible notes to
Permal U.S. Opportunities Limited, Zaxis Equity Neutral,
L.P., Zaxis Institutional Partners, L.P., Zaxis Offshore
Limited, Zaxis Partners, L.P. and Passport Master Fund, L.P.
These notes are convertible into approximately 10 million
shares of Series E convertible preferred stock at
$1.50 per share only if we receive shareholder approval. As
a result, interest expense of approximately $1.5 million
will be recognized as of the date of conversion resulting from
the beneficial conversion feature included in the Series E
preferred stock. If we do not obtain shareholder approval, these
notes will be convertible, at the option of each note holder,
into shares of our common stock at $1.65 per share,
provided the note holder will not be able to convert its notes
into shares of common stock to the extent the note holder,
together with its affiliates, would own 9.9% or more of our
common stock after conversion. If these notes do not convert
into Series E preferred stock or common stock, they become
due and payable on the fourth anniversary of their issuance.

In March 2004, we issued $18.5 million in
principal amount of 10% senior secured convertible notes to
investment entities affiliated with Crosslink Capital, Criterion
Capital Management, Heights Capital Management and Apex Capital.
These notes are convertible into approximately 12.3 million
shares of Series E convertible preferred stock at
$1.50 per share only if we receive shareholder approval. If
we do not obtain shareholder approval, these notes will be
convertible, at the option of each note holder, into shares of
our common stock at $2.18 per share, provided the note
holder will not be able to convert its notes into shares of
common stock to the extent the note holder, together with its
affiliates, would own 9.9% or more of our common stock after
conversion. As a result, interest expense of approximately
$8.4 million will be recognized as of the date of
conversion resulting from the beneficial conversion feature
included in the Series E preferred stock. If these notes do
not convert into Series E preferred stock or common stock,
they become due and payable on the fourth anniversary of their
issuance. The terms of the 10% senior secured convertible
notes, including their covenants and other limitations, are
discussed below under the caption Liquidity and Capital
Resources  Recent Financing Transactions  Debt
covenants and restrictions.

Series D
Preferred Stock

In December 2001, we completed a financing
transaction with a group of investors and their affiliated
entities. In connection with this financing transaction, we
issued 4 million shares of our Series D Cumulative
Redeemable Convertible Participating Preferred Stock, in a
private offering, resulting in gross cash proceeds of
approximately $30 million, and the simultaneous retirement
of approximately $65 million in face value of our
outstanding convertible subordinated notes. See also
Note 15 of Notes to Consolidated Financial Statements
 Financing Transactions and Preferred Stock. The investors
were led by General Atlantic Partners LLC and affiliates and
included Hutchison Whampoa Limited and affiliates and Vectis
Group LLC

47



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and affiliates. In addition, General Atlantic LLC
was granted warrants to purchase 625,000 shares of our
common stock in connection with this offering.


The Series D preferred stock issued in the
financing transaction ranks senior to all of our preferred and
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 convertible
subordinated notes retired in connection with the offering. The
principal terms of the preferred stock include 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  that 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.

We received net cash proceeds associated with the
issuance of the Series D preferred stock of approximately
$27 million, which was net of a $2.75 million
transaction fee paid to Vectis Group LLC and approximately
$200,000 in related legal and accounting fees. At issuance, the
total amount of these costs was 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 million. The value of the beneficial
conversion feature, at issuance, was initially recorded as a
reduction of the carrying amount of the Series D preferred
stock and will accrete over the term of the Series D
preferred stock.

The purchase agreement provides for a
preferential return of equity to the Series D preferred
stockholders, before any return of equity to the common
shareholders, and also provides 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 our November 2003 private
placement of 10% Senior Secured Convertible Notes, we
agreed to seek 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. See also
the 10% Senior Secured Convertible Notes discussion below.

At December 31, 2001, 2002 and 2003, the
estimated fair value of the liquidation preference was
$5.2 million, $12.6 million and $24.8 million,
respectively, and was allocated to that feature and recorded as
a separate component of the Series D preferred stock. In
accordance with the provisions of SFAS No. 133,
Accounting for Derivative Instruments, we are required to adjust
the carrying value of the preference to its fair value at each
balance sheet date and recognize any change since the prior
balance sheet date as a component of operating income.

The warrants are exercisable at any time after
November 8, 2002 until November 8, 2006 at an exercise
price of $4.20, and convert into one share of our common stock.
A portion of the proceeds received for the Series D
preferred stock was allocated to the warrants and the preferred
stock, based upon their relative fair market values. As a result
of this allocation, approximately $5.25 million of the
proceeds were allocated to the warrants, 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 our November 2003 private
placement of 10% Senior Secured Convertible Notes, we
agreed to seek shareholder approval to amend the

48



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warrants to reduce the exercise price per share
from $4.20 to $1.50. See also 10% Senior Secured
Convertible Notes below.




| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Accretion on redeemable convertible preferred
    shares and valuation of liquidation preference

In connection with the financing transaction
completed during December 2001, we received gross cash proceeds
of approximately $30 million and retired approximately
$65 million in face value of our outstanding convertible
subordinated notes in exchange for shares of our Series D
preferred stock. See also Financing Transactions below and
Note 15 of Notes to Consolidated Financial Statements
 Financing Transactions and Preferred Stock.

During 2001, 2002 and 2003, the accretion on
preferred stock totaled $356,000, $13.9 million and
$12.4 million, respectively. The accretion during 2001 was
comprised of $121,000 in accrued dividends and accretion of
$235,000. During 2002 the accretion on preferred stock was
comprised of $4.4 million in accrued dividends and
accretion of $9.5 million. During 2003 the accretion on
preferred stock was comprised of $4.9 million in accrued
dividends and accretion of $7.5 million.

Related Party Transactions

We have entered into certain transactions with
related parties since our inception. These transactions and
relationships are discussed in Part 3, Item 13 
Certain Relationships and Related Party Transactions and
Note 9 of the Notes to Consolidated Financials
Statements  Related Party Transactions.

Liquidity and Capital Resources

We have operated at a loss since our inception.
With our history of operating losses, our primary sources of
capital have come from both debt and equity financings that we
have completed over the past several years. Cash and cash
equivalents totaled $19.0 million at December 31,
2003. Of our cash and cash equivalents at December 31,
2003, $5.0 million is expected to support our outstanding
obligations to Silicon Valley Bank and $7.6 million is
located in accounts outside the United States, which may not be
available to our domestic operations. Accordingly, our readily
available cash resources in the United States as of
December 31, 2003 were $6.4 million.




As of December 31, 2002, our readily
available cash resources in the United States was
$21.5 million.







During 2003, we used an average of approximately
$8.7 million of cash per quarter to fund our operating
activities. In addition, our net revenue fell short of our
budgeted revenue for 2003 primarily due to:






| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
|
| |  | a loss in existing customers who reduced their
    technology spending,                                                             
|
|
|
| |  | a failure to generate new customers, in part due
    to the five-month delay in releasing our new hosted messaging
    platform, and
|
|
|
| |  | the increase of cash operating expenses above our
    budget.                                                                       
|




Faced with a cash shortfall caused by lower than
budgeted revenues and higher than expected expenses discussed
above, we looked to the cash held by our foreign subsidiaries.
However, we determined that restrictions on cash held outside
the United States, including requirements in some jurisdictions
that cash held by foreign subsidiaries must be sufficient to
fund the operation of such foreign subsidiary, limited our
ability to access and utilize this cash for domestic operations.
As a result, the actual cash available to us to fund our
domestic operations is less than the actual cash balance
maintained by the Company.







We also attempted to raise additional funds
through financing transactions. However, because of the
approaching maturity date of the approximately $38 million
in face value of our 5 3/4% Convertible Subordinated Notes
due in 2005 and the uncertainty regarding our ability to remain
in compliance with the covenants of the Silicon Valley Bank line
of credit due to the lower than expected operating results, we
found that investors were reluctant to invest cash which might
be used solely to repay these debt obligations. Although we were
able to raise $10 million in November 2003, due to our rate
of cash usage, the amount of




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cash available to us and the need to dedicate a
portion of the proceeds to pay down a portion of the Silicon
Valley Bank line of credit, our management determined that we
had sufficient cash to continue our operations only through the
first quarter of 2004. As a result of this disclosure, which
appeared in our registration statement on Form S-3 filed
with the SEC on December 24, 2003, as well as our results
of operations and our revised projections, our independent
accountants updated their report as of December 22, 2003 to
add a going concern qualification.








Subsequent to the updated report from our
independent accountants, we were able to raise
$33.5 million from new investors as described in more
detail under the heading Recent Financing
Transactions below. In addition, we extended the maturity
date of the Silicon Valley Bank line of credit to June 2005,
negotiated with the holders of approximately $33 million in
face value of our 5 3/4% Convertible Notes to extend their
maturity dates until April 2006 if they are not converted to
Series E Preferred Stock. As a result, we believe that cash
flow projections prepared in March 2004 support our view that we
have sufficient cash and expected cash flows to fund our
operations through at least December 31, 2004. The report
of our independent accountants that is incorporated into this
Annual Report is unqualified as to our ability to continue as a
going concern.








| |                              
| | -----------------------------
| | Recent Financing Transactions

On November 18, 2003, we entered into a
definitive agreement to issue an aggregate of $10 million
in principal amount of 10% convertible secured notes to the
General Atlantic Investors, and to convert the notes, plus
$1 million in accrued interest, into approximately
7.3 million shares of our Series E preferred stock. In
the same agreement, we agreed to exchange approximately
$32.8 million in face value of our
5 3/4% convertible subordinated notes held by the
Cheung Kong Investors for approximately 21.9 million shares
of our Series E preferred stock. These notes are
convertible into shares of Series E preferred stock at
$1.50 per share only if we receive shareholder approval.

In November 2003, we announced our intention to
make a rights offering to public shareholders of record to
purchase up to approximately $21 million of newly issued
Series E convertible preferred shares at a purchase price
of $1.50 per share. Existing holders of our common stock,
as of the date of record, will have the right to purchase
approximately two shares of the new Series E preferred
stock for every three shares of common stock they own as of the
record date. We intend to initiate this offering if and when the
registration statement filed with the Securities and Exchange
Commission relating to the rights offering is declared effective.

In January 2004, we issued $15 million in
principal amount of 10% senior secured convertible notes to
Permal U.S. Opportunities Limited, Zaxis Equity Neutral,
L.P., Zaxis Institutional Partners, L.P., Zaxis Offshore
Limited, Zaxis Partners, L.P. and Passport Master
Fund, L.P. These notes are convertible into approximately
10 million shares of Series E preferred stock at
$1.50 per share only if we receive shareholder approval. As
a result, interest expense of approximately $1.5 million
will be recognized as of the date of conversion resulting from
the beneficial conversion feature included in the Series E
preferred stock. If we do not obtain shareholder approval, these
notes will be convertible, at the option of each note holder,
into shares of our common stock at $1.65 per share,
provided the note holder will not be able to convert its notes
into shares of common stock to the extent the note holder,
together with its affiliates, would own 9.9% or more of our
common stock after conversion. If these notes do not convert
into Series E preferred stock or common stock, they become
due and payable on the fourth anniversary of their issuance.

In March 2004, we issued $18.5 million in
principal amount of 10% senior secured convertible notes to
investment entities affiliated with Crosslink Capital, Criterion
Capital Management, Heights Capital Management and Apex Capital.
These notes are convertible into approximately 12.3 million
shares of Series E preferred stock at $1.50 per share
only if we receive shareholder approval. If we do not obtain
shareholder approval, these notes will be convertible, at the
option of each note holder, into shares of our common stock at
$2.18 per share, provided the note holder will not be able
to convert its notes into shares of common stock to the extent
the note holder, together with its affiliates, would own 9.9% or
more of our common stock after conversion. As a result, interest
expense of approximately $8.4 million will be recognized as
of the date of conversion resulting from the beneficial
conversion feature included in the Series E preferred
stock. If these

50



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notes do not convert into Series E preferred
stock or common stock, they become due and payable on the fourth
anniversary of their issuance.


Upon shareholder approval of the matters being
presented at a special meeting, the $43.5 million in
principal amount of 10% senior secured convertible notes,
plus interest, will automatically convert into approximately
29 million shares of Series E preferred stock at
$1.50 per share. Additionally upon such approval, the
$32.8 million in face value of its
5 3/4% convertible subordinated notes due in April
2005 held by the Cheung Kong Investors will automatically be
converted into approximately 21.9 million shares of
Series E preferred stock. The Series E preferred stock
will be issued to these investors only if Critical Path receives
shareholder approval and will rank senior in preference to all
of our existing equity. These preferred shares will accrue
dividends at an annual rate of 5 3/4% of the purchase price
of $1.50 per share.

In March 2004, we executed an amendment with a
group of investors led by the Cheung Kong Investors which would
extend the maturity of the $32.8 million in face value of
5 3/4% convertible subordinated notes held by the
Cheung Kong Investors from April 1, 2005 to April 1,
2006. The extension will only take place in the event our
shareholders do not approve the exchange of the
5 3/4% convertible subordinated notes held by the
Cheung Kong Investors for approximately 21.9 million shares
of our Series E preferred stock. In addition, in the event
the maturity date is extended to April 1, 2006, the
interest rate on the 5 3/4% convertible subordinated
notes held by the Cheung Kong Investors will increase to
7 1/2% for the period beginning April 1, 2005 and
ending April 1, 2006, and we will be required to pay fees
totaling $1.5 million.

In a separate agreement, members of the Cheung
Kong Investors have granted us an option, which we may exercise
in our sole discretion, to repurchase approximately
10.9 million shares of the Series E preferred stock
held by the Cheung Kong Investors at $1.50 per share. Our
option expires 10 business days after the Cheung Kong
Investors acquire shares of the Series E preferred stock
after the close of the proposed rights offering of the preferred
stock.




On January 30, 2004, we executed an
amendment with Silicon Valley Bank, which reduced the size of
the credit line to a maximum of $5.0 million and extended
the maturity date to October 31, 2004. Subsequently, on
March 12, 2004 we executed an additional amendment with
Silicon Valley Bank, which increased the size of the credit line
to a maximum of $6.0 million and extended the maturity date
to June 30, 2005. The credit facility continues to be
collateralized by all of our personal property, including
intellectual property, and borrowings under the current
agreement bear a variable interest rate of between Prime plus
1.5% and Prime plus 3.0%, which has historically ranged from
5.25% to 6.25%, and is subject to certain covenants. Interest is
paid each month with principal due at maturity. Initial
commitment fees of $20,000 and $100,000 were charged related to
the January and March amendments, respectively. Additionally,
the facility carries an expedite fee of $50,000, an unused
facility fee of either 0.45% or 2.00%, based upon the level of
cash balances held at the bank, payable at the end of each
quarterly period in arrears, and an early termination fee of
$50,000 if the facility is canceled prior to August 1,
2004. In connection with the March amendment to the credit
facility, we agreed to issue warrants to purchase up to 100,000
shares of our common stock to Silicon Valley Bank. These
warrants were fully exercisable upon grant, had an exercise
price of $2.07 per share and have an expiration date of
March 12, 2011.






| |                                
| | -------------------------------
| | Debt covenants and restrictions



| |                                         
| | ----------------------------------------
| | 10% senior secured convertible
    notes

The 10% senior secured convertible notes
become due and payable upon the consummation of a qualified
asset sale, a change of control or any financing or series of
financings that in the aggregate raises at least
$40 million.

Additionally, the notes become due and payable
when declared due and payable by a holder upon the occurrence of
an event of default, which include, subject to some exceptions:
(1) our failure to pay any amounts due under notes when
they are due and payable, (2) our default on any
indebtedness with a principal amount of at least $500,000,
(3) our voluntary or involuntary bankruptcy, (4) any
judgment for the payment

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of money of more than $500,000, (5) the
attachment by our lenders of any of our assets, or (6) the
occurrence of any event having a material adverse effect on our
business, operations, assets, properties or condition.


The 10% senior secured convertible notes
also contain a financial covenant that requires us to maintain a
minimum monthly average operating cash flow, over any given
fiscal quarter, for our operations in the Americas of negative
$3.0 million. Additionally, we may not incur, create or
assume indebtedness or liens under the notes, with specified
exceptions. Also, with some exceptions, under the notes we may
not: (1) merge with another entity, (2) make any
restricted payments, including dividends, distributions and the
redemption any of our options or capital stock, (3) enter
into any transactions with any affiliates, (4) make
investments, (5) change the nature of our business,
(6) permit our domestic subsidiaries to hold real or
personal property in excess of specified amounts or
(7) create any new subsidiaries.

If we breach any representation or warranty or
fail to abide by any of our covenants, including the foregoing
covenants, then the 10% senior secured convertible notes
may become immediately due and payable. If these notes do not
convert into Series E preferred stock or common stock, the
principal and related interest will become due and payable on
the fourth anniversary of their issuance.



| |                                    
| | -----------------------------------
| | Silicon Valley Bank credit facility

The Silicon Valley Bank credit facility contains
provisions for the acceleration of payment of the indebtedness
in the event of a default which include, subject to some
exceptions: (1) breach of representation or warranty,
(2) failure to pay any amounts due under the credit
facility when due and payable, (3) exceeding the credit
limit, (4) breach of financial covenants or other
covenants, (5) attachment by our lenders of any of our
assets, (6) default on any permitted indebtedness,
(7) any breach which results in a material adverse change
to our business, operations, assets, properties or condition,
(8) dissolution or voluntary or involuntary bankruptcy,
(9) revocation of a guaranty or pledge, (10) payment
by the Company of subordinated indebtedness, (11) change in
beneficial ownership, (12) fraud or (13) any material
adverse change to our business, operations, assets, properties
or condition.

The maturity date of the Silicon Valley Bank
credit facility is June 30, 2005.



| |                                          
| | -----------------------------------------
| | 5 3/4% convertible subordinated
    notes

The holders of the 5 3/4% convertible
subordinated notes may convert the notes into shares of our
common stock at any time before their maturity or the business
day before their redemption or repurchase by us. The conversion
rate is 9.8546 shares per $1,000 principal amount of notes
subject to adjustment in specified circumstances. This rate is
equivalent to a conversion price of approximately
$405.92 per share. In the event of a change of control, the
holders of the 5 3/4% convertible subordinated notes
have the option of requiring us to repurchase any notes held at
a price of 100% of the principal amount of the notes plus
accrued interest to the date of repurchase.

In March 2004, we executed an amendment with a
group of investors led by the Cheung Kong Investors which would
extend the maturity of the $32.8 million in face value of
5 3/4% convertible subordinated notes held by the
Cheung Kong Investors from April 1, 2005 to April 1,
2006. The extension will only take place in the event our
shareholders do not approve the exchange of the
5 3/4% convertible subordinated notes held by the
Cheung Kong Investors for approximately 21.9 million shares
of our Series E preferred stock. In addition, in the event
the maturity date is extended to April 1, 2006, the
interest rate on the 5 3/4% convertible subordinated
notes held by the Cheung Kong Investors will increase to
7 1/2%, for the period beginning April 1, 2005 and
ending April 1, 2006, and we will be required to pay fees
totaling $1.5 million.



| |                                             
| | --------------------------------------------
| | Ability to incur additional
    indebtedness

Subject to certain exceptions for, among others,
indebtedness for accounts payable incurred in the ordinary
course of business or indebtedness to acquire any equipment or
similar property, holders of: (1) a majority of the
10% senior secured convertible notes issued in November,
(2) a majority of the 10% senior secured convertible
notes issued in January and (3) a majority of the
10% senior secured convertible notes issued in March, must
consent to our incurrence of any additional indebtedness. Under
the terms of our line of

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credit with Silicon Valley Bank, we are not
permitted to incur additional indebtedness without the approval,
by Silicon Valley Bank in its sole discretion, that the terms of
the debt are adequately subordinated to the obligations due
under the Silicon Valley Bank credit facility. In addition, we
must seek the consent of the holders of a majority of our
Series D preferred stock in order to incur any additional
indebtedness.




| |                                             
| | --------------------------------------------
| | 2003, 2002 and 2001 Liquidity
    Discussion

Operating
Activities.Cash, cash equivalents and
marketable securities were $19.0 million,
$43.9 million and $69.2 million at December 31,
2003, 2002, and 2001, respectively. Cash and cash equivalents
decreased by $14.5 million during 2003, $25.9 million
during 2002 and $156.5 million during 2001. We used cash to
fund operating activities of $34.9 million during 2003,
$25.1 million during 2002 and $91.2 million during
2001, primarily due to our net loss, adjusted for non-cash
charges, as operating costs, primarily employee and employee
related costs, exceeded the related revenues from the sale of
our software products and services. Also contributing to the use
of cash in operating activities in 2003, 2002 and 2001 were net
cash outlays totaling $8.2 million, $2.4 million and
$8.2 million, respectively, related to our 2003, 2002 and
2001 strategic restructuring activities. Additionally during
2003, we paid $2.2 million in interest payments related to
the convertible subordinated notes, $2.2 million in
insurance premiums and we used $2.9 million to make certain
software and hardware support and maintenance renewal payments.
A more detailed discussion of our 2001, 2002 and 2003 operating
results can be found in the Results of Operations section of
Managements Discussion and Analysis of Financial Condition
and Results of Operations.

Of the cash held outside of the United States, we
may face restrictions on our ability to use that cash for
purposes other than the operation of each of our respective
foreign subsidiaries that hold the cash. For example, our
ability to use cash held in our German subsidiary for any reason
other than the operation of this subsidiary may result in
certain tax liabilities and may be subject to local laws that
could prevent the transfer of cash from Germany to any other
foreign or domestic account.

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 a cost reduction or generating
sufficient revenues, our cash flow from operations will continue
to be negatively impacted.




Our primary source of operating cash flow is the
collection of accounts receivable from our customers and the
timing of payments to our vendors and service providers. We
measure the effectiveness of our collections efforts by an
analysis of the average number of days our accounts receivable
are outstanding. Collections of accounts receivable and related
days outstanding will fluctuate in future periods due to the
timing, amount of our future revenues, payment terms on customer
contracts and the effectiveness of our collection efforts. The
average number of days our accounts receivable were outstanding
was 76 in 2003, 94 in 2002 and 104 in 2001.




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

Our operating cash flows will be impacted in the
future based on the timing of payments to our vendors for
accounts payable. We endeavor to pay our vendors and service
providers in accordance with the invoice terms and conditions.
The timing of cash payments in future periods may be impacted by
the nature of accounts payable arrangements.

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Investing
Activities.During 2003,
$6.3 million in cash was provided by investing activities
while during 2002 and 2001 we used cash in investing activities
of $1.8 million and $34.9 million. Cash used in
investing activities typically relates to the purchase of
property and equipment, primarily for the acquisition of
additional network infrastructure equipment, strategic
investments in private entities and short-term investments in
high-grade, low risk instruments. Cash proceeds typically are
comprised of the sale of investments and marketable securities
and the release of restricted cash and funds held in escrow.
Investments in property and equipment totaled
$12.2 million, $6.8 million, and $11.2 million
during 2003, 2002 and 2001.

During 2003, we received $3.8 million from
the early release of funds held in escrow and $2.4 million
from the sale of certain of our public and private investments
during the second quarter of 2003. Additionally, we received
$9.6 million from the sale of marketable securities and
$2.7 million in previously restricted cash. In 2002, we
acquired the remaining 60% ownership interest in Critical Path
Pacific, Inc. and recognized an increase in cash of
$4.5 million, net of the $3.0 million cash portion of
the purchase price. In 2001, we acquired the outstanding 27.13%
interest in our Italian subsidiary, Critical Path Italy, for
approximately $4.2 million, and paid an investment banking
fee of $5.7 million associated with our ISOCOR acquisition.

We primarily invest excess cash in money market
funds and other highly liquid securities with maturities of less
than 90 days with the intent to make such funds readily
available for operating purposes. During 2002 and 2001, we
invested a portion of our cash in high-grade, low risk
investments with an average maturity of three- to twelve-months.
At December 31, 2003, we did not hold any marketable
securities. As of December 31, 2002 and 2001, marketable
securities totaled approximately $9.6 million and
$9.7 million, respectively.

Financing
Activities.During 2003, financing
activities provided $12.6 million in cash while during 2002
and 2001 we used cash in financing activities of
$0.8 million and $30.3 million, respectively, to
retire a significant portion of our convertible debt and to
payoff capital lease obligations. The cash outlays were
partially offset by proceeds raised in a financing transaction
closed in the fourth quarter of 2001 with General Atlantic
Partners and certain other investors detailed below, the
repayment of notes receivable from officers and shareholders and
from the exercise of stock options.

During 2003, we raised $10 million through
the issuance of 10% senior secured convertible notes to
General Atlantic Investors and $4.9 million in proceeds
related to our line of credit facility with Silicon Valley Bank.
Additionally, we raised $1.1 million in proceeds from the
issuance of common stock during 2003. These cash inflows were
partially offset by approximately $814,000 in principal payments
on note and capital lease obligations and $2.6 million in
payments against the line of credit facility. As of
December 31, 2003 a $2.4 million balance remained
outstanding. Additionally, during the year we reduced letters of
credit held under the credit facility from $3.0 million at
December 31, 2002 to $2.7 million at December 31,
2003. All associated interest and fees are included as a
component of interest expense.

During 2002, we used $3.8 million to payoff
capital lease obligations. These cash outlays were partially
offset by $1.2 million in proceeds from the repayment of
certain officer and shareholder notes receivable and
$1.8 million in proceeds from the exercise of stock options.

During 2001, we used cash in financing activities
of $59.6 million to retire $261.4 million of face
value of 5 3/4% convertible subordinated notes and to
repay certain capital lease obligations. See also Note 15
of Notes to Consolidated Financial Statements  Financing
Transaction and Preferred Stock. These cash outlays were
partially offset by $26.8 million in proceeds raised in the
financing transaction closed in the fourth quarter of 2001
detailed below and $2.6 million in proceeds from the
exercise of stock options.

The financing transaction closed in 2001 was with
a group of investors led by General Atlantic Partners, LLC and
its affiliates. The financing transaction consisted of
approximately $30 million in gross cash proceeds and the
retirement of $65 million in face value of our
5 3/4% convertible subordinated notes in the form of
shares of mandatorily redeemable convertible preferred stock,
and the issuance to General Atlantic Partners and its affiliates
of warrants to purchase 625,000 shares of common stock. The
cash proceeds to us, net of transaction costs, totaled
$26.8 million.

We receive cash from the exercise of stock
options and the sale of stock under our employee stock purchase
plan. While we expect to continue to receive these proceeds in
future periods, the timing and amount of such proceeds is
difficult to predict and is contingent on a number of factors
including the price of our

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common stock, the number of employees
participating in the stock option plans and our employee stock
purchase plan and general market conditions.


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

The table below sets forth our significant
obligations and commitments as of December 31, 2003.

Contractual Obligations and
Commitments

|                              |                                          |                                    |   |        |        |      |   |       |        |      |   |            |        |  |   |       |       |  |   |        |        |  |   |       |       | 
|----------------------------- | ---------------------------------------- | ---------------------------------- | - | ------ | ------ | ---- | - | ----- | ------ | ---- | - | ---------- | ------ |  | - | ----- | ----- |  | - | ------ | ------ |  | - | ----- | ----- | 
|                              |                                          |                                   
|                              |                                          | Fiscal Year                       
|                              |                                          |                                   
|                              |                                          |                                    |   | 2008  
|                              |                                          | Total                              |   | 2004   |        | 2005 |   | 2006  |        | 2007 |   | and Beyond
|                              |                                          |                                    |   |        |        |      |   |       |        |      |   |           
|                              |                                          |                                   
|                              |                                          | (In thousands)                    
|Contractual Cash Obligations: |                                          |                                    |   |        |        |      |   |       |        |      |   |            |        |  |   |       |       |  |   |        |        |  |   |      
|                              | Convertible notes, including interest(1) |                                    | $ | 55,486 |        |      | $ | 2,206 |        |      | $ | 39,280     |        |  | $ |      |       |  | $ | 14,000 |        |  | $ |      |      
|                              | Line of credit facility                  |                                    |   | 2,299  |        |      |   | 2,299 |        |      |   |           |        |  |   |      |       |  |   |       |        |  |   |      |      
|                              | Operating lease obligations              |                                    |   | 19,595 |        |      |   | 4,805 |        |      |   | 4,214      |        |  |   | 4,076 |       |  |   | 1,366  |        |  |   | 5,134 |      
|                              | Capital lease obligations                |                                    |   | 2,088  |        |      |   | 1,024 |        |      |   | 640        |        |  |   | 424   |       |  |   |       |        |  |   |      |      
|                              | Other purchase obligations(2)            |                                    |   | 10,276 |        |      |   | 7,713 |        |      |   | 1,387      |        |  |   | 1,061 |       |  |   | 115    |        |  |   |       |      
|                              |                                          |                                    |   |        |        |      |   |       |        |      |   |            |        |  |   |       |       |  |   |        |        |  |   |      
|                              |                                          | Total Contractual Cash Obligations |   | $      | 89,744 |      |   | $     | 18,047 |      |   | $          | 45,521 |  |   | $     | 5,561 |  |   | $      | 15,481 |  |   | $     | 5,134 | 
|                              |                                          |                                    |   |        |        |      |   |       |        |      |   |            |        |  |   |       |       |  |   |        |        |  |   |      



---



|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the Critical Path
    5 3/4% Convertible Subordinated Notes due April 2005
    and 10% Senior Secured Notes due in November 2007.                                           
|   
|(2) | Represent certain contractual obligations related
    to licensed software, maintenance contracts, management of data
    center operations and network infrastructure storage costs.

Since December 31, 2003, we have issued an
additional $33.5 million in principal amount of
10% senior secured notes. These notes are convertible into
shares of Series E preferred stock, if we receive
shareholder approval, and otherwise are convertible into shares
of common stock, if we do not, at the option of the holder. A
discussion of the terms of the convertible notes is provided
above under the caption Liquidity and Capital Resources
 Recent Financing Transactions. If the holders of
the convertible notes convert the notes or a portion of the
notes to shares of our equity stock, then the contractual
obligation would be correspondingly reduced. In the event that
these notes are not converted into shares of our equity stock,
$21 million in principal and interest will be due and
payable in January 2008 and $25.9 million in principal and
interest will be due and payable in March 2008.

In March 2004, we executed an agreement that
extends the maturity of $32.8 million in face value of the
5 3/4% convertible subordinated notes due in April
2005 to April 2006, if our shareholders do not approve the
conversion of these notes into new Series E preferred
stock. In the event the maturity is extended, $32.8 million
currently due in April 2005 will be extended to April 2006. In
addition, under the agreement we would be required to increase
the interest rate for the extended one year period to 7.5% and
pay a fee for such extension of $1.5 million. Under the
amended agreement for the $32.8 million in notes, $100,000
in fees would be due in 2004, $2.6 million in fees and
interest would be due in 2005 and $34 million in principal
and interest would be due in 2006.

Recent Accounting Pronouncements

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments Hedging Activities. This statement amends
and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133.
SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment

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meets the characteristic of a derivative as
discussed in SFAS No. 133. In addition, it clarifies when a
derivative contains a financing component that warrants special
reporting in the condensed consolidated statement of cash flows.
The provisions of this standard are effective for contracts
entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. In
addition, except as stated below, all provisions of this
statement should be applied prospectively. The provisions of
this statement that relate to SFAS No. 133
implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003 should continue
to be applied in accordance with their respective effective
dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities
that do not yet exist should be applied to existing contracts as
well as new contracts entered into after June 30, 2003. The
adoption of SFAS No. 149 did not have a material
impact on our financial position and results of operations.


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

In May 2003, the EITF reached a consensus on EITF
Issue No. 03-05, Applicability of AICPA Statement of
Position 97-2, Software Revenue Recognition, to
Non-Software Deliverables in Arrangements Containing
More-Than-Incidental Software. EITF No. 03-05 addresses the
applicability of Statement of Position No. 97-2 regarding
software and non-software deliverables in a multiple element
arrangement, giving consideration to whether the deliverables
are essential to the functionality of one another. EITF Issue
No. 03-05 is effective for interim periods beginning after
August 13, 2003. The adoption of EITF Issue No. 03-05
did not have a material impact on our financial position and
results of operations.

In January 2003, the FASB issued FASB
Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51. FIN No. 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN No. 46 is effective immediately for
all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN
No. 46 must be applied for the first interim or annual
period beginning after June 15, 2003. In addition, FIN
No. 46 requires that we make disclosures in our
consolidated financial statements for the year ended
December 31, 2002 when we believe it is reasonably possible
that we will consolidate or disclose information about variable
interest entities after FIN No. 46 becomes effective. In
December 2003, FASB issued a revised FIN No. 46. The FASB
deferred the effective date for VIEs that are nonspecial
purpose entities created before February 1, 2003, to the
first interim or annual reporting period that ends after
March 15, 2004. At this time, we do not believe it is
reasonably possible that we will consolidate or disclose
information about variable interest entities. However, we will
continue to assess the impact of FIN No. 46 on our
consolidated financial statements.

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

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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
OPERATING RESULTS

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

We have not achieved profitability in any period
and may continue to incur net losses in accordance with
generally accepted accounting principles for the foreseeable
future. 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 and identity management
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 continue to increase in absolute dollars and may increase
as a percent of revenues. In addition, in future periods we may
incur significant non-cash charges related to stock-based
compensation. If revenues do not correspondingly increase, our
operating results 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 against our competitors. We also may never obtain
sufficient revenues to exceed our cost structure and achieve
profitability. If we do achieve profitability, we may not be
able to sustain or increase profitability in the future. This
may also, in turn, cause the price of our common stock to
demonstrate volatility and/or continue to decline.

We may need to raise additional capital and
may need to initiate other operational strategies to continue
our operations.

In the future, we may be required to raise
additional funds, particularly if we are unable to generate
positive cash flow as a result of our operations. Such financing
may not be available in sufficient amounts or on terms
acceptable to us. Additionally, we face a number of challenges
in operating our business, including our ability to overcome
viability concerns of our prospective customers given our recent
capital needs, the amount of resources necessary to maintain
worldwide operations and continued sluggishness in technology
spending. Concerns about our long-term viability may cause our
stock price to fall and impair our ability to raise additional
capital and may create a concern among our current and future
customers and vendors as to whether we will be able to fulfill
our contractual obligations. As a result, current and future
customers may determine not to do business with us, which would
cause our revenues to decline.

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

As of March 1, 2004, there were
4,188,587 shares of Series D preferred stock
outstanding which were convertible, at the option of the
holders, into approximately 16.3 million shares of common
stock. If we obtain shareholder approval, we will also amend the
terms of the Series D preferred stock, including the
conversion ratio, to increase the number of shares of common
stock initially issuable upon conversion of the Series D
preferred stock to approximately 44.8 million. In addition,
if we obtain shareholder approval, we will be issuing
approximately 52.3 million shares of Series E
preferred stock which are initially convertible, at the option
of the holders, into an equal number of shares of common stock.
In addition, if all the subscription rights being offered in the
proposed rights offering are exercised, the shares of
Series E preferred stock issued in the rights offering will
initially convert into up to approximately 14.0 million
shares of common stock. Accordingly, if we obtain shareholder
approval and we sell all the shares of preferred stock offered
in the proposed rights offering, our preferred stock will
initially be convertible into approximately 111.1 million
shares of common stock. Even if we do not obtain shareholder
approval, in addition to the approximately 16.2 million
shares of common stock currently issuable upon conversion of the
outstanding Series D preferred stock, approximately
$33.5 million in principal amount of 10% convertible
secured notes plus accrued dividends will be convertible, at the
option of each note holder, into approximately 17.6 million
shares of common stock. Increasing the number of

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additional shares of common stock that may be
sold into the market by this amount 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 accrue dividends at a compounded annual rate of 8%. If the
maximum amount of dividends were to accrue to the Series D
preferred stock prior to the automatic call for redemption date,
a total of approximately 20.3 million shares of common
stock, or an additional 4.1 million shares, would be
issuable upon conversion. If our shareholders approve the
amendment to the terms of the Series D preferred stock and
we issue approximately 52.3 million shares of Series E
preferred stock, all of which will accrue dividends at a rate of
5 3/4% per year, and the maximum amount of dividends
accrue prior to the automatic call for redemption date, the
number of shares of common stock issuable upon conversion will
increase by approximately 25.8 million shares to
approximately 137.2 million shares.




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

In the event of liquidation, dissolution, winding
up or change of control of Critical Path, if we issue shares of
Series E preferred stock, 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 share before any proceeds from the
liquidation, dissolution or winding up is paid with respect to
any other series or class of our capital stock. Accordingly, if
we obtain stockholder approval for the transactions contemplated
by the convertible note purchase and exchange agreement and the
January 2004 and March 2004 private placements, the
approximately 52.3 million shares of Series E
preferred stock that will be outstanding will initially have an
aggregate liquidation preference of approximately
$78.4 million. If all 14 million additional shares of
Series E preferred stock are purchased pursuant to the
proposed rights offering, the initial aggregate liquidation
preference of the Series E preferred stock will increase to
approximately $99.4 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 5 3/4%. After all of the then outstanding
shares of Series E preferred stock have received payment of
their liquidation preference, the holders of Series D
preferred stock would be entitled to receive, at a minimum,
$13.75 per share of Series D preferred stock plus all
accrued dividends on such share before any proceeds from the
liquidation, dissolution or winding up is paid to holders of our
common stock. As of March 1, 2004, the shares of
Series D preferred stock have an aggregate initial
liquidation preference of approximately $68.4 million,
which, as amended, will increase on a daily basis at an annual
rate of 5 3/4%. As amended, the shares of Series D
preferred stock have a maximum aggregate initial liquidation
preference of approximately $91 million. If we are acquired
before the fourth anniversary of the date the shares of
Series E preferred stock are first issued, the holders of
Series D preferred stock will be entitled to receive an
initial preference payment equal to approximately
$91 million, regardless of the amount of dividends accrued
at the time of the acquisition. 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
liquidation preferences of the our Series E preferred stock
and our Series D preferred stock are paid in full.
Consequently, the sale of all or substantially all of the shares
of Critical Path may likely result in all or substantially all
of the proceeds of such transaction being distributed to the
holders of our Series E preferred stock and Series D
preferred stock.

From time to time we engage in discussions with
or receive proposals from third parties relating to potential
acquisitions or strategic transactions that could constitute a
change of control. While we have not engaged in any transaction
of this type in the past, 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 liquidation preferences described above.

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Issuance of Series E preferred stock and
the amendment to the terms of our Series D preferred stock
will cause us to record charges that increase the net loss
attributable to our common shareholders, which may be material
to our results of operations for the period in which they are
recorded.

Based on our current estimates, the application
of generally accepted accounting principles to account for the
proposed rights offering, the conversion of the notes we
privately sold in November 2003, January 2004 and March 2004
into Series E preferred stock, the amendment of the terms
of our Series D preferred stock and the issuance of
Series E preferred stock in exchange for some outstanding
shares of Series D preferred stock will cause us to record
charges that increase our net loss attributable to common
shares. Because these charges will be based in part on the fair
value of our common stock and the Series E preferred stock
on the date or dates the Series E preferred stock is
issued, and on the fair value of the Series D preferred
stock on the date its rights and preferences are modified, we
are only able to estimate the amount of the charges that will
occur. Assuming that these transactions occurred on
November 18, 2003, except for the issuance of the notes
which occurred on November 26, 2003, January 16, 2004
and March 9, 2004 and the estimated fair market values of
the common stock, the Series E preferred stock and the
Series D preferred stock on such dates, we estimate that
one-time charges would total approximately $54.9 million to
be recorded in the period that shareholders approve the
transactions, and that additional charges totaling
$3.2 million would be recorded over the four-year
redemption period of the Series E preferred stock if all of
the shares offered of Series E preferred stock are
purchased in the proposed rights offering. A change in the fair
value of our common stock, or our Series E preferred stock,
as of the date or dates we issue the Series E preferred
stock, or our Series D preferred stock, as of the date we
amend the terms of the Series D preferred stock, would
cause these estimates to vary.




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 our German subsidiary for any reason other than
the operation of this subsidiary may result in certain tax
liabilities and are subject to local laws that could prevent the
transfer of cash from Germany to any other foreign or domestic
account. At December 31, 2003, approximately
$7.6 million was held outside of the United States. Our
inability to utilize this cash could slow our ability to grow
our business and reach our business objectives. 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.
In addition, a portion of our cash must be available to support
our line of credit with Silicon Valley Bank and related letters
of credit secured by the line of credit.




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

We cannot accurately forecast our revenues as a
result of our evolving business strategy and the emerging nature
of the Internet messaging infrastructure market. Forecasting is
further complicated by recent strategic and operational
restructurings, as well as fluctuations in license revenues as a
percentage of total revenues from 30% in 2001 to 40% in 2002 and
31% in 2003. Our revenues in some past quarters fell and could
continue to fall short of expectations if we experience delays
or cancellations of even a small number of orders. We often
offer volume-based pricing, which may affect 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;                                                                                                                           
|
| |  | the demand for outsourced messaging services
    generally and the use of messaging and identity management
    infrastructure products and services in particular;                                              
|
| |  | our ability to attract and retain customers and
    maintain customer satisfaction;                                                                                                                              
|
| |  | our ability to attract and retain qualified
    personnel with industry expertise, particularly sales personnel;                                                                                                 
|
| |  | the ability to upgrade, develop and maintain our
    systems and infrastructure and to effectively respond to the
    rapid technology change of the messaging and identity management
    infrastructure market;

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




In addition to the factors set forth above,
operating results have been and will continue to be impacted by
the extent to which we incur non-cash charges associated with
stock-based arrangements with employees and non-employees. In
particular, during the year ended December 31, 2002 and the
three months ended March 31, 2003, we incurred stock-based
compensation expense of $10.0 million and $85,000,
respectively, relating to the grant of options and warrants to
employees and non-employees in prior years. As of March 31,
2003, we had recognized all stock-based compensation related to
these prior grants. We incurred non-cash charges of $181,000
during the year ended December 31, 2003, associated with
the acceleration of vesting of stock options and the extension
of stock option exercise periods in connection with employee
terminations. 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 and/or subject to further declines.

If we fail to improve our sales and marketing
results, we may be unable to grow our business, which could
cause our operating results to decline.

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

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We have experienced significant turnover of
senior management and our current executive 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 2002, 2003 and 2004, we announced a
series of changes in our management that included the departure
of many senior executives, and there have also been many changes
in our board of directors. Many of the members of our current
board of directors and senior executives joined us in 2002 and
2003, and we may continue to make additional changes to our
senior management team. Our chief executive officer, Mark
Ferrer, joined us at the end of March 2004 and our chief
financial officer, James Clark, joined us on February 4,
2004. Because of these changes, our management team has not
worked together as a group and may not be able to work together
effectively to successfully execute on revenue goals, implement
our strategies and manage our operations. It may also take time
for these new members of our management team to familiarize
themselves with our operations which could slow the growth of
our business and cause our operating results to decline. If our
management team is unable to accomplish our business objectives,
our ability to grow our business and successfully meet
operational challenges could be severely impaired. We do not
have long-term employment agreements with any of our executive
officers. It is possible that this high turnover at our senior
management levels may also continue for a variety of reasons.
The loss of the services of one or more of our key senior
executive officers could also 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.




We depend on strategic relationships and the
loss of any key strategic relationships could reduce our ability
to sell our products and services and our revenues to
decline.

We depend on strategic relationships to expand
distribution channels and opportunities and to undertake joint
product development and marketing efforts. Our ability to
increase revenues depends upon aggressively marketing our
services through new and existing strategic relationships. In
the third quarter of 2002, we entered into certain partnership
agreements in our hosted messaging business with the
Hewlett-Packard Company for the development and marketing of a
complete managed messaging solution. In coming quarters we will
continue to invest heavily in this relationship and make changes
in our operations, including completion of the outsourcing of
our data operations, to accommodate the integration of this
partnership. To the extent this integration does not proceed as
anticipated or the anticipated benefits of this partnership are
not borne out, our revenues may not reach the level expected
from the amount of capital we have invested in this relationship
and our financial results may decline. In addition, if service
levels are not adequate in connection with the outsourcing of
our data centers, our customers may terminate agreements and our
revenues will decline. We have also invested heavily and
continue to invest in this model of hosted services operations.
To the extent this strategic decision and the business
relationships surrounding its execution do not prove profitable
and productive, our revenues and financial results could
decline. We also depend on a broad acceptance of our software
and outsourced messaging services on the part of potential
resellers and partners and our acceptance as a supplier of
outsourced messaging solutions. We also depend on joint
marketing and product development through strategic
relationships to achieve further market acceptance and brand
recognition. Our agreements with strategic partners typically do
not restrict them from introducing competing services. These
agreements typically are for terms of one to three years, and
automatically renew for additional one-year periods unless
either party gives prior notice of its intention to terminate
the agreement. In addition, these agreements are terminable by
our partners without cause, and some agreements are terminable
by us, upon a period of 30 to 120 days notice. Most of our
hosted customer agreements also provide for the partial refund
of fees paid or other monetary penalties in the event that our
services fail to meet defined minimum performance standards.
Distribution partners may choose not to renew existing
arrangements on commercially acceptable terms, or at all. In
addition to strategic relationships, we also depend on the
ability of our customers aggressively to sell and market our
services to their end-users. If we lose any strategic
relationships, fail to renew these agreements or relationships,
fail to fully exploit our relationships, or fail to develop new
strategic relationships, we could encounter increased difficulty
in selling our products and services.

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

We expect that sales of our products and services
to a limited number of customers will continue to account for a
high percentage of our revenue for the foreseeable future. For
example, for the year ended December 31, 2003, our top 10
customers accounted for approximately 27% of our total revenues.
Similarly, for the year ended December 31, 2002, our top 10
customers accounted for approximately 31% of our total revenues
and, for the year ended December 31, 2001, our top 10
customers accounted for approximately 20% 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.

In addition, a number of our customers,
particularly for our hosted services business and in the
technology industry, have also suffered from falling revenue.
Especially in the telecommunications industry, which represented
53% of the revenues from our top 10 customers for the year ended
December 31, 2003. Similarly, customers in the
telecommunications industry accounted for 44% of revenues from
our top 10 customers for the year ended December 31, 2002
and for 55% of revenues from our top 10 customers for the year
ended December 31, 2001. The relative financial performance
of our customers will continue to impact our sales cycles and
our ability to attract new business. Worldwide technology
spending has also decreased in recent quarters across all
industries. If our customers terminate their agreements for any
reason before the end of the contract term, the loss of the
customer could 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.

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

Because we have a variety of messaging and
directory infrastructure products and services, we encounter
different competitors at each level of our products and
services. Our primary competitors for service providers seeking
insourced or outsourced product-based solutions are Sun
Microsystems iPlanet, OpenWave Systems, Inc.,
Mirapoint, Inc., Oracle Corporation, Microsoft Corporation
and IBM Corporations Lotus Division. In the enterprise
eBusiness directory category, we compete primarily with iPlanet,
Microsoft Corporation and Novell Corporation, and our
competitors in the meta-directory market are iPlanet, Microsoft,
Novell and Siemens Corporation. Our competitors for corporate
customers seeking outsourced hosted messaging solutions are
e-mail service providers, such as CommTouch, Easylink Services
Corporation (formerly Mail.com), USA.Net and application service
providers who offer hosted communications services and hosted
Microsoft Exchange services. If we are unable to successfully
compete in our product market, our ability to retain our
customers and attract new customers could decline.

We believe that some of the competitive
factors affecting the market for messaging and identity
management infrastructure solutions include:



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

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

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

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

Our sales cycle is lengthy, and any delays or
cancellations in order 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. In addition, many factors can influence the
decision to purchase our product and service offerings including
budgetary restraints and decreases in capital expenditures,
quarterly fluctuations in operating results of customers and
potential customers, the emerging and evolving nature of the
internet-based services and wireless services markets.
Furthermore, general global economic conditions, and weakness in
global securities markets, continuing recessionary spending
levels, and a protracted slowdown in technology spending in
particular, have further lengthened and affected our sales
cycle. Such factors have led to and could continue to lead to
delays and postponements in purchasing decisions and in many
cases cancellations of anticipated orders. Any delay or
cancellation in sales of our products or services could cause
our operating results to be lower than those projected and cause
our stock price to decline.

Failure to resolve pending securities claims
and other material lawsuits may lead to continued costs and
expenses and increased doubts from existing and potential
customers and investors as to our prospects, which could cause
our revenues and our stock price to decline.

We are a defendant in a shareholder lawsuit filed
in San Diego Superior Court by shareholders of one of our
former customers alleging we participated in fraudulent
transactions to inflate artificially revenues of that customer.
We are also a defendant in a number of securities class action
lawsuits filed in the U.S. District Court for the Southern
District of New York, alleging that prospectuses under
which securities were sold contained false and misleading
statements with respect to discounts and commissions received by
underwriters. Should these lawsuits linger for a long period of
time, whether ultimately resolved in our favor or not, or

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further lawsuits be filed against us, coverage
limits of our insurance or our ability to pay such amounts may
not be adequate to cover the fees and expenses and any ultimate
resolution associated with such litigation. Likewise, we may not
be able to conclude or settle such litigation on terms that
coincide with the coverage limits of our insurance or ability to
pay upon any final determination. It is also likely that our
insurance may not cover some or all of the claims alleged in the
pending lawsuits, which would require us, rather than our
insurance carrier, to pay all or some of the expenses and
damages, if any, relating to these claims. The size of these
payments, individually or in the aggregate, could seriously
impair our cash reserves and financial condition. The continued
defense of these lawsuits also could result in continued
diversion of our managements time and attention away from
business operations, which could cause our financial results to
decline. A failure to resolve definitively current or future
material litigation in which we are involved or in which we may
become involved in the future, regardless of the merits of the
respective cases, could also cast doubt as to our prospects in
the eyes of our customers, potential customers and investors,
which could cause our revenues and stock price to further
decline.


Lingering effects of the recent SEC
investigation could cause further disruption in our operations
and lead to a decline in our financial results.

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

Our failure to carefully manage expenses and
growth 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, and
the growth of our business have placed significant strains on
managerial, operational and financial resources and contributed
to our history of losses. In addition, to manage any future
growth and profitability, we may need to improve or replace our
existing operational, customer service and financial systems,
procedures and controls. Any failure to properly manage these
systems and procedural transitions could impair our ability to
attract and service customers, and could cause us to incur
higher operating costs and delays in the execution of our
business plan. If we cannot manage growth and expenses
effectively, our business and operating results could decline.

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, which was put in place in March 2004, and continues
through March 2005, may not be adequate for the liabilities and
expenses potentially incurred in connection with current and
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

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directors to the fullest extent permitted by law.
The indemnification covers any expenses and liabilities
reasonably incurred in connection with the investigation,
defense, settlement or appeal of legal proceedings. We have made
payments and may continue to make payments in connection with
the indemnification of officers and directors in connection with
lawsuits and possibly pending investigations. See
Lingering effects of the recent SEC investigations could
cause further disruption in our operations and lead to a decline
in our financial results on page 62. However, it is
unlikely that our director and officer liability insurance will
be available to cover such payments.


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

The loss of the services of key personnel 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 services or continue to provide a high level of
customer service, which could result in the loss of customers
and revenues. In addition, volatility and declines in our stock
price may also affect our ability to retain key personnel, all
of whom have been granted stock-based incentive compensation. In
recent quarters we have also initiated reductions in our work
force and job eliminations to balance the size of our employee
base with anticipated revenue levels. Reductions in our
workforce could make it difficult to motivate and retain
remaining employees or attract needed new employees, and provide
distractions affecting our ability to deliver products and
solutions in a timely fashion and provide a high level of
customer service and support.

We do not have long-term employment agreements
with any of our key personnel. In addition, we do not maintain
key person life insurance on our employees and have no plans to
do so. The loss of the services of one or more of our current
key personnel could 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 2002, we incurred a number of restructuring
charges related to the right sizing of our business given market
conditions and the current operating environment. These efforts
included additional facilities and equipment lease terminations,
continuing expense management and headcount reductions. In 2003,
we continued to restructure our operations including
consolidating some office locations and reducing our global
workforce by approximately 175 positions, or approximately 30%
of the workforce. We expect to continue to make determinations
about the strategic future of our business and operations, and
our ability to execute on such plans effectively and to make
such determinations prudently could affect our future
operations. A failure to execute successfully on such plans and
to plan appropriately could cause or expenses to continue to
outpace our revenues and our financial condition could
significantly decline.

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

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

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We may face continued technical, operational
and strategic challenges preventing us from successfully
integrating or divesting acquired businesses.

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

In the past, due to the significant
underperformance of some of our acquisitions relative to
expectation, we eliminated certain acquired product or service
offerings through termination, sale or other disposition. Such
decisions to eliminate or limit our offering of an acquired
product or service involved and could continue to include the
expenditure of capital, the realization of losses, further
reduction in workforce, facility consolidation and the
elimination of revenues along with the associated costs, any of
which could cause our operating results to decline.

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.

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. 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.

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
from new technology sufficient to offset associated acquisition
and maintenance costs. In addition, an inability to obtain
needed licenses could delay product and service development
until equivalent technology can be identified, licensed and
integrated. Any delays in services or integration problems could
hinder our ability to retain and attract customers and cause our
business and operating results to suffer.

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

Few laws currently apply directly to activity on
the Internet and the messaging business; however, new laws are
proposed and other laws made applicable to Internet
communications every year. In particular, the operations of our
business faces risks associated with privacy, confidentiality of
user data and communications, consumer protection, taxation,
content, copyright, trade secrets, trademarks, antitrust,
defamation and other legal issues. In particular, legal concerns
with respect to communication of confidential data have affected
our financial services and health care customers due to newly
enacted federal legislation. The growth of the industry and the
proliferation of Internet-based messaging devices and services
may prompt further legislative attention to our industry and
thus invite more regulatory control of our business. The
imposition of more stringent protections or new regulations and
application of laws to our business could burden our company and
those with which we do business. Any decreased generalized
demand for our services or the loss of, or

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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 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 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.

Finally, the Sarbanes-Oxley Act of 2002 and new
rules subsequently implemented by the Securities and Exchange
Commission have required changes in corporate governance
practices of public companies. In addition to final rules and
rule proposals already made by the Securities and Exchange
Commission, the Nasdaq Stock Market has adopted revisions to its
requirements for listed 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 auditors, 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
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. Given
the significant turnover of the members of our board of
directors and the fact that some members would not qualify as
independent under the new SEC rules and the listing
standards adopted by the Nasdaq Stock Market to which we are
subject, it may be difficult for us to maintain sufficient
independent directors to comply with these new rules and
regulations. For instance, we currently do not have a sufficient
number of independent directors to constitute a majority of the
board or to serve on the audit committee of the board under
listing standards that will apply later this year. If we fail to
comply, our common stock may be delisted from the Nasdaq
National Market. Please see the discussion below titled We
may not be able to maintain our listing on the Nasdaq National
Market, and if we fail to do so, the price and liquidity of our
common stock may decline.

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

The Nasdaq Stock Market has quantitative
maintenance criteria for the continued listing of common stock
on the Nasdaq National Market. The current requirements
affecting us include (i) having total assets of at least
$50 million, (ii) having total revenue of
$50 million, and (iii) maintaining a minimum closing
bid price per share of $1.00. On December 23, 2002, The
Nasdaq Stock Market Inc. issued us a letter that we were not in
compliance with the minimum closing bid price requirement and,
therefore, faced delisting proceedings. Since that time, we have
worked with The Nasdaq Stock Market in an effort to maintain our
listing. On July 24, 2003, The Nasdaq Stock Market notified
us that we had regained compliance with the requirements for
continued listing. Nevertheless, we may not be able to comply
with the quantitative or quantitative maintenance criteria or
any of the Nasdaq National Markets listing requirements or
other rules, or other markets listing requirements to the extent
our stock is listed elsewhere, in the future. For instance, if
we were to issue a large number of shares of common stock, the
price per share of the common stock could fall. If we fail to
maintain continued listing on the Nasdaq National Market and
must move to a market with

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less liquidity, our stock price would likely
further decline. If we are delisted, it could have a material
adverse effect on the market price of, and the liquidity of the
trading market for, our common stock.


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

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

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.

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

Our customers have, in the past, experienced some
interruptions in our hosted messaging service. We believe that
these interruptions will continue to occur from time to time.
These interruptions may be due to hardware failures, unsolicited
bulk e-mail, or spam, attacks and operating system
failures or other causes beyond our control. 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 email services. We expect to experience occasional
temporary capacity constraints due to unanticipated sharply
increased traffic, which may cause unanticipated system
disruptions, slower response times, impaired quality and
degradation in levels of customer service. If this were to
continue to happen, our ability to retain existing customers and
attract new customers could suffer dramatically and our revenues
would decline.

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

If our system security is breached, our
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,

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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 several patents
pending in the United States and may seek additional patents in
the future. However, the status of United States patent
protection in the software industry is not well defined and will
evolve as the U.S. Patent and Trademark Office grants
additional patents. We do not know if our patent applications or
any of our future patent applications will be issued with the
scope of the claims sought, if at all, or whether any patents we
have received or will receive will be challenged or invalidated.

Our proprietary rights may not be adequately
protected because:



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

In addition, the laws of some foreign countries
may not protect proprietary rights to the same extent as do the
laws of the United States. Our means of protecting proprietary
rights in the United States or abroad may not be adequate and
competitors may independently develop similar technology.
Additionally, we cannot be certain that our products do not
infringe issued patents that may relate to our products. In
addition, because patent applications in the United States are
not publicly disclosed until the patent is issued, applications
may have been filed which relate to our software products.

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

We assume a certain level of credit risk with our
customers in order to do business. Conditions affecting any of
our customers could cause them to become unable or unwilling to
pay us in a timely manner, or at all, for products or services
we have already provided them. For example, if economic
conditions decline or if new or unanticipated government
regulations are enacted which affect our customers, they may
experience financial difficulties and be unable to pay their
bills. In the past, we have experienced significant collection
delays from certain customers, and we cannot predict whether we
will continue to experience similar or more severe delays in the
future. In particular, some of our customers are suffering from
the general weakness in the economy and among technology
companies in particular. Any reserves that we may establish to
cover losses due to delays in their inability to pay may not be
sufficient to cover our losses. If losses due to delays or
inability to pay are greater than our reserves, our capital
resources may not be sufficient to meet our operating needs and
our business could suffer.

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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 62% of our revenues from international
sales in 2003 and 54% of our revenues from international sales
in 2002. We intend to continue to operate in international
markets and to spend significant financial and managerial
resources to do so. In particular, in 2002 we purchased the
remaining interests of our joint venture partners for our
operations in Japan. We hope to expend revenues and plan to
increase resources to grow our operations in the Asian market.
If revenues from international operations do not exceed the
expense of establishing and maintaining these operations, our
business 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                                                               
|
| |  | 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 issuance of our Series E preferred
stock to the General Atlantic Investors and the Cheung Kong
Investors upon conversion of their convertible notes and the
amendment of the terms of the Series D preferred stock will
result in significant equity ownership by the General Atlantic
Investors and the Cheung Kong Investors, which may limit the
ability of our other shareholders to influence significant
corporate decisions either of which could delay or prevent a
change of control or depress our stock price.

If we obtain shareholder approval and convert the
notes held by the General Atlantic Investors and the Cheung Kong
Investors into Series E preferred stock and amend the terms
of our Series D preferred stock, the General Atlantic
Investors will beneficially own approximately 30% of our
outstanding securities (which represents 21% of the voting
power) and the Cheung Kong Investors will beneficially own
approximately 26% of our outstanding securities (which
represents 28% of the voting power). In addition, the General
Atlantic Investors have the right, but not the obligation, to
purchase 55% of the shares of Series E preferred stock not
subscribed for by the holders of our common stock and the Cheung
Kong Investors have the right, but not the obligation, to
purchase 45% of the shares of Series E preferred stock not
subscribed for by the holders of our common stock. Further, the
General Atlantic Investors and the Cheung Kong Investors have
the right to purchase shares of Series E preferred stock,
if any, not purchased by the other. Accordingly, the percentage
ownership of the General Atlantic Investors and the Cheung Kong
Investors may increase as a result of the proposed rights
offering. In addition, the holders of our Series D
preferred stock, which is controlled by the General Atlantic
Investors, are entitled to elect one director and, upon
consummation of the transactions contemplated by the convertible
note purchase and exchange agreement, the Cheung Kong Investors
will have the right to elect one director. As a result, the
General Atlantic Investors and the Cheung Kong Investors,
although not affiliated, will have the ability, 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 and the sale of all or
substantially all of our assets or other business combination
transactions, charter and

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bylaw amendments and other significant corporate
actions, which could delay or prevent a change in control or
depress our stock price.


The issuance of our Series E preferred
stock to the General Atlantic Investors and the Cheung Kong
Investors upon conversion of their convertible notes and the
amendment of the terms of the Series D preferred stock will
result in significant equity ownership by the General Atlantic
Investors and the Cheung Kong Investors, which may result in
potential conflicts of interests, which could adversely affect
the holders of our common stock, delay a change in control and
depress our stock price.

The 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 can
approve a change in control transaction in order to receive
payment of their liquidation preference even if our other
shareholders oppose the transaction, which could depress the
price of our common stock. 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, which could depress our stock
price, limit the number of potential investors 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 conversion price for our 10% senior
secured convertible notes and the subscription price determined
for our proposed rights offering is not necessarily an
indication of our value.

The conversion price for our 10% senior
secured convertible notes and the subscription price per share
of the Series E preferred stock in the rights offering was
the price proposed by the General Atlantic Investors and the
Cheung Kong Investors in connection with our negotiation of the
convertible note purchase and exchange agreement and was
approved by the independent members of our board of directors
(which excluded William E. McGlashan, Jr., our chief
executive officer and a related party of one of our holders of
Series D preferred stock, and Raul J. Fernandez and William
E. Ford, each of whom is affiliated with General Atlantic) based
on the recommendation of the strategic alternatives committee of
the board of directors. The conversion price for our
10% senior secured convertible notes and the subscription
price do not necessarily bear any relationship to the book value
of our assets, past operations, cash flows, losses, financial
condition or any other established criteria for value.

The use of our net operating losses could be
limited if we undergo an ownership change upon exercise of the
subscription rights.

If the exercise of the subscription rights in the
proposed rights offering causes us to undergo an ownership
change for federal income tax purposes (i.e., an increase
by more than 50% of the amount of stock held by one or more of
our 5% shareholders during the past 3 years), our use of
our pre-change net operating losses will generally be limited
annually to the product of the long-term tax-exempt rate
(currently 4.58%) and the value of our stock immediately before
the ownership change. This could increase our federal income tax
liability if we generate taxable income in the future.

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 fourth quarter of 2003, the
closing sale prices of our common stock on the Nasdaq National
Market ranged from $1.26 on December 29, 2003 to $3.21 on
October 31, 2003 and November 3, 2003. Our stock price
may further decline or fluctuate in response to any number of
factors and events, such as announcements related to
technological innovations, intense regulatory scrutiny and new
corporate and securities and other legislation, strategic and
sales relationships, new product and service offerings by us or
our competitors, litigation outcomes, changes in senior
management, changes in

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financial estimates and recommendations of
securities analysts, the operating and stock price performance
of other companies that investors may deem comparable, news
reports relating to trends in our markets and the market for our
stock, media interest in accounting scandals and corporate
governance questions, overall market conditions and domestic and
international economic factors unrelated to our performance. In
addition, the stock market in general, particularly with respect
to technology stocks, has experienced extreme volatility and a
significant cumulative decline in recent quarters. This
volatility and decline has affected many companies, including
our company, irrespective of the specific operating performance
of such companies. These broad market influences and
fluctuations may adversely affect the price of our stock, and
our ability to remain listed on the Nasdaq National Market,
regardless of our operating performance or other factors.


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.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

The following table presents the hypothetical
changes in fair value in our outstanding convertible
subordinated notes and senior secured convertible note at
December 31, 2003. The value of both instruments 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
traded fair market value of the notes (in thousands):

|                                      |  |                              |        |             |  |                              |        |      |  |        |        |         |  |         |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|------------------------------------- |  | ---------------------------- | ------ | ----------- |  | ---------------------------- | ------ | ---- |  | ------ | ------ | ------- |  | ------- | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                      |  |                              |        |             |  |                             
|                                      |  | Valuation of Borrowing Given |        |             |  | Valuation of Borrowing Given
|                                      |  | an Interest Rate Decrease    |        |             |  | an Interest Rate Increase   
|                                      |  | of X Basis Points            |        | No Change   |  | of X Basis Points           
|                                      |  |                              |        | in Interest |  |                             
|                                      |  | 150 BPS                      |        | 100 BPS     |  | 50 BPS                       |        | Rate |  | 50 BPS |        | 100 BPS |  | 150 BPS
|                                      |  |                              |        |             |  |                              |        |      |  |        |        |         |  |        
|5 3/4% convertible subordinated notes |  | $                            | 36,340 |             |  | $                            | 36,165 |      |  | $      | 35,991 |         |  | $       | 35,819 |  |  | $ | 35,647 |  |  | $ | 35,476 |  |  | $ | 35,306 | 
|10% senior secured convertible notes  |  | $                            | 10,239 |             |  | $                            | 10,188 |      |  | $      | 10,138 |         |  | $       | 10,088 |  |  | $ | 10,038 |  |  | $ | 9,988  |  |  | $ | 9,939  | 
|                                      |  |                              |        |             |  |                              |        |      |  |        |        |         |  |         |        |  |  |   |        |  |  |   |        |  |  |   |        | 

As of December 31, 2003, we had a
$2.3 million balance outstanding against our variable rate
line of credit with Silicon Valley Bank. An immediate 10% change
in interest rate would not materially affect our results of
operations.

As of December 31, 2003, we held cash and
cash equivalents of $19.0 million and no investments in
marketable securities. See also Note 6 of Notes to
Consolidated Financial Statements  Investments. Our
long-term obligations consist of our $38.4 million
five-year, 5 3/4% Convertible Subordinated Notes due
April 2005, $10.0 million four-year, 10% Senior
Subordinated Convertible Notes due November 2007 and certain

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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
rate risk is primarily associated with fluctuations in the Euro,
and, prior to March 1, 2002, the Italian Lira and Irish
Punt. We realized a net gain on foreign exchange equal to
$947,000 in 2001, and net losses of $817,000 and $440,000 in
2002 and 2003, respectively. To date, we have not sought to
hedge the risks associated with fluctuations in exchange rates.

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






|        |                                               
|------- | ----------------------------------------------
|Item 8. | Financial Statements and Supplemental
    Data

Financial Statements




Reference is made to the Index of Consolidated
Financial Statements that appears in Item 15(a)(i) of this
report. The Report of Independent Auditors, Consolidated
Financial Statements, Notes to Consolidated Financial Statements
and Financial Statement Schedule which are listed in the Index
of Consolidated Financial Statements and which appear beginning
on page 93 of this report are incorporated into this
Item 8.









|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures




(a) Evaluation of disclosure controls and
procedures. We maintain disclosure controls and
procedures, as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act), that are designed to ensure that information
required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls
and procedures, management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures,
our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any disclosure controls
and procedures also is based in part upon certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Our disclosure
controls and procedures are designed to provide reasonable
assurance of achieving their objectives, and the Chief Executive
Officer and the Chief Financial Officer have concluded that
these controls and procedures are effective at the
reasonable assurance level.




Based on their evaluation as of the end of the
period covered by this Annual Report on Form 10-K, our
Chief Executive Officer and Chief Financial Officer have
concluded that, subject to the limitations noted above, our
disclosure controls and procedures were effective to ensure that
material information relating to us, including our consolidated
subsidiaries, is made known to them by others within those
entities, and that our system of disclosure controls and
procedures was operating at a level such that they could give
reasonable assurance that the objectives of our system of
disclosure controls and procedures were met, particularly during
the period in which this Annual Report on Form 10-K was
being prepared.

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




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Directors and Executive Officers




The executive officers, directors and other key
employees of Critical Path and their ages as of April 6,
2004 are as follows:







|                            |  |     |    |          |  |                                                                                
|--------------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------------------
|Name                        |  | Age |    | Position
|                            |  |     |    |         
|William E. McGlashan, Jr.   |  |     | 40 |          |  | Chairman of the Board                                                          
|Mark Ferrer                 |  |     | 44 |          |  | Chief Executive Officer                                                        
|James Clark                 |  |     | 47 |          |  | Executive Vice President and Chief Financial
    Officer                       
|Paul Bartlett               |  |     | 43 |          |  | Chief Operating Officer                                                        
|Bernard Harguindeguy        |  |     | 45 |          |  | General Manager, Identity Management                                           
|Patrick Tracy Currie        |  |     | 42 |          |  | Executive Vice President, Services and General
    Manager of Hosted Operations
|Michael J. Zukerman         |  |     | 44 |          |  | Senior Vice President, General Counsel and
    Secretary                       
|Menelaos (Michael) Serbinis |  |     | 30 |          |  | Chief Technology Officer                                                       
|Barry Twohig                |  |     | 37 |          |  | Senior Vice President, Engineering                                             
|Peter L.S. Currie(3)        |  |     | 47 |          |  | Director                                                                       
|Ross Dove(1)(2)(3)          |  |     | 51 |          |  | Director                                                                       
|William E. Ford(1)          |  |     | 42 |          |  | Director                                                                       
|Frost R. R. Prioleau(2)(3)  |  |     | 43 |          |  | Director                                                                       
|Steven R. Springsteel(1)    |  |     | 46 |          |  | Director                                                                       






---



|    |                                                                    
|--- | -------------------------------------------------------------------
|(1) | Member of the Audit Committee of the Board of
    Directors.       
|   
|(2) | Member of the Compensation Committee of the Board
    of Directors.
|   
|(3) | Member of the Nominating and Corporate Governance
    Committee.   




William E.
McGlashan, Jr.has served as a
director since December of 2001 and as Chairman of the Board
since June 2002. Mr. McGlashan served as our Chief
Executive Officer from December 2001 through March 2004.
Mr. McGlashan joined us in April 2001 as our Interim
President and Chief Operating Officer. He was appointed Interim
Chief Executive Officer in August 2001. Mr. McGlashan also
serves as the chief executive officer and founder of the Vectis
Group LLC, an investment company which he founded in 2000. Prior
to his tenure at Vectis, he was a venture partner at Whitney and
Co., a venture capital firm, and was also the co-founder and
president of Pharmanex, a phyto-pharmaceutical company from 1995
to 2000. He co-founded and served as chief executive officer of
Generation Ventures, a firm funded by Whitney & Co.,
from 1993 to 1995 and also co-founded and served as president
for TRADE, Inc. from 1991 to 1993. Prior to that,
Mr. McGlashan was a senior associate at Bain Capital from
1990 to 1991. Mr. McGlashan currently serves as a director
of Vectis Group LLC, Hard Dollar Corporation and two
not-for-profit organizations, JustGive and the
San Francisco Conservation Corps. Mr. McGlashans
term expires in 2004.







Mark Ferrerhas
served as our Chief Executive Officer since the end of March
2004. Prior to joining us, Mr. Ferrer served as president
and chief executive officer of Vastera, Inc. from February 2002
to November 2003 and prior to that as its president and chief
operating officer from December 1999 to November 2003. From
April 1998 to December 1999, Mr. Ferrer held various
management positions with the Baan Company,




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serving as president of Baan Americas and as
chief operating officer of Aurum Software. From June 1982 to
April 1998, Mr. Ferrer served in various roles at IBM
Corporation.





James Clarkhas
served as our Chief Financial Officer since February 2004. Prior
to joining us, from January 2002 to October 2003, he was the
chief financial officer at Diversified Healthcare
Services, Inc., which was recently acquired by Fair Isaac
Corporation. Before that, he was the chief financial officer at
several software and services businesses, including
StellarNet, Inc. from February 2001 to January 2002,
Netopia, Inc. from November 1994 to February 2001 and
Integral Systems, Inc from November 1985 to November 1994.
He is a certified public accountant.

Paul Bartletthas
served as our Chief Operating Officer since November 2003. From
February 2003 until November 2003, Mr. Bartlett served as
our Chief Financial Officer and Executive Vice President,
Corporate Development. In April 2002, he first joined Critical
Path as Executive Vice President, Corporate Development. From
June 2001 to April 2002, Mr. Bartlett was an independent
business consultant. From November 2000 to June 2001,
Mr. Bartlett worked at Quintus Corporation from April 2000
to November 2000, serving as its chief executive officer and
prior to that as its chief operating officer. In 2001, Quintis
Corporation filed a petition under the Federal bankruptcy laws
while Mr. Bartlett was serving as its chief executive
officer. From October 1996 to March 2000, Mr. Bartlett was
president and a director of Hall Kinion and Associates.

Bernard Harguindeguyhas served as our Executive Vice
President and Chief Marketing Officer from January 2002 to May
2003, when he became Executive Vice President and General
Manager of our Identity Management business. Before joining
Critical Path, from June 2000 to January 2002,
Mr. Harguindeguy was an independent consultant serving
various technology companies. From December 1996 to September
1999, he served as chief executive officer of Worldtalk
Communications Corporation.

Patrick Tracy Curriehas served as our Executive Vice
President, Operations and General Manager, Hosted Operations
since November 2002 and prior to that served as a consultant to
the Company from July 2002. From December 2000 to July 2002,
Mr. Currie founded and served as president of CTD, LLC, a
business consulting company providing services to technology
industry clients. Prior to his founding of CTD, from September
2000 to November 2000, Mr. Currie headed a start-up venture
called MSP Holdings, funded by Thoma-Cressey Equity Partners.
Prior to that from May 1996 to August 2000, Mr. Currie
served as senior vice president of Tanning Technology
Corporation, a professional services firm.

Michael J. Zukermanhas served as our Senior Vice
President, General Counsel and Secretary since June 2001. From
July 1999 to June 2001, he was vice president of business
development for Driveway Corporation, a provider of web-based
file storage services. Prior to that, Mr. Zukerman was
senior vice president of business development, general counsel
and secretary at Sega.com, Inc., from October 1996 to June
1999. From 1989 to October 1996, Mr. Zukerman was vice
president and general counsel at Netopia, Inc. Prior to
that, Mr. Zukerman was an attorney with Brobeck,
Phleger & Harrison LLP.

Menelaos (Michael) Serbinishas served as our Chief Technology
Officer since February 2001. Mr. Serbinis joined Critical
Path as its Chief Security Officer in March 2000 and served in
this capacity until February 2001. From November 1997 to March
2000, Mr. Serbinis was the chief technology officer of The
docSpace Company, which he co-founded in November 1997. From
September 1996 to October 1997, Mr. Serbinis was a software
engineer for Total Control, a subsidiary of General Electric.
From April 1996 to August 1996, Mr. Serbinis was
responsible for search engine engineering at Zip2 Corporation.

Barry Twohighas
served as our Senior Vice President, Engineering since October,
2002 and as Vice President, Messaging since November 2000, after
joining us as a result of the acquisition of ISOCOR Corporation,
where he held Director of Engineering and other engineering
management positions, since February 1995. From August 1988 to
January 1995, Mr. Twohig served in various roles at Retix
Corporation.

Peter L. S. Curriehas served as a director since January
2004. Since January 2002, Mr. Currie has been a General
Partner at General Atlantic Partners LLC (GAP LLC),
a worldwide private equity firm, where he focuses on the
Enterprise Software sector. May 1999 to December 2001,
Mr. Currie was a partner and co-founder of The Barksdale
group, an early stage venture capital firm. Before that, he was
Executive Vice President and Chief Administrative Officer of
Netscape Communications from April 1995 until May 1999,

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following the sale of the company to AOL. From
April 1989 to March 1995, Mr. Currie held various
management positions at McCaw Cellular Communications
(predecessor company to AT&T Wireless) including Executive
Vice President and Chief Financial Officer, and Executive Vice
President-Corporate Development. Mr. Curries term
expires in 2004.








Ross Dovehas served
as a director since April 2003. Since 1980, Mr. Dove has
served as chairman and chief executive officer of
DoveBid, Inc. Mr. Doves term expires in 2004.







William E. Fordhas
served as a director since December 2001. Mr. Ford is an
employee of General Atlantic Service Corporation and is a
managing member of GAP LLC, a private equity firm that invests
in information technology, process outsourcing and
communications businesses on a global basis, and has been with
GAP LLC (or its predecessor) since July 1991. Mr. Ford is
also a director of Computershare Limited, a leading provider of
financial market services and technology to the global
securities industry, and several private information technology
companies in which entities affiliated with GAP LLC are
investors. Mr. Ford received a BA in Economics from Amherst
College and an MBA from the Stanford Graduate School of
Business. Mr. Ford is a trustee of Amherst College and The
Common Ground Community. Mr. Ford is also a director of
United Hospital Fund, NYC2012, Echoing Green and Spence School.
Mr. Ford previously served as a trustee of the Lown
Cardiovascular Research Foundation and The Friends of Family
Academy in Manhattan. Mr. Ford, who was elected by the
holders of a majority of the outstanding Series D preferred
stock, shall serve until the earlier of his resignation, his
removal by holders of a majority of the outstanding
Series D preferred stock or such time as there are fewer
than 500,000 shares of Series D preferred stock outstanding.







Frost R. R. Prioleauhas served as director since February
2004. From September 2003 to the present, he has served as the
managing partner of Blue Bridge Capital. Since January 2004,
Mr. Prioleau has served as the Chief Executive Officer of
Nova Media GP, LLC. From December 2000 to August 2002,
Mr. Prioleau served as the President of
Intraware, Inc., an internet software/services company.
From May 2000 to December 2000, Mr. Prioleau served as the
Executive Vice President of eServices of Intraware, Inc.
From 1989 to 1998, Mr. Prioleau served as the President and
Chief Executive Officer of Plynetics Express Corporation, a
company that provides rapid-response prototyping and
manufacturing services. From 1984 to 1989, Mr. Prioleau
served as National Sales Manager of Precision
Founders, Inc., a manufacturer of investment castings to
aerospace, nuclear and medical companies.
Mr. Prioleaus term expires in 2004.







Steven R. Springsteelhas served as director since April
2003. Mr. Springsteel has been senior vice president of
finance and administration and chief financial officer of
Verity, Inc., a provider of enterprise software, since
January 2003. From November 2001 to January 2003,
Mr. Springsteel was chief operating officer and chief
financial officer of Sagent Technology, Inc., an enterprise
business intelligence software company. He remains a director of
Sagent Technology, Inc. Prior to joining Sagent
Technology, Inc., he was chief operating officer and chief
financial officer of NOCpulse, a provide of operation support
system technology from 2000 to 2001. From 1996 to 2000,
Mr. Springsteel served as executive vice president and
chief financial officer of Chordiant Software.
Mr. Springsteels term expires in 2004.







There are no family relationships between any of
our directors and executive officers.




Communications with the Board of
Directors

The Board of Directors believes it is in the best
interest of the company and our shareholders to maintain a
policy of open communication between our shareholders and the
Board. Accordingly, the Board of Directors has adopted the
following procedures for shareholders who wish to communicate
with the Board. Shareholders who wish to communicate with the
Board of Directors or with specified directors should do so by
sending any communication to the Board of Directors,
c/o Investor Relations, Critical Path, Inc., 350 The
Embarcadero, San Francisco, California 94105, or by sending
an email to ir@criticalpath.net.

Any such communication must state the number of
shares beneficially owned by the shareholder making the
communication. The Investor Relations department will forward
such communication to the full Board or to any individual
director or directors to whom the communication is directed.
However, if the communication

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is unduly hostile, threatening, illegal or
similarly inappropriate, the Investors Relations department
(after consultation with our legal department, if appropriate)
may discard the communication or take appropriate legal action
regarding the communication.


Board Independence

The board of directors has determined in
accordance with The Nasdaq Stock Market listing standards that
the following directors are independent: Ross Dove, Frost R.R.
Prioleau and Steven R. Springsteel. The independent directors
currently do not constitute a majority of our board of directors.

Audit Committee

We have an audit committee that is comprised of
William E. Ford, Ross Dove and Steven R. Springsteel.
Messrs. Dove and Springsteel are independent
directors as determined in accordance with The Nasdaq
Stock Market listing standards. In compliance with
Rule 4350A(d)(2)(B) of the Nasdaq Stock Markets
listing standards, our Board of Directors previously determined
that Mr. Fords service on the Audit Committee is in
the best interests of the company and our shareholders because
of the extent of his knowledge and experience in financial
matters. Mr. Ford will be ineligible to serve on the Audit
Committee beginning on the date of our annual meeting of
shareholders or October 31, 2004, whichever comes first.

The primary functions of the audit committee are
as follows:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | Reviewing our financial results                                                                        
|
| |  | Appointing, compensating and overseeing the work
    of our independent auditors                       
|
| |  | Reviewing the results of audits performed by our
    independent auditors                              
|
| |  | Reviewing the effectiveness of our accounting
    policies, financial reporting and internal controls  
|
| |  | Reviewing the scope of independent audit
    coverages and the fees charged by the independent auditors

The charter for the audit committee is available
on our website at www.criticalpath.net. All of the members of
the Audit Committee are financially literate. Our board of
directors has determined that Steven R. Springsteel is an
audit committee financial expert within the
applicable definition of the Securities and Exchange Commission
(the SEC).

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended (the Exchange Act), requires our
directors, executive officers and holders of more than 10% of
our common stock to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock
and our other equity securities. To our knowledge, we believe
that during the fiscal year ended December 31, 2003, our
officers, directors and holders of more than 10% of our common
stock complied with all Section 16(a) filing requirements
with the exception of the following late filings: Jeffrey
Webber, a former director, failed to file a Form 4 to
report the transfer of an option to buy common stock which took
place on February 12, 2003. In making this statement, we
have relied upon the written representations of our directors
and officers.

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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The following table summarizes all compensation
earned by or paid to the Named Executive Officers for services
rendered in all capacities to Critical Path during the fiscal
years ended December 31, 2003, 2002, and 2001.

Summary Compensation Table for Last Three
Fiscal Years

|                            |                                        |                     |      |              |  |              |         |            |  |                  |   |         |  |  |         |           |  |  |         |        |    
|--------------------------- | -------------------------------------- | ------------------- | ---- | ------------ |  | ------------ | ------- | ---------- |  | ---------------- | - | ------- |  |  | ------- | --------- |  |  | ------- | ------ | ---
|                            |                                        |                     |      | Long-Term   
|                            |                                        | Annual Compensation |      | Compensation
|                            |                                        |                     |      | Awards      
|                            |                                        |                     |      | Securities   |  |             
|                            |                                        |                     |      | Underlying   |  | All Other   
|Name and Principal Position |                                        | Year                |      | Salary ($)   |  | Bonus ($)(1) |         | Options(2) |  | Compensation ($)
|                            |                                        |                     |      |              |  |              |         |            |  |                 
|William E. McGlashan Jr.(3) |                                        |                     | 2003 |              |  |              | 392,500 |            |  |                  |  |         |  |  | 625,000 |           |  |  |        |       
|                            | Chairman of the Board                  |                     |      | 2002         |  |              |         | 437,637    |  |                  |   |        |  |  |         | 250,000   |  |  |         |       |    
|                            | of Directors and Chief                 |                     |      | 2001         |  |              |         | 189,000    |  |                  |   | 500,000 |  |  |         | 1,003,250 |  |  |         |       |    
|                            | Executive Officer                      |                     |      |              |  |              |         |            |  |                  |   |         |  |  |         |           |  |  |         |        |    
|Patrick Tracy Currie        |                                        |                     | 2003 |              |  |              | 287,517 |            |  |                  |  |         |  |  | 37,500  |           |  |  | 317,428 | (4)   
|                            | General Manager,                       |                     |      | 2002         |  |              |         |           |  |                  |   |        |  |  |         |          |  |  |         |       |    
|                            | Hosted Operations and                  |                     |      | 2001         |  |              |         |           |  |                  |   |        |  |  |         |          |  |  |         |       |    
|                            | Executive Vice President,
    Services |                     |      |              |  |              |         |            |  |                  |   |         |  |  |         |           |  |  |         |        |    
|Robert (Al) Shipp           |                                        |                     | 2003 |              |  |              | 218,750 |            |  |                  |  |         |  |  |        |           |  |  | 262,500 | (5)   
|                            | Former President                       |                     |      | 2002         |  |              |         | 11,963     |  |                  |   |        |  |  |         |          |  |  |         |       |    
|                            |                                        |                     |      | 2001         |  |              |         |           |  |                  |   |        |  |  |         |          |  |  |         |       |    
|Barry Twohig                |                                        |                     | 2003 |              |  |              | 221,042 |            |  |                  |  |         |  |  | 112,500 |           |  |  |        |       
|                            | Senior Vice President,                 |                     |      | 2002         |  |              |         | 157,716    |  |                  |   |        |  |  |         |          |  |  |         |       |    
|                            | Engineering                            |                     |      | 2001         |  |              |         | 152,759    |  |                  |   |        |  |  |         |          |  |  |         |       |    
|Paul Bartlett(6)            |                                        |                     | 2003 |              |  |              | 261,667 |            |  |                  |  |         |  |  | 437,500 |           |  |  | 8,907   | (6)   
|                            | Chief Operating Officer                |                     |      | 2002         |  |              |         | 219,319    |  |                  |   |        |  |  |         |          |  |  |         |       |    
|                            |                                        |                     |      | 2001         |  |              |         |           |  |                  |   |        |  |  |         |          |  |  |         |       |    
|Bernard Harguindeguy        |                                        |                     | 2003 |              |  |              | 113,637 |            |  |                  |  |         |  |  |        |           |  |  | 468,790 | (7)(8)
|                            | General Manager,                       |                     |      | 2002         |  |              |         | 283,801    |  |                  |   | 100,000 |  |  |         | 375,000   |  |  |         | 13,673 | (8)
|                            | Identity Management                    |                     |      | 2001         |  |              |         |           |  |                  |   |        |  |  |         |          |  |  |         |       |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We did not pay any discretionary bonuses to our
    officers in 2003. In connection with certain employment
    agreements and commission plans, we paid commissions in fiscal
    2003 as noted herein.                                                                                                                                                                                                                                         
|   
|(2) | The number of shares in this column have been
    adjusted to reflect the reverse stock split effected on
    August 1, 2003.                                                                                                                                                                                                                                                                                                                    
|   
|(3) | Mr. McGlashan joined us in April 2001 as
    interim Chief Operating Officer and President. In August 2001,
    Mr. McGlashan accepted the position of interim Chief
    Executive Officer and entered into a direct employment agreement
    with us.                                                                                                                                                                                           
|   
|(4) | In 2003, we paid consulting fees of $317,428 to
    CTD, LLC, an affiliate of Mr. Currie, for services rendered.                                                                                                                                                                                                                                                                                                                                 
|   
|(5) | In connection with his separation from Critical
    Path in December 2003, Mr. Shipp received a lump sum
    separation payment of $262,500.                                                                                                                                                                                                                                                                                                     
|   
|(6) | Mr. Bartlett joined us in April 2002 as
    Executive Vice President, Corporate Development, and was
    appointed to the additional role of Chief Financial Officer in
    February 2003. In November 2003, Mr. Bartlett transitioned
    to his current role as Chief Operating Officer and relocated to
    Dublin, Ireland. In connection with his relocation to
    Ireland he was reimbursed for $8,907 in taxable relocation
    expenses.
|   
|(7) | Mr. Harguindeguy earned $155,563 in
    commissions paid in 2003. Mr. Harguindeguy also received a
    one-time payment of $300,000 in connection with a substantial
    modification of his title, duties and responsibilities at
    Critical Path.                                                                                                                                                                                            
|   
|(8) | Mr. Harguindeguy received $13,227 and
    $13,673 for use of a corporate car during 2003 and 2002,
    respectively.                                                                                                                                                                                                                                                                                                                             

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Stock Options

The following table provides summary information
concerning option grants to the Named Executive Officers during
2003 and the potential realizable value of the options held by
each Named Executive Officer at the end of fiscal year 2003.

Option Grants in Fiscal Year 2003

|                          |  |                   |         |                     |  |           |       |                      |  |                  |      |        |  |  |            |  |  |   |           |  |  |   |           | 
|------------------------- |  | ----------------- | ------- | ------------------- |  | --------- | ----- | -------------------- |  | ---------------- | ---- | ------ |  |  | ---------- |  |  | - | --------- |  |  | - | --------- | 
|                          |  |                   |         |                     |  |           |       |                      |  |                 
|                          |  |                   |         | Aggregate Potential
|                          |  | Individual Grants |         | Realized Value at  
|                          |  |                   |         | Assumed Annual     
|                          |  | Number of         |         | Percentage          |  |           |       | Rates of Stock Price
|                          |  | Securities        |         | of Total            |  | Exercise  |       |                      |  | Appreciation for
|                          |  | Underlying        |         | Options             |  | of Base   |       |                      |  | Option Term     
|                          |  | Options           |         | Granted to          |  | Price     |       |                      |  | (4)(5)(6)       
|                          |  | Granted           |         | Employees in        |  | ($/Share) |       | Expiration           |  |                 
|Name                      |  | (#)(1)(2)         |         | 2003(3)             |  | (4)(5)    |       | Date                 |  | 5%($)            |      | 10%($)
|                          |  |                   |         |                     |  |           |       |                      |  |                  |      |       
|William E. McGlashan, Jr. |  |                   | 625,000 | (5)                 |  |           | 18.16 | %                    |  |                  | 3.12 |        |  |  | 04/24/2013 |  |  | $ | 3,176,345 |  |  | $ | 5,057,798 | 
|Patrick Tracy Currie      |  |                   | 37,500  | (6)                 |  |           | 1.09  | %                    |  |                  | 3.12 |        |  |  | 04/24/2013 |  |  | $ | 190,581   |  |  | $ | 303,468   | 
|Robert (Al) Shipp         |  |                   |        |                     |  |           |      |                      |  |                  |     |        |  |  |           |  |  |   |          |  |  |   |          | 
|Barry Twohig              |  |                   | 112,500 |                     |  |           | 3.27  | %                    |  |                  | 3.12 |        |  |  | 04/24/2013 |  |  | $ | 571,742   |  |  | $ | 910,404   | 
|Paul Bartlett             |  |                   | 187,500 |                     |  |           | 7.27  | %                    |  |                  | 3.28 |        |  |  | 01/15/2013 |  |  | $ | 1,270,538 |  |  | $ | 2,023,119 | 
|                          |  |                   | 250,000 |                     |  |           | 5.45  | %                    |  |                  | 3.12 |        |  |  | 04/24/2013 |  |  | $ | 1,001,770 |  |  | $ | 1,595,152 | 
|Bernard Harguindeguy      |  |                   |        |                     |  |           |      |                      |  |                  |     |        |  |  |           |  |  |   |          |  |  |   |          | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Except where otherwise noted in the footnote
    below, these stock options have a ten-year term, vesting ratably
    on a monthly basis, and become fully vested on the fourth
    anniversary of the vesting start date.                                                                                                                                                                                                                                                                                                             
|   
|(2) | The number of shares in this column have been
    adjusted to reflect the reverse stock split effected on
    August 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(3) | Based on options to purchase an aggregate of
    3,441,125 shares of common stock granted during fiscal 2003
    (adjusted to reflect the reverse stock split effected on
    August 1, 2003) and vesting over various periods of time
    based on continued employment and other performance metrics.                                                                                                                                                                                                                                
|   
|(4) | The exercise price is equal to fair market value
    that is the closing price of our common stock on the Nasdaq
    National Market on the date prior to the date of grant.                                                                                                                                                                                                                                                                                                                                                           
|   
|(5) | The exercise prices reflected or utilized for the
    calculation in this column have been adjusted to reflect the
    reverse stock split effected on August 1, 2003.                                                                                                                                                                                                                                                                                                                                                                 
|   
|(6) | The 5% and 10% assumed rates of appreciation are
    mandated by the rules of the SEC and do not represent Critical
    Paths estimate or projection of the future common stock
    price. There can be no assurance that any of the values
    reflected in the table will be achieved. Actual gains, if any,
    on stock option exercises will depend on future performance of
    our common stock, the officers continued employment
    through applicable vesting periods and the date on which the
    options are exercised.

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##### Table of Contents



FISCAL YEAR END OPTION VALUES

The following table provides summary information
concerning stock options held as of December 31, 2003 by
each of the Named Executive Officers. None of the Named
Executive Officers exercised options in 2003.

Aggregated Option Exercises in Last Fiscal
Year And Fiscal

Year-End Option Values(1)


|                          |  |             |   |          |  |                        |   |                      |  |             |         |               |  |  |         |  |  |  |   |  |  |  |   | 
|------------------------- |  | ----------- | - | -------- |  | ---------------------- | - | -------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  |  | - |  |  |  | - | 
|                          |  |             |   |          |  |                        |   |                      |  |            
|                          |  |             |   |          |  | Number of Securities   |   |                     
|                          |  |             |   |          |  | Underlying Unexercised |   | Value of Unexercised
|                          |  |             |   |          |  | Options at Fiscal      |   | In-the-Money        
|                          |  | Shares      |   | Value    |  | Year-End(#)            |   | Options($)(3)       
|                          |  | Acquired on |   | Realized |  |                        |   |                     
|Name                      |  | Exercise(#) |   | ($)(2)   |  | Exercisable            |   | Unexercisable        |  | Exercisable |         | Unexercisable
|                          |  |             |   |          |  |                        |   |                      |  |             |         |              
|William E. McGlashan, Jr. |  |             |  |          |  |                        |  |                      |  |             | 522,999 |               |  |  | 855,251 |  |  |  |  |  |  |  |  | 
|Patrick Tracy Currie      |  |             |  |          |  |                        |  |                      |  |             | 78,645  |               |  |  | 158,855 |  |  |  |  |  |  |  |  | 
|Robert (Al) Shipp         |  |             |  |          |  |                        |  |                      |  |             | 145,831 |               |  |  | 354,169 |  |  |  |  |  |  |  |  | 
|Barry Twohig              |  |             |  |          |  |                        |  |                      |  |             | 79,548  |               |  |  | 110,563 |  |  |  |  |  |  |  |  | 
|Paul Bartlett             |  |             |  |          |  |                        |  |                      |  |             | 158,850 |               |  |  | 466,149 |  |  |  |  |  |  |  |  | 
|Bernard Harguindeguy      |  |             |  |          |  |                        |  |                      |  |             | 212,239 |               |  |  | 162,761 |  |  |  |  |  |  |  |  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The number of shares and the exercise prices of
    the options in this table have been adjusted to reflect the
    reverse stock split effected on August 1, 2003.                                                                                                                                                                                                                                                                                                                                                      
|   
|(2) | The value realized is calculated by determining
    the difference between the fair market value of the securities
    underlying the options and the exercise price of the options at
    the time of exercise. For purposes of this table, fair market
    value is deemed to be $1.33 per share, the closing price of
    the common stock as reported on the Nasdaq National Market on
    December 31, 2003. Calculations that result in a negative
    value are reflected as no value realized in the above table.
|   
|(3) | The value of unexercised in-the-money options at
    fiscal year-end is based on a price per share of $1.33, the
    closing price quoted on the Nasdaq National Market on
    December 31, 2003, minus the exercise price.                                                                                                                                                                                                                                                                                              

Compensation of Directors

We reimburse each member of our Board of
Directors for out-of-pocket expenses incurred in connection with
attending Board meetings. Commencing with the appointment of a
new chairman of the Audit Committee in April 2003, we pay $2,000
to the chairman for each Audit Committee meeting the chairman
attends. No member of our Board of Directors receives any
additional cash compensation for services rendered as a
director. It has been the Boards practice to grant
non-employee directors a one time option to purchase
75,000 shares of our common stock at the time of joining
the Board vesting over a four year period. However, where
warranted and deemed to be in the best interests of the company,
we may grant additional options to directors at the time of
joining the Board, or from time to time thereafter in connection
with committee service or otherwise.

Employment Contracts and Termination of
Employment and Change-in-Control Arrangements

In August 2001, William E. McGlashan, Jr.
entered into an employment agreement with us under which he was
appointed interim Chief Executive Officer. In January 2002 the
agreement was amended and restated in its entirety in connection
with Mr. McGlashans appointment as Chief Executive
Officer. The employment agreement provides Mr. McGlashan,
as our Chief Executive Officer, with an annual base salary of
$450,000 per year. As an inducement to enter into this
agreement, Mr. McGlashan received a bonus of $500,000 and a
loan commitment in the amount of up to $4.0 million for the
purchase of a principal residence. However, in May 2002, the
Compensation Committee of the Board and Mr. McGlashan
agreed to amend the employment agreement in order to reduce the
amount of the loan commitment to $1.5 million, which has
not been funded and is discussed further below.
Mr. McGlashan is also eligible to receive an annual cash
bonus of up to 200% of his base salary to be paid at the end of
each fiscal year beginning with the fiscal year ending

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December 31, 2002. Mr. McGlashan did
not receive any cash bonus for his services during the fiscal
year ended December 31, 2003. In September 2003, we amended
Mr. McGlashans employment agreement to reduce his
base salary to $300,000 until such time as Critical Path meets
specified performance targets. For the purposes of the bonus
tied to Mr. McGlashans base salary described above
and the change in control severance payment described below,
will continue to be considered unchanged.


In August 2001, Mr. McGlashan received an
option to purchase 375,000 shares of our common stock at an
exercise price of $1.60 per share, which was fair market
value at the time of grant. The option vested one-third upon
grant, one-third one year from grant and one-third on
December 31, 2004 or upon the earlier achievement of
positive EBITDA prior to June 30, 2002. In November 2001,
Mr. McGlashan was granted an option to purchase
203,250 shares at an exercise price of $4.52 per
share, which was fair market value at the time of grant, on the
same terms and conditions and in the same pro rata proportions
to the vesting schedule above. In December 2001,
Mr. McGlashan was granted an option to purchase
425,000 shares at an exercise price of $10.24 per
share, which was fair market value at the time of grant, vesting
in equal monthly installments over a three-year period. In May
2002, in connection with the reduction of the loan commitment,
Mr. McGlashan was also granted an option to purchase
250,000 shares of our common stock, at an exercise price of
$6.96, which was fair market value at the time of grant. The
option was immediately exercisable subject to our lapsing right
of repurchase over a three year period. Mr. McGlashan
exercised his right to early exercise and purchase the shares
through a promissory note and stock pledge agreement in May
2002. As such, we now hold a promissory note in the amount of
$1,740,000 secured by the shares of common stock. In April 2003,
Mr. McGlashan was granted an option to purchase
625,000 shares at an exercise price of $3.12 per
share, which was the fair market value on the date of grant. The
terms of each of the above-referenced and summarized loans are
also discussed in the section of this Form 10-K entitled
Item 13. Certain Relationships and Related Party
Transactions  Loans to Officers.

Following a change in control of Critical Path,
all of Mr. McGlashans unvested options to purchase
shares of our common stock will become vested in certain
circumstances. In addition, in the event
Mr. McGlashans employment is terminated for any
reason other than for cause or if he resigns as a result of
constructive termination, we will pay Mr. McGlashan a lump
sum payment equal to the sum of twelve months of salary and 50%
of his prior years bonus. Mr. McGlashan will also be
entitled to receive employee benefits, including health care
coverage, for a period of twelve months following his
termination and any unvested stock options will vest as to the
amount that would have vested had Mr. McGlashan continued
to work for us for an additional twelve months.

In April 2002, we entered into an employment
agreement with Paul Bartlett, pursuant to which
Mr. Bartlett became employed as our Executive Vice
President, Business Development at a base salary of
$250,000 per year. In May 2002, Mr. Bartlett was
granted an option to purchase 187,500 shares of our common
stock at an exercise price of $6.96, which was the fair market
value at the time of grant. In February 2003, Mr. Bartlett
became our Chief Financial Officer and Executive Vice President,
Corporate Development and was granted an option to purchase an
additional 187,500 shares of our common stock at an
exercise price of $3.28 per share, which was the fair
market value at the time of grant. In April 2003,
Mr. Bartlett was granted an additional option to purchase
250,000 shares of common stock at an exercise price of
$3.12 per share, which was the fair market value on the
date of grant. In August 2003, we amended
Mr. Bartletts employment agreement, added the
position of Chief Operating Officer, and relocated him to
Dublin, Ireland. His base salary was also reduced to
$200,000, except for the purposes of the change in control
severance arrangement described below, and we agreed to
reimburse him for certain relocation expenses. In addition, such
amendment provides that if Mr. Bartletts employment
is terminated for any reason other than for cause, he will be
entitled to salary continuation for nine months following his
termination unless he receives other employment at a specified
salary. In November 2003, we further amended our arrangement
with Mr. Bartlett to provide for his separation from the
company no later than June 2004 and with Mr. Bartlett
serving only as Chief Operating Officer on a transitional basis
until his separation. We also agreed to accelerate the vesting
of certain options upon his termination.

In January 2002, we entered into an employment
agreement with Bernard Harguindeguy, pursuant to which
Mr. Harguindeguy became employed as our Executive Vice
President, Chief Marketing Officer at a

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base salary of $300,000 per year.
Mr. Harguindeguy is eligible to receive an annual cash
bonus of up to $300,000 upon the satisfaction of certain
performance criteria. As an inducement to enter into this
agreement, Mr. Harguindeguy received a bonus of $100,000.
In the event Mr. Harguindeguys employment is
terminated by us for any reason other than for cause, we will
pay to Mr. Harguindeguy a lump sum payment equal to
$300,000. We have also granted Mr. Harguindeguy options to
purchase shares of our common stock, which options vest over
time. Following a change of control of Critical Path, all of
Mr. Harguindeguys options will become vested in
certain circumstances.


In May 2003 and in connection with a substantial
modification of Mr. Harguindeguys title, duties and
responsibilities at the Company he was paid $300,000 and
transitioned to a 100% commission-based compensation plan as
Executive Vice President, General Manager of Identity
Management. In October 2003, we also agreed to pay
Mr. Harguindeguy a bonus upon attaining specified targets
in connection with the possible future sale of one of our
business units. No amounts have been paid under this agreement.

In August 2003, we entered into an Amendment to
Employment Agreement and Release of claims with Robert A. Shipp
in connection with the modification of his duties and
responsibilities. Pursuant to the Amendment, we agreed to pay
Mr. Shipp a lump sum $262,500 plus commissions for
Mr. Shipps participation in closing transactions with
specified customers in consideration of terminating
Mr. Shipps salary and bonus eligibility and a release
of any actual or potential claims by Mr. Shipp in
connection with his employment with us. Under this amendment, we
have paid Mr. Shipp $262,500 in severance payments and no
commissions. Mr. Shipps employment with Critical Path
ended in December 2003.

During 2003, we entered into change of control
severance agreements with certain of our key employees. These
agreements provide that so long as the employee signs and does
not revoke a standard release of claims with us, the employee is
entitled to certain severance payments if the employee is
involuntarily terminated (as defined in the agreement) within
twenty-four months following a change of control (as defined in
the agreement) of Critical Path or within three months on or
before a change of control. Assuming the conditions under the
agreements that trigger payment obligations are met, the
aggregate payment under these agreements is currently estimated
to be between $3.5 million and $5.0 million.

All the employment and loan agreements summarized
above are as more fully-described in the agreements themselves,
filed as Exhibits to this Annual Report on Form 10-K, for
the fiscal year ended December 31, 2003.

In connection with his employment with the
Company, Mr. McGlashan received a loan from the Company.
Please see Item 13. Certain Relationships and Related
Party Transactions  Loans to Officers for a
description of this loan.

For payments made to Mr. Shipp in connection
with his termination, please see Item 13. Certain
Relationships and Related Party Transactions  Severance
Agreements.

Compensation Committee Interlocks and Insider
Participation

During fiscal year 2003, Raul Fernandez, William
Ford, William C. Gorog and Ross Dove, all non-employee directors
of the company, served at various times on the board of
directors Compensation Committee. During fiscal year 2003,
no member of our Board of Directors or Compensation Committee
served as a member of the board of directors or compensation
committee of any entity that had one or more executive officers
serving as a member of our Board of Directors or Compensation
Committee.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The following table sets forth certain
information regarding beneficial ownership of common stock as of
March 1, 2004 by:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | Each person or entity known to Critical Path to
    own beneficially more than 5% of Critical Paths common
    stock;
|
| |  | Each of Critical Paths directors;                                                                                    

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our Chief Executive Officer as of
    December 31, 2003, each of our four other most highly
    compensated executive officers whose total salary and bonus
    exceeded $100,000 during the year ended December 31, 2003,
    and two former executive officers whose total salary and bonus
    exceeded $100,000 during the year ended December 31, 2003,
    one of whom, Robert (Al) Shipp, is no longer employed with us
    (collectively, the Named Executive
    Officers); and
|
| |  | All executive officers and directors as a group.                                                                                                                                                                                                                                                                                                                                                                                                                                          

BENEFICIAL OWNERSHIP TABLE

|                                                                                                                                  |  |                                           |           |              |  |                  |           |          |  |            |            |           |  |               |            |  |  |  |      |  |  |  |      |  |  |  |      | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | --------- | ------------ |  | ---------------- | --------- | -------- |  | ---------- | ---------- | --------- |  | ------------- | ---------- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- | 
|                                                                                                                                  |  |                                          
|                                                                                                                                  |  | Amount and Nature of Beneficial Ownership
|                                                                                                                                  |  |                                          
|                                                                                                                                  |  |                                           |           | Shares of    |  | Right to Acquire |           |         
|                                                                                                                                  |  | Shares of                                 |           | Series D     |  | Ownership of     |           |          |  | Common and
|                                                                                                                                  |  | Common                                    |           | Preferred    |  | Common Stock     |           |          |  | Series D  
|                                                                                                                                  |  | Stock                                     |           | Stock        |  | Within 60 Days   |           | Total of |  |            |            | Series D  |  | Preferred    
|Name and Address of                                                                                                               |  | Beneficially                              |           | Beneficially |  | of March 1,      |           | Common   |  | Common     |            | Preferred |  | Stock (As    
|Beneficial Owner(1)                                                                                                               |  | Owned                                     |           | Owned        |  | 2004             |           | Stock    |  | Stock(2)   |            | Stock(2)  |  | Converted)(2)
|                                                                                                                                  |  |                                           |           |              |  |                  |           |          |  |            |            |           |  |              
|5% SHAREHOLDERS                                                                                                                   |  |                                           |           |              |  |                  |           |          |  |            |            |           |  |               |            |  |  |  |      |  |  |  |      |  |  |  |      | 
|Entities affiliated with General Atlantic
    Partners, LLC(3)
    3 Pickwick Plaza
    Greenwich, CT                             |  |                                           |          |              |  |                  | 2,545,455 |          |  |            | 10,523,656 |           |  |               | 10,523,656 |  |  |  | 2.9  |  |  |  | 60.8 |  |  |  | 27.7 | 
|Scott Smith and affiliated entities(4)
    c/o Camelot Management Corp.
    3 Pickwick Plaza
    Greenwich, CT                    |  |                                           | 1,071,888 |              |  |                  |          |          |  |            |           |           |  |               | 1,071,888  |  |  |  | 5.1  |  |  |  |     |  |  |  | 2.9  | 
|Peter Kellner and affiliated entities(5)
    c/o Richmond I, LLC
    10563 Brunswick Road,
    Suite 7
    Grass Valley, CA 95945 |  |                                           | 1,330,084 |              |  |                  |          |          |  |            |           |           |  |               | 1,330,084  |  |  |  | 6.3  |  |  |  |     |  |  |  | 3.6  | 
|Cheung Kong (Holdings) Limited and affiliated
    8th Floor, Cheung Kong Center
    2 Queens Road Central
    Hong Kong(6)       |  |                                           |          |              |  |                  | 872,727   |          |  |            | 3,393,823  |           |  |               | 3,393,823  |  |  |  |     |  |  |  | 20.8 |  |  |  | 9.1  | 
|Vectis Group, LLC and affiliated entities(7)
    c/o BPM 600 California Street,
    Suite 1300
    San Francisco, CA 94180        |  |                                           |          |              |  |                  | 581,818   |          |  |            | 2,378,799  |           |  |               | 2,378,799  |  |  |  | *    |  |  |  | 13.9 |  |  |  | 6.3  | 
|DIRECTORS AND NAMED EXECUTIVE OFFICERS                                                                                            |  |                                           |           |              |  |                  |           |          |  |            |            |           |  |               |            |  |  |  |      |  |  |  |      |  |  |  |      | 
|William E. McGlashan, Jr.                                                                                                         |  |                                           | 280,288   | (8)          |  |                  | 581,818   |          |  |            | 3,146,936  | (9)       |  |               | 3,427,224  |  |  |  | 5.3  |  |  |  | 13.9 |  |  |  | 8.9  | 
|Paul Bartlett                                                                                                                     |  |                                           |          |              |  |                  |          |          |  |            | 210,933    | (10)      |  |               | 210,933    |  |  |  | 1.0  |  |  |  |     |  |  |  | *    | 
|Patrick Currie                                                                                                                    |  |                                           |          |              |  |                  |          |          |  |            | 96,354     | (11)      |  |               | 96,354     |  |  |  | *    |  |  |  |     |  |  |  | *    | 
|Barry Twohig                                                                                                                      |  |                                           | 1,001     |              |  |                  |          |          |  |            | 77,611     | (12)      |  |               | 78,612     |  |  |  | *    |  |  |  |     |  |  |  | *    | 
|Bernard Harguindeguy                                                                                                              |  |                                           |          |              |  |                  |          |          |  |            | 238,281    | (13)      |  |               | 238,281    |  |  |  | 1.1  |  |  |  |     |  |  |  | *    | 
|Robert Shipp                                                                                                                      |  |                                           |          |              |  |                  |          |          |  |            | 151,747    | (14)      |  |               | 151,747    |  |  |  | *    |  |  |  |     |  |  |  | *    | 
|Peter Currie                                                                                                                      |  |                                           |          |              |  |                  |          |          |  |            | 4,687      | (15)      |  |               | 4,687      |  |  |  | *    |  |  |  |     |  |  |  | *    | 
|Ross Dove                                                                                                                         |  |                                           |          |              |  |                  |          |          |  |            | 18,750     | (16)      |  |               | 18,750     |  |  |  | *    |  |  |  |     |  |  |  | *    | 
|William E. Ford                                                                                                                   |  |                                           |          |              |  |                  | 2,545,455 |          |  |            | 10,593,968 | (17)      |  |               | 10,593,968 |  |  |  | 3.2  |  |  |  | 60.8 |  |  |  | 27.8 | 
|Frost R.R. Prioleau                                                                                                               |  |                                           |          |              |  |                  |          |          |  |            | 3,125      | (18)      |  |               | 3,125      |  |  |  | *    |  |  |  |     |  |  |  | *    | 
|Steven R. Springsteel                                                                                                             |  |                                           |          |              |  |                  |          |          |  |            | 18,750     | (19)      |  |               | 18,750     |  |  |  | *    |  |  |  |     |  |  |  | *    | 
|All Named Executive Officers and current
    directors, nominees and executive officers as a group
    (13 persons)(20)           |  |                                           | 283,001   |              |  |                  | 3,127,273 |          |  |            | 14,832,692 |           |  |               | 15,115,693 |  |  |  | 12.4 |  |  |  | 74.7 |  |  |  | 37.7 | 

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---



|  |                                                                               
|- | ------------------------------------------------------------------------------
|* | Amount represents less than 1% of the indicated
    class or classes of stock.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Unless otherwise indicated, the address for each
    of the executive officers and directors above is
    c/o Critical Path, Inc., 350 The Embarcadero,
    San Francisco, California 94105-1204.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (2) | Applicable percentage ownership of common stock
    is based on 21,171,399 shares of common stock issued and
    outstanding as of March 1, 2004 including
    110,209 shares of common stock issuable upon exchange of
    Exchangeable Shares of Class A Non-Voting Preferred Shares
    of Critical Path Messaging Co., an unlimited liability company
    existing under the laws of the Province of Nova Scotia and a
    wholly-owned subsidiary of the Company. Each Exchangeable Share
    is exchangeable for one Common Share. Applicable percentage
    ownership of Series D preferred stock is based on
    4,188,587 shares of Series D preferred stock issued
    and outstanding on March 1, 2004. Beneficial ownership is
    determined in accordance with the rules and regulations of the
    Securities and Exchange Commission (SEC). In computing the
    number of shares beneficially owned by a person and the
    percentage ownership of that person, shares of common stock
    subject to options or convertible or exchangeable into such
    shares of common stock, held by that person, that are currently
    exercisable or exercisable within 60 days of March 1,
    2004 are deemed outstanding. These shares, however, are not
    deemed outstanding for the purposes of computing the percentage
    ownership of another person. Except as indicated in the
    footnotes to this table and pursuant to applicable community
    property laws, each shareholder named in the table has sole
    voting and investment power with respect to the shares set forth
    opposite such shareholders name.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (3) | According to a Schedule 13D, dated as of
    December 21, 2001, filed jointly by General Atlantic
    Partners, LLC (GAP), General Atlantic Partners 74, L.P. (GAP
    74), GapStar, LLC (GapStar) and GAP Coinvestment
    Partners II, L.P. (GAPCO and, collectively with GAP, GAP 74
    and GapStar, the Reporting Persons), the Reporting Persons own
    no shares of the Companys common stock. The Reporting
    Persons report collective beneficial ownership as to
    2,545,455 shares of the Companys Series D
    preferred stock, which were initially convertible into
    8,333,333 shares of common stock, and warrants to purchase
    625,000 shares of common stock that are exercisable within
    60 days of March 1, 2004. GAP is the general partner
    of GAP 74 and the sole member of GapStar. The managing members
    of GAP (other than Klaus Esser) are also the general partners of
    GAPCO. GAP and the managing members of GAP report shared voting
    and dispositive power of the 2,545,455 shares of
    Series D preferred stock and the warrants to purchase
    625,000 shares of common stock held by the Reporting
    Persons. GAP 74 owns 2,091,218 shares of Series D
    preferred stock or 6,846,249 shares of common stock on an
    as converted basis and owns warrants to purchase
    513,468 shares of common stock. GapStar owns
    159,091 shares of Series D preferred stock or
    520,833 shares of common stock on an as converted basis and
    owns warrants to purchase 39,063 shares of common stock.
    GAPCO owns 295,146 shares of Series D preferred stock
    or 966,251 shares of common stock on an as converted basis
    and warrants to purchase 72,469 shares of common stock. The
    number of shares of common stock into which the Series D
    preferred stock convert as reflected in this footnote does not
    include the accretion of dividends after the date of the
    applicable Schedule 13D. The number of shares of common
    stock as reflected in the table does include such accretion of
    dividends. The number of shares in this footnote have been
    adjusted to reflect the stock split effected on August 1,
    2003.
|
| | (4) | Scott Smith filed a Schedule 13G/ A, dated
    as of February 11, 2003, with the SEC on behalf of himself
    and related parties described herein. According to the
    Schedule 13G/ A, shares are held for the account of Camelot
    Management Corporation, Camelot Offshore Fund Limited and Scott
    Smith. Scott Smith is an officer of Camelot Management
    Corporation and a director of Camelot Offshore Fund Limited.
    Scott Smith reported beneficial ownership of
    1,071,888 shares of common stock as of December 31,
    2002. The shares held consist of 268,325 shares of common
    stock held for the account of Camelot Management Corporation,
    268,325 shares of common stock held for the account of
    Camelot Offshore Fund Limited and 1,071,888 shares of
    common stock held for the account of Scott Smith. The reporting
    person reported shared voting power over 1,071,888 shares
    and shared dispositive power over 1,071,888 shares. The
    number of shares in this footnote have been adjusted to reflect
    the stock split effected on August 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (5) | Peter Kellner filed a Schedule 13D, dated as
    of February 4, 2004, with the SEC on behalf of himself and
    related parties described herein. According to the
    Schedule 13D, shares are held for the account of
    Richmond I, LLC and Peter Kellner. Peter Kellner has voting
    and dispositive voting power over Richmond I, LLC. Peter
    Kellner reported beneficial ownership of 1,330,084 shares
    of common stock (adjusted to include 57,825 options exercisable
    within 60 days of February 2, 2004). The shares held
    consist of 696,056 shares of common stock held for the
    account of Richmond I, LLC and 1,330,084 shares of
    common stock held for the account of Peter Kellner. The
    reporting person reported shared voting power over
    1,330,084 shares and shared dispositive power over
    1,330,084 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (6) | According to a Schedule 13D/ A, dated as of
    December 1, 2003, filed by jointly by Cheung Kong
    (Holdings) Limited (Cheung Kong), Campina Enterprises Limited,
    an indirect wholly owned subsidiary of Cheung Kong (Campina),
    Hutchison Whampoa Limited (HWL), an entity in which Cheung Kong
    holds a 49.97% interest, Cenwell Limited, an indirect wholly
    owned subsidiary of HWL (Cenwell), CK Life Sciences Intl.,
    (Holdings) Inc. (CK Life), an entity in which Cheung Kong holds
    a 44.0% interest, and Great Affluent Limited (GAL), an indirect
    wholly owned subsidiary of CK Life, Campina and Cenwell hold
    436,363 and 436,364 shares of our Series D preferred
    stock, respectively, collectively convertible into
    3,317,782 shares of our common stock. Cheung Kong and
    Campina report shared voting and dispositive power as to the
    shares held by Campina. Cheung Kong, HWL and Cenwell reported
    shared voting and dispositive power as to the shares held by
    Cenwell. Cheung Kong disclaims beneficial ownership of the
    3,317,782 shares of common stock beneficially owned by
    Cenwell and Campina. The number of shares of common stock into
    which the Series D preferred stock convert as reflected in
    this footnote does not include the accretion of dividends after
    the date of the applicable Schedule 13D/ A. The number of
    shares as reflected in the table does include such accretion of
    dividends.
|
| | (7) | Vectis Group LLC, a Delaware limited liability
    company (Vectis), filed a Schedule 13D, dated as of
    August 8, 2003, with the SEC on behalf of itself and
    related parties. According to the Schedule 13D, shares are
    held for the account of Vectis, the reporting person. William E.
    McGlashan, Jr. and Matthew Hobart are the managing members
    of Vectis. The shares held consist of
    (i) 2,064,780 shares of common stock issuable upon the
    conversion of shares of Series D preferred stock, including
    the accretion of dividends, and (ii) 116,250 shares of
    common stock issuable subject to warrants currently exercisable
    in full. The shares exclude shares held individually by the
    principals of Vectis and shares beneficially owned by the
    principals of Vectis subject to options exercisable within
    60 days of March 1, 2004. The number of shares of
    common stock into which the Series D preferred stock
    convert as reflected in this footnote does not include the
    accretion of dividends after the date of the applicable
    Schedule 13D. The number of shares as reflected in the
    table does include such accretion of dividends.                                                                                                                                                                                                                                                                                       
|
| | (8) | Includes (i) 250,000 shares of common
    stock purchased by Mr. McGlashan through an early option
    exercise pursuant to a promissory note and stock pledge
    agreement with us, and subject to a lapsing right of repurchase
    by us, (ii) 20,000 shares of common stock purchased by
    Mr. McGlashans spouse and
    (iii) 10,288 shares purchased under our employee stock
    purchase plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | (9) | Includes (i) 768,137 shares subject to
    options exercisable within 60 days of March 1, 2004,
    (ii) 116,250 shares subject to warrants to purchase
    shares of common stock held by Vectis and exercisable within
    60 days of March 1, 2004 and
    (iii) 2,262,549 shares of common stock issuable upon
    the conversion of shares of Series D preferred stock. See
    footnote 7 above. Mr. McGlashan disclaims beneficial
    ownership of the securities held by Vectis and its affiliates
    within the meaning of Rule 13d-3 under the Securities
    Exchange Act of 1934. The shares exclude all shares subject to
    options issued to other Vectis principals as part of their
    individual employment agreements with Critical Path and all
    shares individually owned by other Vectis principals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



|     |                                                                                               
|---- | ----------------------------------------------------------------------------------------------
|(10) | Consists of 210,933 shares subject to
    options exercisable within 60 days of March 1, 2004.
|    
|(11) | Consists of 96,354 shares subject to options
    exercisable within 60 days of March 1, 2004. 
|    
|(12) | Consists of 77,611 shares subject to options
    exercisable within 60 days of March 1, 2004. 
|    
|(13) | Consists of 283,281 shares subject to
    options exercisable within 60 days of March 1, 2004.

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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(14) | Consists of 151,747 shares subject to
    options exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                        
|    
|(15) | Consists of 4,687 shares subject to options
    exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                          
|    
|(16) | Consists of 18,750 shares subject to options
    exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                         
|    
|(17) | Includes 10,523,656 shares issuable upon the
    conversion of the Series D preferred stock and exercise of
    warrants to purchase shares of common stock. See footnote
    (3) above. Mr. Ford disclaims beneficial ownership of
    the securities described in footnote (3) above except to
    the extent of his pecuniary interest therein. Also includes
    70,312 shares subject to options exercisable within
    60 days of March 1, 2004.
|    
|(18) | Consists of 3,125 shares subject to options
    exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                          
|    
|(19) | Consists of 18,750 shares subject to options
    exercisable within 60 days of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                         
|    
|    
|(20) | Includes shares beneficially owned by the
    directors and executive officers as a group consisting of the
    named executive officers and Messrs. Zukerman and Serbinis.
    Includes an aggregate of 1,712 shares of common stock
    beneficially owned and 271,550 shares subject to options
    exercisable within 60 days of March 1, 2004 held by
    Messrs. Zukerman and Serbinis.                                                         
|    

Equity Compensation Plan Information

The following table sets forth certain
information as to our equity compensation plans for fiscal 2003
as of December 31, 2003. The number of shares to be issued
and remaining for issuance under our equity compensation plans
and the exercise price of outstanding options have been adjusted
to reflect the reverse stock split effected August 1, 2003.

|                                                               |  |                         |            |                   |  |                         |       |  |  |  |           |    
|-------------------------------------------------------------- |  | ----------------------- | ---------- | ----------------- |  | ----------------------- | ----- |  |  |  | --------- | ---
|                                                               |  |                         |            |                   |  | Number of Securities   
|                                                               |  |                         |            |                   |  | Remaining Available for
|                                                               |  |                         |            | Weighted-Average  |  | Future Issuance under  
|                                                               |  | Number of Securities to |            | Exercise Price of |  | Equity Compensation    
|                                                               |  | be Issued upon Exercise |            | Outstanding       |  | Plans (Excluding       
|                                                               |  | of Outstanding Options, |            | Options, Warrants |  | Securities Reflected in
|                                                               |  | Warrants and Rights     |            | and Rights        |  | Column (a))            
|Plan Category                                                  |  | (a)                     |            | (b)               |  | (c)                    
|                                                               |  |                         |            |                   |  |                        
|Equity compensation plans approved by the
    shareholders     |  |                         | 8,326,836  | (1)               |  | $                       | 23.54 |  |  |  | 1,815,712 | (2)
|Equity compensation plans not approved by the
    shareholders |  |                         | 6,534,972  | (3)               |  | $                       | 26,76 |  |  |  | 2,111,734 |    
|Total                                                          |  |                         | 14,861,808 |                   |  | $                       | 24.96 |  |  |  | 3,927,446 | (4)



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the 1998 Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | The number of shares reserved for issuance under
    the 1998 Stock Option Plan (the 1998 Plan) is
    subject to an annual increase in the number of shares equal to
    2% of the outstanding shares of common stock on January 1
    of such year. The aggregate number of shares of common stock
    which may be issued under the 1998 Plan shall at all times be
    subject to adjustment as a result of stock splits, dividends
    payable in shares, combinations or consolidations of outstanding
    stock, recapitalizations, mergers or reorganizations.                                               
|   
|(3) | Includes the 1999 Nonstatutory Stock Option Plan.
    For a description of the material features of this plan, please
    see Note 16  Shareholders Equity (Deficit) to
    the Companys Notes to Consolidated Financial Statements
    contained in this Annual Report on Form 10-K . Also
    includes shares of common stock to be issued (subject to
    vesting) upon the exercise of outstanding options we assumed in
    connection with our acquisitions of other companies. Also
    includes an aggregate of 1,840,850 shares reserved for
    issuance pursuant to the exercise of outstanding warrants.
|   
|(4) | Includes 274,539 shares of common stock
    available for future issuance under our employee stock purchase
    plan (ESPP). The number of shares reserved for
    issuance under the ESPP is subject to an annual increase on
    January 1 of each year by an amount equal to 1% of our
    issued and outstanding common stock on such date, not to exceed
    1,000,000 additional shares each year.                                                                                                                                                                                                             

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|         |                                                          
|-------- | ---------------------------------------------------------
|Item 13. | Certain Relationships and Related Party
    Transactions.

Severance Agreements

In May 2002, David Hayden resigned his employment
with us and from the board of directors. In connection with a
separation agreement finalized in July 2002, Mr. Hayden
received a lump sum separation payment of $350,000 plus
applicable taxes, continuation of health and welfare benefits
until May 31, 2003, an extension of time to repay the
$1.95 million loan with us and to exercise his vested stock
options until no later than June 30, 2005, acceleration of
a portion of his unvested options if a change of control of
Critical Path occurs prior to September 30, 2003 and
reimbursement for $50,000 of legal fees incurred. In connection
with the provision of these benefits, Mr. Hayden agreed to
(i) forfeit the right under the severance provisions of his
employment agreement to an additional one year extension of the
$1.95 million loan until August 2006; (ii) pay all
proceeds (net of taxes) from the sale of any shares held by him
in Critical Path to reduce the principal balance of the
$1.95 million loan; and (iii) forfeit his right to
receive a $2.5 million loan from us to exercise certain of
his stock options. All sales of our common stock by
Mr. Hayden are to be made under a publicly filed trading
plan. In addition, we executed a mutual release of claims. As a
result of Mr. Haydens separation, we recorded
aggregate one-time charges of $2.6 million, included in
operating expenses, inclusive of $572,400 related to the
separation payment and legal fee reimbursements made to
Mr. Hayden and $2.0 million in stock-based expenses
related to the extension of the exercise period on
Mr. Haydens vested stock options.

In connection with his employment agreement, in
October 2001, we made a loan and held a note receivable from
Pierre Van Beneden, our former President, totaling $350,000.
Mr. Van Benedens loan was interest free for the first
year and was forgiven in monthly installments over the first
year of Van Benedens employment, resulting in a
compensation charge to operating expense ratably over the first
twelve months of his employment. As of October 8, 2002, the
one-year anniversary of his employment with us, the note had
been fully forgiven. In November 2002, Pierre Van Beneden
terminated his employment as President, but continued through
January 2003 as a consultant. In connection with a separation
agreement and release, Mr. Van Beneden agreed to provide
consulting services to us on a commissioned basis and we agreed
to provide the benefits to which he was entitled under his
employment agreement. Such employment agreement benefits, which
were paid in January 2003 upon the completion of the consulting
term, included a lump sum payment of $337,500, representing nine
months base salary, accelerated vesting on a portion of his
option grants and commissions of $50,000. These payments reflect
all our cash obligations to Mr. Van Beneden and accordingly
no additional payments will be made in connection with the
consulting services portion of his termination agreement. As an
additional benefit under the separation agreement, Mr. Van
Beneden was granted an extension until January 17, 2004 to
exercise his option grants. We and Mr. Van Beneden executed
a mutual release of all claims.

In February 2003, Laureen DeBuono terminated her
employment as our executive vice president and chief financial
officer, but continued through June 2003 as a consultant. In
connection with a separation agreement and release,
Ms. DeBuono received a lump sum payment of $208,000,
representing four months base salary, and a $25,000 payment
intended to cover reimburseable expenses incurred during her
tenure with us. Ms. DeBuono was paid $125,000 associated
with the consulting work performed through June 2003. As an
additional benefit under the separation agreement,
Ms. DeBuono was granted an extension until
December 31, 2004, to exercise her option grants, resulting
in a charge of $92,000 to stock-based expenses.

In August 2003, we entered into an Amendment to
Employment Agreement and Release of claims with Robert A. Shipp
in connection with the modification of his duties and
responsibilities. Pursuant to the Amendment, we agreed to pay
Mr. Shipp a lump sum $262,500 plus commissions for
Mr. Shipps participation in closing transactions with
specified customers in consideration of terminating
Mr. Shipps salary and bonus eligibility and a release
of any actual or potential claims by Mr. Shipp in
connection with his employment with us. Under this amendment, we
have paid Mr. Shipp $262,500 in severance payments and no
commissions. Mr. Shipps employment with us ended in
December 2003.

In April 2002, we entered into an employment
agreement with Paul Bartlett. The terms of our agreement are
described above under Item 11. Executive Compensation
 Employment Contracts and Termination of

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Employment and Change-in-Control Arrangements. In
November 2003, we amended our arrangement with Mr. Bartlett
to provide for his separation from the company no later than
June 2004 and with Mr. Bartlett serving as Chief Operating
Officer on a transitional basis until his separation. We also
agreed to accelerate the vesting of certain options upon his
termination.


Loans to Officers

During 2001 and in connection with his employment
agreement, we made a loan and held a note receivable from David
C. Hayden, our former Executive Chairman, totaling
$1.5 million. Mr. Haydens note and loan
agreement were amended in February 2002 to increase the amount
to $1.95 million. See the section of this Form 10-K
entitled Employment Contracts and Termination of
Employment and Change-in-Control Arrangements. As amended
in 2002, Mr. Haydens full recourse note accrued
interest at the rate of 6.75% per annum and provided that
it may be forgiven upon the achievement of a performance-based
milestone whereby a change of control event occurs with
consideration received by the shareholders in excess of
$10.00 per share. Mr. Haydens loan was initially
due and payable on August 13, 2004; provided, however, if
his employment was terminated without cause or he resigned for
good reason, the due date would be extended for two years. As of
$320,362 in accrued interest under Mr. Haydens note
totaled $2,270,362. Interest payments are due and payable on
August 13th of each year that the loan is outstanding.
Mr. Hayden terminated his employment and resigned from the
Board in May 2002. The terms of this loan are more fully
discussed in the section of this Form 10-K entitled
Employment Contracts and Termination of Employment and
Change-in-Control Arrangements.

In December 2001 and in connection with his
amended and restated employment agreement, the Board approved a
secured loan to Mr. McGlashan to be used for the purchase
of a principal residence in the San Francisco Bay Area. In
May 2002, the Compensation Committee and Mr. McGlashan
agreed to amend Mr. McGlashans employment agreement
to reduce the amount of the loan to $1.5 million from
$4.0 million. The housing loan is to be secured by the
residence, by the pledge of Mr. McGlashans personal
options and shareholdings in us and other assets of
Mr. McGlashan to the extent necessary such that at all
times the assets securing the loan equal at least 120% of the
principal and interest outstanding on the housing loan and any
other loan secured by the residence. Interest on the housing
loan is to be accrued at 4.75%, and is deferred until the
principal is due, over a 10 year term. The housing loan
provides that it shall be forgiven upon a change of control
event where consideration received by the shareholders exceeds
$10.00 per share. In the event Mr. McGlashan
terminates his employment either by voluntary resignation or for
cause, as defined in the agreement, the housing loan shall be
due and payable, with interest, no later than 12 months
following such termination. In the event Mr. McGlashan is
terminated for any reason other than his voluntary resignation
or cause, the housing loan shall remain outstanding for the
remainder of its term. We have not yet funded the housing loan
and, accordingly, no accrued interest is currently outstanding.

In May 2002, in connection with the reduction of
the principal amount available under the housing loan,
Mr. McGlashan received an option grant of
1,000,000 shares of our common stock and an opportunity to
early exercise and purchase such shares through a full-recourse
promissory note and stock pledge agreement. The purchased shares
are subject to a lapsing right of repurchase with respect to the
shares over a three-year period. Mr. McGlashan exercised
the option by delivery of his promissory note on May 8,
2002. The terms of the note were established in consultation
with our outside auditors to avoid adverse accounting treatment
to the Company. Accordingly, the promissory note will begin to
accrue interest at the adjustable quarterly reference rate of
Fidelity Investments or similar banking entity as the shares
vest with respect to that portion of the purchase price that
represents the purchase price of the vested shares.
The promissory note is full recourse and secured by the acquired
shares under the stock pledge agreement. As of December 31,
2003, $23,636 in interest had accrued on the note and the amount
of indebtedness outstanding under the note at December 31,
2003 was $1,763,636.

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Commercial Relationships

Consulting Agreements

In March 2001, we entered into a series of
certain consulting and transactional agreements with Vectis
Group, LLC (Vectis) to engage Vectis as our advisor
with respect to various strategic alternatives and other
management related services. The agreement provided Vectis with:
(i) a $50,000 monthly retainer fee for consulting
services during the term of the agreement, (ii) a warrant
to purchase 125,000 shares of our common stock at a price
of $8.00 per share, and (iii) transaction fees in
connection with certain dispositions or acquisitions of assets
in an amount equal to 5% of proceeds, up to a maximum of
$1 million per transaction. Also effective March 2001, we
entered into an agreement with Vectis to engage Vectis as a
placement agent in connection with a possible private placement
by Critical Path of equity securities. Under the agreement,
Vectis was entitled to 5% of the gross proceeds we raised from
specified purchasers, payable in cash, securities or a
combination thereof at the election of Vectis. In April 2001, we
and Vectis agreed to enter into an additional agreement whereby
Vectis would act as an advisor with respect to a restructuring
of and management of Critical Path. The agreement provided
Vectis with a monthly retainer fee of $125,000 during the term
of the agreement. All of the agreements with Vectis were
terminated effective September 30, 2001, at which time
several employees of Vectis joined us as regular full time
employees. In 2001, we paid a total of fees to Vectis in the
amount of $1,073,041 for aggregate monthly consulting service
fees and expense reimbursements, and $3,057,928 in fees
associated with the Series D preferred stock investment in
November 2001 and other transactions regarding our
restructuring. Although the agreements were terminated, certain
obligations under the agreements survive including
indemnification obligations and some obligations with respect to
expense reimbursements and transactional fees. We paid Vectis a
total of approximately $12,500 for expense reimbursement in
February 2002. The total potential remaining fees payable
aggregate between zero and $135,000.

William E. McGlashan, Jr., who was appointed
our interim President and Chief Operating Officer in April 2001,
our interim Chief Executive Officer in August 2001, and our
Chief Executive Officer on January 2002, formerly served as a
principal and the Chief Executive Officer of Vectis, which
beneficially owns more than 5% of our capital stock, and holds a
significant beneficial ownership in Vectis. In September 2001,
we terminated our relationship with Vectis subject to certain
obligations as described herein.

In August 2002, we retained the services of The
Cohen Group, an international strategic consulting company. The
chairman and chief executive officer of The Cohen Group is
William S. Cohen, a former member of the Board of Critical Path.
Under the agreement, The Cohen Group received a former $150,000
retainer fee to be credited against a sliding scale of earned
sales and referral commissions on transactions resulting in
license revenue for us. The agreement is for a one year
renewable term, with reimbursement for specified expenses up to
a cap of 5% of the retainer and a provision for extension in the
event the retainer fee is not earned during the term. This
agreement was not renewed in 2003.

In April 2002, we retained the services of CTD,
LLC (CTD), an operational planning consulting
company. The founder and president of CTD is Patrick Tracy
Currie, who subsequently became our Executive Vice President,
Operations and General Manager of Hosted Operations following
the termination of the consulting arrangement with CTD as
described below. Mr. Currie and his spouse share full
ownership of CTD. Under the terms of the Statement of Work
entered into between us and CTD, CTD received payments for its
services based on daily rates as well as reimbursement of costs
associated with the work performed. In connection with this
consulting arrangement, we paid CTD an aggregate of
approximately $320,000 in 2003.

Investment Transactions

In November 2001, we entered into a financing
transaction with a group of investors that resulted in gross
cash proceeds to us of approximately $30 million as well as
the retirement of $65 million in face value of
5 3/4% Convertible Subordinated Notes. In connection
with the financing, we issued and sold four million shares of
our Series D preferred stock (convertible into
approximately 13.1 million shares of common stock) and
warrants to purchase 625,000 shares of common stock, to a
group of investors that included General Atlantic Partners 74,
L.P., GapStar, LLC and GAP Coinvestment Partners II, L.P.
(collectively, General

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Atlantic), which entities are associated
with William E. Ford and Peter L.S. Currie, two of our current
directors, and Raul J. Fernandez, a former director, Vectis
Group LLC and its affiliated entities (Vectis),
which is associated with our Chief Executive Officer William E.
McGlashan, Jr., and Cheung Kong (Holdings) Limited and its
affiliated entities (Cheung Kong). The preferred
stock will accrue and cumulate dividends at 8% and is
convertible into shares of common stock at the option of the
holder. The warrants are exercisable at any time until
November 8, 2006 at an exercise price of $4.20 per
share.


As a result of the transaction, General Atlantic,
Vectis and Cheung Kong are each deemed to be beneficial owners
of more than 5% of our common stock. In connection with the
financing, General Atlantic purchased 708,037 shares of
Series D preferred stock, convertible as of
December 31, 2003 into approximately 9,767,960 shares
of common stock, and warrants to acquire 625,000 shares of
common stock for an aggregate purchase price of $10,735,509 in
cash and the exchange of an aggregate face amount of $64,630,000
of our 5 3/4% Convertible Subordinated Notes due
April 1, 2005, for which General Atlantic paid $25,264,495.
Vectis purchased 581,818 shares of Series D preferred
stock, which as of December 31, 2003 are convertible into
2,232,675 shares of common stock for a purchase price of
$7,999,997.50 and Cheung Kong purchased 872,727 shares of
Series D preferred stock, which as of December 31,
2003 are convertible into 3,349,013 shares of common stock,
for a purchase price of $11,999,996.25.

As part of this transaction, we, General
Atlantic, Vectis and Cheung Kong entered into a Stockholders
Agreement pursuant to which we granted the investors preemptive
rights for certain issuances of our capital stock and rights to
designate board members as described below. The Stockholders
Agreement also limited these investors ability to acquire
additional shares of our capital stock, solicit proxies and
propose business combination transactions involving us. The
parties also entered into a Registration Rights Agreement
pursuant to which each of General Atlantic and Cheung Kong were
granted one demand registration right and all the parties were
granted piggy-back registration rights.

In November 2003, General Atlantic (with its
affiliate GAPCO GmbH & Co. KG) and Cheung Kong (with
some additional affiliates) entered into a Convertible Note
Purchase and Exchange Agreement with us. Under this agreement,
General Atlantic loaned us $10,000,000. We also agreed, subject
to obtaining shareholder approval, to convert the $10,000,000
loan from General Atlantic and approximately $32,795,000 of
5 3/4% Subordinated Convertible Notes, due
April 1, 2005, held by Cheung Kong into an aggregate of
approximately 29.2 million shares of Series E
preferred stock. We waived the standstill provisions of the
Stockholders Agreement for these transactions. We also agreed,
subject to obtaining shareholder approval, to amend the terms of
the existing Series D preferred stock (which is held by
General Atlantic, Vectis, Cheung Kong and MBCP PeerLogic, LLC
and its affiliates) to, among others, modify the liquidation
preference upon a liquidation or a change in control, to
eliminate the participation feature upon a liquidation or change
in control, to reduce the conversion to common stock 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. In
addition, we agreed, subject to obtaining shareholder approval,
to amend the warrants to purchase 625,000 shares of common
stock held by General Atlantic to reduce the exercise price from
$4.20 to $1.50. Finally, we agreed to undertake to commence a
rights offering for holders of our common stock, as of a record
date to be determined by our board of directors, to purchase up
to $21,000,000 of Series E preferred stock. We, our
subsidiary Compass Holding Corp., and General Atlantic entered
into a Guaranty and Security Agreement pursuant to which Compass
guaranteed our payment and performance of all obligations under
the loan documentation.

As part of the November 2003 transaction, the
parties amended the Stockholders Agreement to add the additional
General Atlantic and Cheung Kong affiliates that were parties to
the November 2003 agreement, to grant Cheung Kong the right to
elect a director, as described below, and to grant Cheung Kong
additional approval rights for certain corporate actions of the
Company. The parties also amended the Registration Rights
Agreement to include the additional General Atlantic and Cheung
Kong affiliates that were parties to the November 2003 agreement
and to include the shares of common stock issuable upon
conversion of the Series E preferred stock. The Convertible
Note Purchase and Exchange Agreement, the Amended and Restated
Stockholders Agreement and the Amended and Restated Registration
Rights Agreement were filed as exhibits to the Current Report on
Form 8-K we filed on November 20, 2003.

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For so long as 500,000 shares of the
Series D preferred stock is outstanding and a majority of
the Series D preferred stock is owned by General Atlantic,
the holders of the Series D preferred stock are entitled to
elect one of the Companys directors. In December 2001, the
holders of the Series D preferred stock elected William E.
Ford, a managing member of General Atlantic Partners, LLC, to
serve on the Board of Directors. For so long as Cheung Kong owns
750,000 shares of Series D preferred stock, Cheung
Kong is entitled to designate a non-voting observer to the Board
of Directors. In connection with the November 2003 transaction,
if we issue shares of Series E preferred stock, Cheung Kong
is entitled to elect one of our directors.

Indemnification

Our articles of incorporation limit the liability
of our directors for monetary damages arising from a breach of
their fiduciary duty as directors, except to the extent
otherwise required by the California Corporations Code. Such
limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission.

Our bylaws provide that we may indemnify our
directors and officers to the fullest extent permitted by
California law, including in circumstances in which
indemnification is otherwise discretionary under California law.
We have also entered into indemnification agreements with our
officers and directors containing provisions that may require
us, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their
status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified,
and to obtain directors and officers insurance if
available on reasonable terms.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services



| |           
| | ----------
| | Audit Fees




The aggregate fees for professional services
billed by PricewaterhouseCoopers LLP, our independent auditors,
in connection with their audit of our consolidated financial
statements, reviews of the consolidated financial statements
included in our quarterly reports on Form 10-Q and related
statutory and regulatory filings were:







|                               |  |   |         | 
|------------------------------ |  | - | ------- | 
|Fiscal year ended December 31: |  |   |         | 
|2003                           |  | $ | 628,283 | 
|2002                           |  | $ | 378,400 | 






| |                   
| | ------------------
| | Audit-Related Fees




The aggregate fees billed by
PricewaterhouseCoopers LLP for assurance and related services
related to the performance of their audit and review of our
financial statements that are not included in our audit
fees above were:







|                               |  |   |        | 
|------------------------------ |  | - | ------ | 
|Fiscal year ended December 31: |  |   |        | 
|2003                           |  | $ | 12,900 | 
|2002                           |  | $ | 23,000 | 







These audit-related fees billed by
PricewaterhouseCoopers LLP related to consultation on revenue
recognition related to specific license software agreements
negotiated during the related annual period and consultation on
accounting related to the financing transaction completed in
November 2003.




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| |         
| | --------
| | Tax Fees




The aggregate fees billed by
PricewaterhouseCoopers LLP for professional services related to
tax compliance, tax advice and tax planning were:







|                               |  |   |         | 
|------------------------------ |  | - | ------- | 
|Fiscal year ended December 31: |  |   |         | 
|2003                           |  | $ | 523,204 | 
|2002                           |  | $ | 494,665 | 







These professional service fees billed by
PricewaterhouseCoopers LLP related to tax compliance work for
domestic and international tax filings, consultation on sales,
use and franchise tax filings and audits, consultation on
foreign statutory compliance and consultation on tax related
structures of certain vendor contracts.




All Other
Fees

There were no fees billed by
PricewaterhouseCoopers for any other products and services not
included in audit fees, audit-related
fees, and tax fees.

Pre-Approval
Policies and Procedures

The Audit Committee charter requires the Audit
Committee, or a committee of the Audit Committee, to pre-approve
the provision of all auditing and non-audit services to us and
our subsidiaries by our independent auditors and all audit and
non-audit engagement fees and terms. The Audit Committee must
also pre-approve the engagement of non-audit services to be
performed by other certified public accounting firms that are
not our independent auditors. In connection with the approval of
non-audit services, the Audit Committee must consider whether
the independent auditors performance of any non-audit
services is compatible with the independence of our auditors. In
fiscal year 2003, the Audit Committee pre-approved 100% of the
services performed by PricewaterhouseCoopers relating to
audit-related fees, tax fees, and
all other fees.

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PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)(1) Index to Consolidated Financial
Statements

Please see the Index to Consolidated Financial
Statements that appears below.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS




|                                                              |  |      |     | 
|------------------------------------------------------------- |  | ---- | --- | 
|                                                              |  | Page
|                                                              |  |     
|Report of Independent Auditors                                |  |      | 104 | 
|Consolidated Balance Sheets                                   |  |      | 105 | 
|Consolidated Statements of Operations                         |  |      | 106 | 
|Consolidated Statements of Shareholders
    Equity (Deficit) |  |      | 107 | 
|Consolidated Statements of Cash Flows                         |  |      | 108 | 
|Notes to Consolidated Financial Statements                    |  |      | 109 | 
|Schedule II  Valuation and Qualifying
    Accounts           |  |      | 150 | 




(a)(2) Financial Statement Schedule




Schedule II  Valuation and Qualifying
Accounts for the years ended December 31, 2001, 2002 and
2003 appears on page 150 of this report and should be read
in conjunction with the consolidated financial statements and
related notes thereto and report of independent auditors filed
herewith.




Schedules not mentioned above have been omitted
because the information required to be set forth therein is not
applicable or the information is otherwise included in the
Financial Statements or notes thereto.

(b) Reports on Form 8-K

(a) A Current Report on Form 8-K was
furnished by the company on November 12, 2003. In this
report, Critical Path furnished a press release announcing the
Companys unaudited financial results for its third fiscal
quarter ended September 30, 2003.

(b) A Current Report on Form 8-K was
filed by the Company on November 20, 2003. In this report,
Critical Path issued a press released dated November 18,
2003, announcing that the company had signed a definitive
agreement to issue $10 million in principal amount of
10% convertible secured notes and, upon shareholder
approval, to convert the newly issued notes into shares of
Series E preferred stock, to exchange approximately
$32.8 million in face value of outstanding
5 3/4% convertible subordinated notes for
Series E preferred stock and to amend the terms of its
Series D preferred stock. The press release also announced
the companys intention to conduct a rights offering to
allow the Companys common shareholders to purchase up to
$21 million of its Series E preferred stock.

(c) A Current Report on Form 8-K was
filed on December 24, 2003. In this report, the Company
announced that, in connection with the filing of the
registration statement, PricewaterhouseCoopers LLP has updated
its report as of December 22, 2003 on the consolidated
financial statements and financial statement schedule of the
company for the fiscal year ended December 31, 2002 to add
an explanatory paragraph regarding the Companys ability to
continue as a going concern as described in Note 22 of
Notes to Consolidated Financial Statements 
Subsequent Events. In this report, the company filed
Consolidated Balance Sheets as of December 31, 2001 and
2002, Consolidated Statements of Operations for the years ended
December 31, 2000, 2001 and 2002, Consolidated Statements
of Shareholders Equity (Deficit) for the years ended
December 31, 2000, 2001 and 2002, Consolidated Statements
of Cash Flows for the years ended December 31, 2000, 2001
and 2002 and Notes to Consolidated Financial Statements. The
consolidated financial statements were retroactively restated to
give effect to the one-for-four reverse stock split, effected on
August 1, 2003, of the Companys authorized and
outstanding common stock and of all shares of common stock
subject to stock options and warrants and the updated auditors
report.

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(d) A Current Report on Form 8-K was
filed by the company on January 21, 2004. In this report
Critical Path announced that the company amended its Preferred
Stock Rights Agreement dated as of March 19, 2001, as
amended, between Critical Path and Computershare Trust
Company, Inc., as rights agent. The Preferred Stock Rights
Agreement was amended to exclude certain persons from the
definition of Acquiring Person under the agreement.

(e) A Current Report on Form 8-K was
filed by the Company on January 21, 2004. In this report,
Critical Path filed a press release dated January 20, 2004,
announcing that on January 16, 2004 the Company issued and
sold to qualified institutional buyers $15 million in
10% senior secured notes convertible into shares of the
Companys Series E preferred stock upon shareholder
approval.

(f) A Current Report on Form 8-K was
furnished by the Company on February 4, 2004. In this
report, Critical Path furnished a press release announcing the
preliminary unaudited financial results for its fourth fiscal
quarter and fiscal year ended December 31, 2003.

(g) A Current Report on Form 8-K was
filed by the Company on February 5, 2004. In this report,
Critical Path filed a press release dated February 4, 2004
announcing the resignation of its chief financial officer,
William Smartt, and the appointment of his successor James Clark
as executive vice president and chief financial officer of the
Company.

(h) Two Current Reports on Form 8-K
were filed by the Company on March 10, 2004. In one report,
Critical Path filed a press release dated March 9, 2004
announcing that it had issued and sold to qualified
institutional buyers $18.5 million in 10% senior
secured notes convertible into shares of the Companys
Series E preferred stock upon shareholder approval. In the
other report, the Company announced that it had amended its
Preferred Stock Rights Agreement dated as of March 19,
2001, as amended, between Critical Path and Computershare Trust
Company, Inc., as rights agent. The Preferred Stock Rights
Agreement was amended to exclude certain persons from the
definition of Acquiring Person under the agreement.




(i) A Current Report on Form 8-K was
filed by the Company on March 30, 2004. In this report,
Critical Path filed a press release dated March 29, 2004
announcing the appointment of Mark Ferrer as chief executive
officer of the Company.




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(c) Exhibits

The following exhibits are filed as part of, or
are incorporated by reference into, this Annual Report on
Form 10-K:




| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                  
| | ------ |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3(i).1 |  |  | Amended and Restated Articles of Incorporation
    (Incorporated by reference to Exhibit 3(i)(b) to the
    Registrants Registration on Form S-1 (File
    No. 333-71499)).                                                                                                                                                                                                                     
| | 3(i).2 |  |  | Amendment to the Articles of Incorporation, dated
    January 5, 2001 (Incorporated by reference to
    Exhibit 3.2 to the Registrants Annual Report on Form
    10-K for the fiscal year ended December 31, 2000).                                                                                                                                                                             
| | 3(i).3 |  |  | Certificate of the Powers, Designations,
    Preferences and Rights of the Series D Cumulative
    Redeemable Convertible Participating Preferred Stock dated
    November 6, 2001 (Incorporated by reference to
    Exhibit 3(i).3 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2001).                                                                    
| | 3(i).4 |  |  | Certificate of Amendment of Amended and Restated
    Articles of Incorporation (Incorporated by reference to
    Exhibit 3(i) to Registrants Quarterly Report on Form
    10-Q for the quarter ended June 30, 2003).                                                                                                                                                                            
| | 3(i).5 |  |  | Certificate of Increase in Number of Shares of
    Series D Cumulative Redeemable Convertible Participating
    Preferred Stock dated November 20, 2003 (Incorporated by
    reference to Exhibit 3(i).5 to Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2003).                                                                                               
| | 3(ii)  |  |  | Amended and Restated Bylaws. (Incorporated by
    reference to Exhibit 3(ii)(b) to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2003).                                                                                                                                                                                                                  
| | 4.1    |  |  | Form of Common Stock Certificate. (Incorporated
    by reference to Exhibit 4.1 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2003).                                                                                                                                                                                                                  
| | 4.2    |  |  | Preferred Stock Rights Agreement dated as of
    March 19, 2001 between Registrant and ComputerShare Trust
    Company, Inc., including the Certificate of Determination,
    the form of Rights Certificate and the Summary of Rights
    attached thereto as Exhibits A, B and C respectively
    (Incorporated by reference to Exhibit 4.5 of
    Registrants Form 8-A filed on May 7, 2001).
| | 4.3    |  |  | Indenture, dated March 31, 2000, by and
    between Registrant and State Street Bank and Trust Company of
    California, N.A., Trustee, relating to the $300 million
    five-year, 5.75% Convertible Subordinated Notes due
    April 1, 2005 (Incorporated by reference to
    Exhibit 4.5 to the Registrants Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2000).       
| | 4.4    |  |  | Warrant to Purchase Common Stock dated
    March 29, 2001 issued by the Registrant to Vectis Group LLC
    (Incorporated by reference to Exhibit 4.3 to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001).                                                                                                                                            
| | 4.5    |  |  | Warrant to Purchase Common Stock dated
    January 29, 1999 issued by the Registrant to America
    Online, Inc. (Incorporated by reference to Exhibit 4.4
    to the Registrants Registration Statement on Form S-1
    (File No. 333-71499)).                                                                                                                                                 
| | 4.6    |  |  | Warrant to Purchase up to 25,000 Shares of
    Common Stock dated as of December 29, 1999 by and between
    Ecker Folsom Properties, LLC (Incorporated by reference to
    Exhibit 4.6 to the Registrants Annual Report on Form
    10-K for the year ended December 31, 2001).                                                                                                                
| | 4.7    |  |  | Warrant to Purchase up to 834,000 Shares of
    Common Stock dated as of June 2000 by and between Worldsport
    Networks Europe Ltd. (Incorporated by reference to
    Exhibit 4.7 to the Registrants Annual Report on Form
    10-K for the year ended December 31, 2001).                                                                                                                    




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| |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.8  |  |  | Stock and Warrant Purchase and Exchange Agreement
    dated as of November 8, 2001 by and among Registrant and
    General Atlantic Partners 74, LP, GAP Coinvestment
    Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC,
    Cenwell Limited, Campina Enterprises Limited (Incorporated by
    reference to Exhibit 4.8 to the Registrants Annual
    Report on Form 10-K for the year ended December 31, 2001).                                                                                                          
| | 4.9  |  |  | Stockholders Agreement dated as of
    November 8, 2001 by and among Registrant and General
    Atlantic Partners 74, L.P., GAP Coninvestment
    Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC,
    Cenwell Limited, Campina Enterprises Limited (Incorporated by
    reference to Exhibit 4.9 to the Registrants Annual
    Report on Form 10-K for the year ended December 31, 2001).                                                                                                                                  
| | 4.10 |  |  | Registration Rights Agreement dated as of
    November 8, 2001 by and among Registrant and General
    Atlantic Partners 74, L.P., GAP Coninvestment
    Partners II, LP, Gapstar, LLC, Vectis CP Holdings, LLC,
    Cenwell Limited, Campina Enterprises Limited (Incorporated by
    reference to Exhibit 4.10 to the Registrants Annual
    Report on Form 10-K for the year ended December 31, 2001).                                                                                                                          
| | 4.11 |  |  | Escrow Agreement dated as of November 8,
    2001 by and among Registrant and General Atlantic
    Partners 74, L.P., GAP Coninvestment Partners II, LP,
    Gapstar, LLC, Vectis CP Holdings, LLC, Cenwell Limited, Campina
    Enterprises Limited (Incorporated by reference to
    Exhibit 4.11 to the Registrants Annual Report on Form
    10-K for the year ended December 31, 2001).                                                                                                                                       
| | 4.12 |  |  | Employee Stock Purchase Plan. (Incorporated by
    reference to Exhibit 4.3 to the Registrants
    Registration Statement on Form S-8 filed on June 15,
    2001 (File No. 333-63080)).                                                                                                                                                                                                                                                                                                                                            
| | 4.13 |  |  | Amended and Restated 1998 Stock Plan.
    (Incorporated by reference to Exhibit 4.1 to the
    Registrants Registration Statement on Form S-8 filed
    on June 15, 2001 (File No. 333-63080)).                                                                                                                                                                                                                                                                                                                                    
| | 4.14 |  |  | 1999 Stock Option Plan and forms of agreements
    thereunder (Incorporated by reference to Exhibit 10.5 to
    the Registrants Registration Statement on Form S-8
    filed on September 22, 1999 (File No. 333-87553)).                                                                                                                                                                                                                                                                                                          
| | 4.15 |  |  | Amendment No. 1 to Preferred Stock Rights
    Agreement dated as of November 6, 2001 between the
    Registrant and Computershare Trust Company, Inc., as Rights
    Agent (Incorporated by reference to Exhibit 4.2 to the
    Registrants Amendment No. 1 to the Companys
    Registration Statement on Form 8-A filed on January 21,
    2004 (File No. 000-25331)).                                                                                                                                                           
| | 4.16 |  |  | Amendment No. 2 to Preferred Stock Rights
    Agreement dated as of November 18, 2003 between the
    Registrant and Computershare Trust Company, Inc., as Rights
    Agent (Incorporated by reference to Exhibit 4.3 to the
    Registrants Amendment No. 1 to the Companys
    Registration Statement on Form 8-A filed on
    January 21, 2004 (File No. 000-25331)).                                                                                                                                                          
| | 4.17 |  |  | Amendment No. 3 to Preferred Stock Rights
    Agreement dated as of January 16, 2004 between Registrant
    and Computershare Trust Company, Inc., as Rights Agent
    (Incorporated by reference to Exhibit 4.4 to the
    Registrants Amendment No. 1 to the Companys
    Registration Statement on Form 8-A filed on
    January 21, 2004 (File No. 000-25331)).                                                                                                                                                               
| | 4.18 |  |  | Amendment No. 4 to Preferred Stock Rights
    Agreement dated as of March 9, 2004 between Critical
    Path, Inc. and Computershare Trust Company, Inc., as
    Rights Agent (Incorporated by reference to Exhibit 4.5 to
    the Registrants Amendment No. 2 to the Companys
    Registration Statement on Form 8-A filed on March 10,
    2004 (File No. 000-25331)).                                                                                                                                                           
| | 4.19 |  |  | Amended and Restated Registration Rights
    Agreement, dated November 26, 2003 among Registrant,
    General Atlantic Partners 74, L.P., GAP Coinvestment
    Partners II, L.P., GapStar, LLC, GAP-W, LLC, GAPCO
    GmbH & Co. KG, Cenwell Limited, Campina Enterprises
    Limited, Great Affluent Limited, Dragonfield Limited, Lion
    Cosmos Limited and Vectis CP Holdings, LLC (Incorporated by
    reference to Exhibit 4.19 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2003).




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| |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.20 |  |  | Amended and Restated Stockholders Agreement,
    dated November 26, 2003, among Registrant, General Atlantic
    Partners 74, L.P., GAP Coinvestment Partners II, L.P.,
    GapStar, LLC, GAP-W, LLC, GAPCO GmbH & Co. KG, Cenwell
    Limited, Campina Enterprises Limited, Great Affluent Limited,
    Dragonfield Limited, Lion Cosmos Limited and Vectis CP Holdings,
    LLC (Incorporated by reference to Exhibit 4.20 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                                         
| | 4.21 |  |  | Convertible Subordinated Promissory Note dated
    November 26, 2003 issued by Registrant to General Atlantic
    Partners 74, L.P. (Incorporated by reference to
    Exhibit 4.21 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 4.22 |  |  | Convertible Subordinated Promissory Note dated
    November 26, 2003 issued by Registrant to GAP Coinvestment
    Partners II, L.P. (Incorporated by reference to
    Exhibit 4.22 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 4.23 |  |  | Convertible Subordinated Promissory Note dated
    November 26, 2003 issued by Registrant to GapStar, LLC
    (Incorporated by reference to Exhibit 4.23 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 4.24 |  |  | Convertible Subordinated Promissory Note dated
    November 26, 2003 issued by Registrant to GAPCO
    GmbH & Co. KG (Incorporated by reference to
    Exhibit 4.24 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 4.25 |  |  | Second Amended and Restated Registration Rights
    Agreement dated January 16, 2004, among Registrant, General
    Atlantic Partners 74, L.P., GAP Coinvestment
    Partners II, L.P., GapStar, LLC, GAPCO GmbH & Co.
    KG, Cenwell Limited, Campina Enterprises Limited, Great Affluent
    Limited, Dragonfield Limited, Lion Cosmos Limited, Vectis CP
    Holdings, LLC, Permal U.S. Opportunities Limited, Zaxis
    Equity Neutral, L.P., Zaxis Institutional Partners, L.P., Zaxis
    Offshore Limited, Zaxis Partners, L.P. and Passport Master Fund,
    L.P. (Incorporated by reference to Exhibit 4.25 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).
| | 4.26 |  |  | Convertible Subordinated Promissory Note dated
    January 16, 2004 issued by Registrant to Permal
    U.S. Opportunities Limited (Incorporated by reference to
    Exhibit 4.26 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 4.27 |  |  | Convertible Subordinated Promissory Note dated
    January 16, 2004 issued by Registrant to Zaxis Equity
    Neutral, L.P. (Incorporated by reference to Exhibit 4.27 to
    the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 4.28 |  |  | Convertible Subordinated Promissory Note dated
    January 16, 2004 issued by Registrant to Zaxis
    Institutional Partners, L.P. (Incorporated by reference to
    Exhibit 4.28 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 4.29 |  |  | Convertible Subordinated Promissory Note dated
    January 16, 2004 issued by Registrant to Zaxis Offshore
    Limited (Incorporated by reference to Exhibit 4.29 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 4.30 |  |  | Convertible Subordinated Promissory Note dated
    January 16, 2004 issued by Registrant to Zaxis Partners,
    L.P. (Incorporated by reference to Exhibit 4.30 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 4.31 |  |  | Convertible Subordinated Promissory Note dated
    January 16, 2004 issued by Registrant to Passport Master
    Fund, L.P. (Incorporated by reference to Exhibit 4.31 to
    the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 4.32 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Permal
    U.S. Opportunities Limited (Incorporated by reference to
    Exhibit 4.32 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                            




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| |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.33 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Zaxis Equity Neutral,
    L.P. (Incorporated by reference to Exhibit 4.33 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 4.34 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Zaxis Institutional
    Partners, L.P. (Incorporated by reference to Exhibit 4.34
    to the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 4.35 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Zaxis Offshore
    Limited (Incorporated by reference to Exhibit 4.35 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 4.36 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Zaxis Partners, L.P.
    (Incorporated by reference to Exhibit 4.36 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 4.37 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Guggenheim Portfolio
    Company XIII (Incorporated by reference to
    Exhibit 4.37 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 4.38 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Crosslink Crossover
    Fund IV, L.P. (Incorporated by reference to
    Exhibit 4.38 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 4.39 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Sagamore Hill Hub
    Fund, Ltd. (Incorporated by reference to Exhibit 4.39 to
    the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 4.40 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Criterion Capital
    Partners, Ltd. (Incorporated by reference to Exhibit 4.40
    to the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 4.41 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Criterion Capital
    Partners, Institutional (Incorporated by reference to
    Exhibit 4.41 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 4.42 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Criterion Capital
    Partners, L.P. (Incorporated by reference to Exhibit 4.42
    to the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 4.43 |  |  | Convertible Subordinated Promissory Note dated
    March 9, 2004 issued by Registrant to Capital Ventures
    International (Incorporated by reference to Exhibit 4.43 to
    the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 4.44 |  |  | Third Amended and Restated Registration Rights
    Agreement, dated March 9, 2004, among Registrant, General
    Atlantic Partners 74, L.P., GAP Coinvestment
    Partners II, L.P., GapStar, LLC, GAPCO GmbH & Co.
    KG, Cenwell Limited, Campina Enterprises Limited, Great Affluent
    Limited, Dragonfield Limited, Lion Cosmos Limited, Vectis CP
    Holdings, LLC, Permal U.S. Opportunities Limited, Zaxis
    Equity Neutral, L.P., Zaxis Institutional Partners, L.P., Zaxis
    Offshore Limited, Zaxis Partners, L.P., Guggenheim Portfolio
    Company XIII, Passport Master Fund, L.P., Crosslink Crossover
    Fund IV, L.P., Sagamore Hill Hub Fund, Ltd., Criterion
    Capital Partners, Ltd., Criterion Capital
    Partners, Institutional, Criterion Capital Partners, L.P.
    and Capital Ventures International (Incorporated by reference to
    Exhibit 4.44 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).
| | 4.45 |  |  | Note Amendment Agreement dated
    March 12, 2004, by and among Registrant, Cenwell Limited,
    Campina Enterprises Limited, Great Affluent Limited, Dragonfield
    Limited and Lion Cosmos Limited (Incorporated by reference to
    Exhibit 4.45 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     




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| |       |  |  |                                                                                                                                                                                                                                                                                      
| | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.46  |  |  | Warrant to Purchase up to 100,000 Shares of
    Common Stock dated March 12, 2004 issued by the Registrant
    to Silicon Valley Bank (Incorporated by reference to
    Exhibit 4.46 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).       
| | 10.1  |  |  | Master Services Agreement dated December 10,
    1998 by and between the Registrant and US West
    Communications Services, Inc. (Incorporated by reference to
    Exhibit 10.15 to the Registrants Registration
    Statement on Form S-1 (File No. 333-71499)).                  
| | 10.2  |  |  | Amendment to Email Services Agreement
    September 30, 1998 by and between the Registrant and
    E*TRADE Group, Inc. (Incorporated by reference to
    Exhibit 10.18 to the Registrants Registration
    Statement on Form S-1 (File No. 333-71499)).                             
| | 10.3  |  |  | Email Services Agreement dated January 29,
    1999 by and between the Registrant and ICQ, Inc.
    (Incorporated by reference to Exhibit 10.22 to the
    Registrants Registration Statement on Form S-1 (File
    No. 333-71499)).                                                
| | 10.4  |  |  | Hills Plaza I Office Lease dated as of
    November 16, 2001 by and between Registrant and SPI Hills
    Plaza Venture, LLC (Incorporated by reference to
    Exhibit 10.4 to the Registrants Annual Report on Form
    10-K for the year ended December 31, 2001).                 
| | 10.5  |  |  | Standard Industrial/Multitenant Lease-Gross dated
    June 20, 1997 by and between the Registrant and 501 Folsom
    Street Building. (Incorporated by reference to
    Exhibit 10.10 to the Registrants Registration
    Statement on Form S-1 (File No. 333-71499)).              
| | 10.6  |  |  | Office lease dated December 1999 by and between
    Ecker-Folsom Properties, LLC and the Registrant. (Incorporated
    by reference to Exhibit 10.25 to the Registrants
    Annual Report on Form 10-K for the year ended December 31,
    1999).                                   
| | 10.7  |  |  | Office lease dated December 1999 by and between
    Ecker-Folsom Properties, LLC and the Registrant. (Incorporated
    by reference to Exhibit 10.26 to the Registrants
    Annual Report on Form 10-K for the year ended December 31,
    1999).                                   
| | 10.8  |  |  | Agreement dated as August 13, 2001 by and
    between Registrant and David Hayden (Incorporated by reference
    to Exhibit 10.3 to the Registrants Quarterly Report
    on Form 10-Q for the quarter and nine months ended
    September 30, 2001).                                
| | 10.9  |  |  | Nonstatutory Stock Option Agreement dated as of
    November 8, 2001 by and between Registrant and David Hayden
    (Incorporated by reference to Exhibit 10.9 to the
    Registrants Annual Report on Form 10-K for the year ended
    December 31, 2001).                         
| | 10.10 |  |  | Agreement dated as of August 1, 2001 by and
    between Registrant and William E. McGlashan, Jr.
    (Incorporated by reference to Exhibit 10.4 to the
    Registrants Quarterly Report for the quarter and nine
    months ended September 30, 2001).                              
| | 10.11 |  |  | Nonstatutory Stock Option Agreement dated as of
    August 1, 2001 by and between Registrant and William E.
    McGlashan, Jr. (Incorporated by reference to
    Exhibit 10.11 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2001).             
| | 10.12 |  |  | Nonstatutory Stock Option Agreement dated as of
    November 8, 2001 by and between Registrant and William E.
    McGlashan, Jr. (Incorporated by reference to
    Exhibit 10.12 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2001).           
| | 10.13 |  |  | First Amended and Restated Employment Agreement
    dated as of January 7, 2002 by and between Registrant and
    William E. McGlashan, Jr. (Incorporated by reference to
    Exhibit 10.13 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2001).
| | 10.14 |  |  | Nonstatutory Stock Option Agreement dated as of
    December 21, 2001 by and between Registrant and William E.
    McGlashan, Jr. (Incorporated by reference to
    Exhibit 10.14 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2001).          
| | 10.15 |  |  | Agreement dated as of October 8, 2001 by and
    between Registrant and Pierre Van Beneden (Incorporated by
    reference to Exhibit 10.5 to the Registrants
    Quarterly Report for the quarter and nine months ended
    September 30, 2001).                                    




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| |       |  |  |                                                                                                                                                                                                                                                                    
| | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.16 |  |  | Nonstatutory Stock Option Agreement dated as of
    October 8, 2001 by and between Registrant and Pierre Van
    Beneden (Incorporated by reference to Exhibit 10.16 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001). 
| | 10.17 |  |  | Nonstatutory Stock Option Agreement dated as of
    November 8, 2001 by and between Registrant and Pierre Van
    Beneden (Incorporated by reference to Exhibit 10.17 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001).
| | 10.18 |  |  | Consulting Agreement dated as of August 16,
    2001 by and between Registrant and Laureen DeBuono (Incorporated
    by reference to Exhibit 10.18 to the Registrants
    Annual Report on Form 10-K for the year ended
    December 31, 2001).                   
| | 10.19 |  |  | Nonstatutory Stock Option Agreement dated as of
    September 5, 2001 by and between Registrant and Laureen
    DeBuono (Incorporated by reference to Exhibit 10.19 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001).  
| | 10.20 |  |  | Addendum to Consulting Agreement dated as of
    October 31, 2001 by and between Registrant and Laureen
    DeBuono (Incorporated by reference to Exhibit 10.20 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001).      
| | 10.21 |  |  | Nonstatutory Stock Option Agreement dated as of
    October 31, 2001 by and between Registrant and Laureen
    DeBuono (Incorporated by reference to Exhibit 10.21 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001).   
| | 10.22 |  |  | Nonstatutory Stock Option Agreement dated as of
    November 8, 2001 by and between Registrant and Laureen
    DeBuono (Incorporated by reference to Exhibit 10.22 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001).   
| | 10.23 |  |  | Employment Agreement dated as of January 14,
    2002 by and between Registrant and Bernard Harguindeguy
    (Incorporated by reference to Exhibit 10.23 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001).             
| | 10.24 |  |  | Agreement, dated as of May 15, 2001, by and
    between the Registrant and Lawrence P. Reinhold (Incorporated by
    reference to Exhibit 10.2 to the Registrants
    quarterly report on Form 10-Q for the quarter ended
    September 30, 2001).                
| | 10.25 |  |  | Agreement and Release, dated February 9,
    2001, by and between the Registrant and Douglas Hickey
    (Incorporated by reference to Exhibit 10.31 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2000).                  
| | 10.26 |  |  | Promissory Note and Security Agreement dated
    November 2, 1998 by and between the Registrant and Douglas
    Hickey. (Incorporated by reference to Exhibit 10.12 to the
    Registrants Registration Statement on Form S-1 (File
    No. 333-71499)).          
| | 10.27 |  |  | Nonstatutory Stock Option Agreement dated as of
    May 8, 2002 by and between Registrant and Paul Bartlett
    (Incorporated by reference to Exhibit 10.27 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002).          
| | 10.28 |  |  | Nonstatutory Stock Option Agreement dated as of
    January 15, 2003 by and between Registrant and Paul
    Bartlett (Incorporated by reference to Exhibit 10.28 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002).     
| | 10.29 |  |  | Employment Agreement dated as of April 8,
    2002 by and between Registrant and Paul Bartlett (Incorporated
    by reference to Exhibit 10.29 to the Registrants
    Annual Report on Form 10-K for the year ended
    December 31, 2002).                       
| | 10.30 |  |  | Nonstatutory Stock Option Agreement dated as of
    October 10, 2002 by and between Registrant and Robert Allen
    Shipp (Incorporated by reference to Exhibit 10.30 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002).
| | 10.31 |  |  | Employment Agreement dated as of October 9,
    2002 by and between Registrant and Robert Allen Shipp
    (Incorporated by reference to Exhibit 10.31 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002).                

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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                          
| | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.32 |  |  | Employment Agreement dated as of November 4,
    2002 by and between Registrant and Patrick Tracy Currie
    (Incorporated by reference to Exhibit 10.32 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002).                                                                                                   
| | 10.33 |  |  | Nonstatutory Stock Option Agreement dated as of
    November 6, 2002 by and between Registrant and Patrick
    Tracy Currie (Incorporated by reference to Exhibit 10.33 to
    the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2002).                                                                                    
| | 10.34 |  |  | Separation Agreement and Release dated as of
    November 16, 2002 by and between Registrant and Pierre Van
    Beneden (Incorporated by reference to Exhibit 10.3 to the
    Registrants Quarterly Report on Form 10-Q for the
    period ended September 30, 2002).                                                                                   
| | 10.35 |  |  | Separation Agreement and Release dated as of
    January 15, 2003 by and between Registrant and Laureen
    DeBuono (Incorporated by reference to Exhibit 10.35 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002).                                                                                            
| | 10.36 |  |  | Form of Indemnification Agreement by and between
    the Registrant and each of its directors and officers.
    (Incorporated by reference to Exhibit 10.32 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2000).                                                                                                
| | 10.37 |  |  | Loan and Security Agreement dated as of
    September 30, 2002 by and between Registrant and Silicon
    Valley Bank (Incorporated by reference to Exhibit 10.36 to
    the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2002).                                                                                           
| | 10.38 |  |  | Share Purchase Agreement by and among Registrant,
    Critical Path Japan K.K., Mitsui & Co., Ltd.,
    Mitsui & Co. (U.S.A.), NTT Communications Corporation
    and NEC Corporation dated as June 6, 2002 (Incorporated by
    reference to Exhibit 10.38 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2002).
| | 10.39 |  |  | Change of Control Severance Agreement dated
    May 29, 2003 by and between the Registrant and William E.
    McGlashan, Jr. (Incorporated by reference to
    Exhibit 10.2 to Registrants Quarterly Report on Form
    10-Q for the quarter ended June 30, 2003).                                                                                      
| | 10.40 |  |  | Change of Control Severance Agreement dated
    May 29, 2003 by and between the Registrant and Paul
    Bartlett (Incorporated by reference to Exhibit 10.2 to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2003).                                                                                                  
| | 10.41 |  |  | Amendment to Employment Agreement and Release of
    Claims dated August 16, 2003 by and between the Registrant
    and Robert A. Shipp (Incorporated by reference to
    Exhibit 10.1 to Registrants Quarterly Report on
    Form 10-Q for the quarter ended October 30, 2003).                                                                        
| | 10.42 |  |  | Amendment to Employment Agreement and Release of
    Claims dated May 16, 2003 by and between the Registrant and
    Bernard Harguindeguy (Incorporated by reference to
    Exhibit 10.42 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                      
| | 10.43 |  |  | Incentive Bonus Agreement dated October 23,
    2003 between the Registrant and Bernard Harguindeguy
    (Incorporated by reference to Exhibit 10.43 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                       
| | 10.44 |  |  | Amendment to Employment Agreement dated
    August 31, 2003 by and between the Registrant and Paul
    Bartlett (Incorporated by reference to Exhibit 10.44 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                
| | 10.45 |  |  | Summary of Expense Reimbursement dated
    August 31, 2003 by and between the Registrant and Paul
    Bartlett (Incorporated by reference to Exhibit 10.45 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                 
| | 10.46 |  |  | Amendment to Employment Agreement and Release of
    Claims dated November 24, 2003 by and between the
    Registrant and Paul Bartlett (Incorporated by reference to
    Exhibit 10.46 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                        




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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.47 |  |  | Amendment No. 1 to First Amended and
    Restated Employment Agreement dated as of September 1, 2003
    by and between the Registrant and William McGlashan, Jr.
    (Incorporated by reference to Exhibit 10.47 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                                         
| | 10.48 |  |  | Employment Agreement dated February 4, 2004
    by and between the Registrant and James Clark (Incorporated by
    reference to Exhibit 10.48 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2003).                                                                                                                                                                                                                                                             
| | 10.49 |  |  | Modification of Loan and Security Agreement dated
    as of March 25, 2003 by and between Registrant and Silicon
    Valley Bank Incorporated by reference to Exhibit 10.1 to
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended March 31, 2003).                                                                                                                                                                                                                                 
| | 10.50 |  |  | Amended and Restated Loan and Security Agreement
    dated as of July 18, 2003 by and between Registrant and
    Silicon Valley Bank (Incorporated by reference to
    Exhibit 10.1 to Registrants Quarterly Report on Form
    10-Q for the quarter ended June 30, 2003).                                                                                                                                                                                                                             
| | 10.51 |  |  | First Amendment to Amended and Restated Loan and
    Security Agreement dated as of November 26, 2003 by and
    between Registrant and Silicon Valley Bank (Incorporated by
    reference to Exhibit 10.51 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2003).                                                                                                                                                                                               
| | 10.52 |  |  | Second Amendment to Amended and Restated Loan and
    Security Agreement dated as of January 30, 2004 by and
    between Registrant and Silicon Valley Bank (Incorporated by
    reference to Exhibit 10.52 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2003).                                                                                                                                                                                               
| | 10.53 |  |  | Convertible Note Purchase and Exchange Agreement
    dated November 18, 2003 among Registrant, General Atlantic
    Partners 74, L.P., GAP Coinvestment Partners II, L.P.,
    GapStar, LLC, GAP-W, LLC, GAPCO GmbH & Co. KG, Cenwell
    Limited, Campina Enterprises Limited, Great Affluent Limited,
    Dragonfield Limited and Lion Cosmos Limited (Incorporated by
    reference to Exhibit 10.1 to Registrants Current
    Report on Form 8-K filed on November 20, 2003).                      
| | 10.54 |  |  | Amendment to Convertible Note Purchase and
    Exchange Agreement dated January 16, 2004 among Registrant,
    General Atlantic Partners 74, L.P., GAP Coinvestment
    Partners II, L.P., GapStar, LLC, GAPCO GmbH & Co.
    KG, Cenwell Limited, Campina Enterprises Limited, Great Affluent
    Limited, Dragonfield Limited and Lion Cosmos Limited
    (Incorporated by reference to Exhibit 10.54 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).   
| | 10.55 |  |  | Amendment No. 2 to Convertible Note Purchase
    and Exchange Agreement dated March 9, 2004 among
    Registrant, General Atlantic Partners 74, L.P., GAP
    Coinvestment Partners II, L.P., GapStar, LLC, GAPCO
    GmbH & Co. KG, Cenwell Limited, Campina Enterprises
    Limited, Great Affluent Limited, Dragonfield Limited and Lion
    Cosmos Limited (Incorporated by reference to Exhibit 10.55
    to the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2003).
| | 10.56 |  |  | Convertible Note Purchase Agreement dated
    January 16, 2004 among Registrant, Permal
    U.S. Opportunities Limited, Zaxis Equity Neutral, L.P.,
    Zaxis Institutional Partners, L.P., Zaxis Offshore Limited,
    Zaxis Partners, L.P. and Passport Master Fund, L.P.
    (Incorporated by reference to Exhibit 10.1 to
    Registrants Current Report on Form 8-K filed on
    January 21, 2004).                                                                                               
| | 10.57 |  |  | Amendment No. 1 to Convertible Note Purchase
    Agreement dated March 9, 2004 among Registrant, Permal
    U.S. Opportunities Limited, Zaxis Equity Neutral, L.P.,
    Zaxis Institutional Partners, L.P., Zaxis Offshore Limited,
    Zaxis Partners, L.P. and Passport Master Fund, L.P.
    (Incorporated by reference to Exhibit 10.57 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                               




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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.58 |  |  | Convertible Note Purchase Agreement dated
    March 9, 2004 among Registrant, Permal
    U.S. Opportunities Limited, Zaxis Equity Neutral, L.P.,
    Zaxis Institutional Partners, L.P., Zaxis Offshore Limited,
    Zaxis Partners, L.P., Guggenheim Portfolio Company XIII,
    Crosslink Crossover Fund IV, L.P., Sagamore Hill Hub Fund,
    Ltd., Criterion Capital Partners, Ltd., Criterion Capital
    Partners, Institutional, Criterion Capital Partners, L.P.
    and Capital Ventures International (Incorporated by reference to
    Exhibit 10.1 to Registrants Current Report on
    Form 8-K filed on March 10, 2004).
| | 10.59 |  |  | Third Amendment to Amended and Restated Loan and
    Security Agreement dated as of March 12, 2004 by and
    between Registrant and Silicon Valley Bank (Incorporated by
    reference to Exhibit 10.59 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2003).                                                                                                                                                                                                                                                                                                                                 
| | 10.60 |  |  | First Amendment to Lease dated November 17,
    2003 by and between the Registrant and Sri Hills Plaza Venture,
    LLC (Incorporated by reference to Exhibit 10.60 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                      
| | 10.61 |  |  | Employment Agreement dated as of March 29,
    2004 by and between Registrant and Mark Ferrer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 21.1  |  |  | List of Subsidiaries (Incorporated by reference
    to Exhibit 21.1 to the Registrants Annual Report on
    Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 23.1  |  |  | Consent of PricewaterhouseCoopers
    LLP, Independent Accountants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 24.1  |  |  | Power of Attorney (see the signature page of the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             




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Report of Independent Auditors

To the Board of Directors and Shareholders

of Critical Path, Inc.:


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(i) present fairly, in all material respects, the
financial position of Critical Path, Inc. and its
subsidiaries at December 31, 2002 and 2003, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and the financial statement schedule are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our
audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Note 1 and Note 8 of
Notes to Consolidated Financial Statements, effective
January 1, 2002, the Company changed its method of
accounting for goodwill in accordance with Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.

/s/ PRICEWATERHOUSECOOPERS LLP




San Jose, California




March 12, 2004


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CRITICAL PATH, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share
amounts)


|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |            |         |  
|------------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------------------------------------------- | ------ | ---------- | ------- | - | ------ | ---------- | ------- | -
|                                                                                      |                                                     |                                                                                        
|                                                                                      |                                                     | December 31,                                                                           
|                                                                                      |                                                     |                                                                                        
|                                                                                      |                                                     | 2002                                                                                    |        | 2003      
|                                                                                      |                                                     |                                                                                         |        |           
|ASSETS                                                                               
|Current assets                                                                        |                                                     |                                                                                         |        |            |         |   |        |           
|                                                                                      | Cash and cash equivalents                           |                                                                                         | $      | 33,498     |         |   | $      | 18,984     |        
|                                                                                      | Short-term marketable securities                    |                                                                                         |        | 5,583      |         |   |        |           |        
|                                                                                      | Accounts receivable, net                            |                                                                                         |        | 22,818     |         |   |        | 16,880     |        
|                                                                                      | Prepaid and other current assets                    |                                                                                         |        | 4,030      |         |   |        | 4,664      |        
|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |           
|                                                                                      |                                                     | Total current assets                                                                    |        |            | 65,929  |   |        |            | 40,528  |  
|Long-term marketable securities                                                       |                                                     |                                                                                         | 3,990  |            |         |   |       |           
|Equity investments                                                                    |                                                     |                                                                                         | 357    |            |         |   |       |           
|Property and equipment, net                                                           |                                                     |                                                                                         | 18,142 |            |         |   | 14,821 |           
|Goodwill                                                                              |                                                     |                                                                                         | 6,613  |            |         |   | 6,613  |           
|Restricted cash                                                                       |                                                     |                                                                                         | 2,729  |            |         |   |       |           
|Other assets                                                                          |                                                     |                                                                                         | 6,246  |            |         |   | 5,763  |           
|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |           
|                                                                                      |                                                     | Total assets                                                                            |        | $          | 104,006 |   |        | $          | 67,725  |  
|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |           
|LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
    STOCK
    AND SHAREHOLDERS DEFICIT
|Current liabilities                                                                   |                                                     |                                                                                         |        |            |         |   |        |           
|                                                                                      | Accounts payable                                    |                                                                                         | $      | 4,284      |         |   | $      | 5,022      |        
|                                                                                      | Accrued liabilities                                 |                                                                                         |        | 27,573     |         |   |        | 20,755     |        
|                                                                                      | Deferred revenue                                    |                                                                                         |        | 10,272     |         |   |        | 8,856      |        
|                                                                                      | Line of credit facility                             |                                                                                         |        |           |         |   |        | 2,298      |        
|                                                                                      | Capital lease and other obligations, current        |                                                                                         |        | 3,323      |         |   |        | 1,721      |        
|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |           
|                                                                                      |                                                     | Total current liabilities                                                               |        |            | 45,452  |   |        |            | 38,652  |  
|Deferred revenue                                                                      |                                                     |                                                                                         | 516    |            |         |   | 1,343  |           
|Convertible subordinated notes payable                                                |                                                     |                                                                                         | 38,360 |            |         |   | 38,360 |           
|Convertible secured note payable                                                      |                                                     |                                                                                         |       |            |         |   | 10,016 |           
|Capital lease and other obligations, long-term                                        |                                                     |                                                                                         | 1,332  |            |         |   | 1,295  |           
|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |           
|                                                                                      |                                                     | Total liabilities                                                                       |        |            | 85,660  |   |        |            | 89,666  |  
|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |           
|Commitments and contingencies (Note 13)                                               |                                                     |                                                                                         |        |            |         |   |        |           
|Mandatorily redeemable Series D preferred
    stock, par value $0.001 (Note 15)       |                                                     |                                                                                         |        |            |         |   |        |           
|                                                                                      | Shares authorized: 5,000                            |                                                                                         |        |            |         |   |        |            |        
|                                                                                      | Shares issued and outstanding: 4,000                |                                                                                         |        |            |         |   |        |            |        
|                                                                                      | Liquidation value at December 31, 2003:
    $67,494 |                                                                                         |        | 26,900     |         |   |        | 55,301     |        
|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |           
|Shareholders deficit                                                                 |                                                     |                                                                                         |        |            |         |   |        |           
|                                                                                      | Common Stock and paid-in-capital, par value $0.001  |                                                                                         |        |            |         |   |        |            |        
|                                                                                      | Shares authorized: 125,000                          |                                                                                         |        |            |         |   |        |            |        
|                                                                                      | Shares issued and outstanding: 20,032 and 21,078    |                                                                                         |        | 2,163,196  |         |   |        | 2,154,295  |        
|                                                                                      | Common stock warrants                               |                                                                                         |        | 5,947      |         |   |        | 5,947      |        
|                                                                                      | Notes receivable from shareholders                  |                                                                                         |        |           |         |   |        | (870       | )      
|                                                                                      | Unearned compensation                               |                                                                                         |        | (59        | )       |   |        |           |        
|                                                                                      | Accumulated deficit                                 |                                                                                         |        | (2,176,595 | )       |   |        | (2,238,728 | )      
|                                                                                      | Accumulated other comprehensive income (loss)       |                                                                                         |        | (1,043     | )       |   |        | 2,114      |        
|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |           
|                                                                                      |                                                     | Total shareholders deficit                                                             |        |            | (8,554  | ) |        |            | (77,242 | )
|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |           
|                                                                                      |                                                     | Total liabilities, mandatorily redeemable
    preferred stock and shareholders deficit |        | $          | 104,006 |   |        | $          | 67,725  |  
|                                                                                      |                                                     |                                                                                         |        |            |         |   |        |           

The accompanying notes are an integral part of
these consolidated financial statements.

105



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##### Table of Contents



CRITICAL PATH, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |        |        | 
|------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------- | -------- | ------ | ------- | ---- | -------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                                                          |                                                          |                           
|                                                                          |                                                          | Year Ended December 31,   
|                                                                          |                                                          |                           
|                                                                          |                                                          | 2001                       |          | 2002   |         | 2003
|                                                                          |                                                          |                            |          |        |         |     
|Net revenues                                                              |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|                                                                          | Software license                                         |                            | $        | 30,960 |         |      | $        | 35,176 |         |   | $       | 22,104 |       
|                                                                          | Hosted messaging                                         |                            |          | 43,821 |         |      |          | 24,893 |         |   |         | 19,444 |       
|                                                                          | Professional services                                    |                            |          | 12,573 |         |      |          | 11,593 |         |   |         | 12,315 |       
|                                                                          | Maintenance and support                                  |                            |          | 16,819 |         |      |          | 15,471 |         |   |         | 18,434 |       
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|                                                                          |                                                          | Total net revenues         |          |        | 104,173 |      |          |        | 87,133  |   |         |        | 72,297 | 
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|Cost of net revenues                                                      |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|                                                                          | Software license                                         |                            |          | 1,533  |         |      |          | 2,682  |         |   |         | 4,068  |       
|                                                                          | Hosted messaging                                         |                            |          | 59,124 |         |      |          | 29,303 |         |   |         | 26,193 |       
|                                                                          | Professional services                                    |                            |          | 10,315 |         |      |          | 10,020 |         |   |         | 12,203 |       
|                                                                          | Maintenance and support                                  |                            |          | 10,081 |         |      |          | 8,670  |         |   |         | 5,803  |       
|                                                                          | Amortization of purchased technology                     |                            |          | 21,284 |         |      |          | 18,522 |         |   |         |       |       
|                                                                          | Stock-based expense  Hosted messaging                   |                            |          | 1,520  |         |      |          | 590    |         |   |         | 8      |       
|                                                                          | Stock-based expense  Professional
    services          |                            |          | 1,347  |         |      |          | 222    |         |   |         | 3      |       
|                                                                          | Stock-based expense  Maintenance and
    support        |                            |          | 1,183  |         |      |          | 413    |         |   |         | 6      |       
|                                                                          | Impairment of long-lived assets                          |                            |          | 16,654 |         |      |          |       |         |   |         |       |       
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|                                                                          |                                                          | Total cost of net revenues |          |        | 123,041 |      |          |        | 70,422  |   |         |        | 48,284 | 
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|Gross profit (loss)                                                       |                                                          |                            | (18,868  | )      |         |      | 16,711   |        |         |   | 24,013  |       
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|Operating expenses                                                        |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|                                                                          | Sales and marketing                                      |                            |          | 53,356 |         |      |          | 43,604 |         |   |         | 31,224 |       
|                                                                          | Research and development                                 |                            |          | 30,744 |         |      |          | 19,649 |         |   |         | 19,047 |       
|                                                                          | General and administrative                               |                            |          | 42,260 |         |      |          | 22,128 |         |   |         | 12,603 |       
|                                                                          | Amortization of goodwill and other intangible
    assets |                            |          | 32,746 |         |      |          | 24,773 |         |   |         |       |       
|                                                                          | Acquisition-related retention bonuses                    |                            |          | 1,381  |         |      |          | 11     |         |   |         |       |       
|                                                                          | Stock-based expense  Sales and
    marketing            |                            |          | 5,174  |         |      |          | 3,877  |         |   |         | 18     |       
|                                                                          | Stock-based expense  Research and
    development       |                            |          | 3,691  |         |      |          | 1,214  |         |   |         | 15     |       
|                                                                          | Stock-based expense  General and
    administrative     |                            |          | 25,220 |         |      |          | 3,681  |         |   |         | 35     |       
|                                                                          | Stock-based expense  Settlement of
    litigation       |                            |          |       |         |      |          |       |         |   |         | 5,056  |       
|                                                                          | Restructuring and other expenses                         |                            |          | 18,267 |         |      |          | 3,168  |         |   |         | 6,886  |       
|                                                                          | Impairment of long-lived assets                          |                            |          | 9,991  |         |      |          |       |         |   |         |       |       
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|                                                                          |                                                          | Total operating expenses   |          |        | 222,830 |      |          |        | 122,105 |   |         |        | 74,884 | 
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|Loss from operations                                                      |                                                          |                            | (241,698 | )      |         |      | (105,394 | )      |         |   | (50,871 | )     
|Interest and other income (expense), net                                  |                                                          |                            | 5,840    |        |         |      | (5,852   | )      |         |   | (7,619  | )     
|Interest expense                                                          |                                                          |                            | (14,714  | )      |         |      | (2,748   | )      |         |   | (3,336  | )     
|Equity in net loss of joint venture                                       |                                                          |                            | (1,866   | )      |         |      | (1,408   | )      |         |   |        |       
|Gain (loss) on investments                                                |                                                          |                            | (702     | )      |         |      | (1,530   | )      |         |   | 549     |       
|Gain on retirement of subordinated notes, net                             |                                                          |                            | 180,882  |        |         |      |         |        |         |   |        |       
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|Loss before income taxes                                                  |                                                          |                            | (72,258  | )      |         |      | (116,932 | )      |         |   | (61,277 | )     
|Provision for income taxes                                                |                                                          |                            | (7,206   | )      |         |      | (979     | )      |         |   | (856    | )     
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|Net loss                                                                  |                                                          |                            | (79,464  | )      |         |      | (117,911 | )      |         |   | (62,133 | )     
|Accretion on mandatorily redeemable preferred
    stock                   |                                                          |                            | (356     | )      |         |      | (13,904  | )      |         |   | (12,446 | )     
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|Net loss attributable to common shares                                    |                                                          | $                          | (79,820  | )      |         | $    | (131,815 | )      |         | $ | (74,579 | )     
|                                                                          |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|Net loss per share attributable to common
    shares  basic and diluted: |                                                          |                            |          |        |         |      |          |        |         |   |         |       
|                                                                          | Net loss per share attributable to common shares         |                            | $        | (4.32  | )       |      | $        | (6.78  | )       |   | $       | (3.73  | )     
|                                                                          | Weighted average shares  basic and
    diluted          |                            |          | 18,495 |         |      |          | 19,445 |         |   |         | 20,020 |       

The accompanying notes are an integral part of
these consolidated financial statements.

106



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##### Table of Contents



CRITICAL PATH, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY (DEFICIT)

|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |            |         |            |         |  
|--------------------------------------------------------------------- | -------------------------------------------------------------------- | ----------------------- | -------------------- | ------------------------------------ | ------- | ---------- | --------- | ---------- | -------- | ---------- | --------- | ---------- | ------- | ---------- | ------- | -
|                                                                      |                                                                      |                        
|                                                                      |                                                                      | Year Ended December 31,
|                                                                      |                                                                      |                        
|                                                                      |                                                                      | 2001                    |                      | 2002                                 |         | 2003      
|                                                                      |                                                                      |                         |                      |                                      |         |           
|                                                                      |                                                                      |                        
|                                                                      |                                                                      | (In thousands)         
|Common Stock and Common Stock Warrants Balance,
    beginning of year |                                                                      | $                       | 2,127,608            |                                      |         | $          | 2,178,716 |            |          | $          | 2,169,143 |           
|Common Stock issued under Employee Stock Purchase
    Plan            |                                                                      |                         | 431                  |                                      |         |            | 511       |            |          |            | 275       |           
|Common Stock issued to settle litigation                              |                                                                      |                         |                     |                                      |         |            |          |            |          |            | 1,300     |           
|                                                                      | Conversion feature on mandatorily redeemable
    preferred
    stock |                         |                      | 41,600                               |         |            |           | (125       | )        |            |           |           |        
|                                                                      | Dividend accretion on mandatorily redeemable
    preferred
    stock |                         |                      | (121                                 | )       |            |           | (4,427     | )        |            |           | (4,935     | )      
|                                                                      | Exercise of stock options and warrants                               |                         |                      | 2,139                                |         |            |           | 1,268      |          |            |           | 846        |        
|                                                                      | Issuance of warrants to purchase common stock                        |                         |                      | 5,250                                |         |            |           | 697        |          |            |           | 48         |        
|                                                                      | Stock-based compensation related to stock options                    |                         |                      | 3,632                                |         |            |           | 1,980      |          |            |           | 206        |        
|                                                                      | Lapse of early exercise repurchase rights                            |                         |                      |                                     |         |            |           |           |          |            |           | 870        |        
|                                                                      | Accretion on mandatorily redeemable preferred
    Stock              |                         |                      | (235                                 | )       |            |           | (9,477     | )        |            |           | (7,511     | )      
|                                                                      | Repurchase of Common Stock                                           |                         |                      | (67                                  | )       |            |           |           |          |            |           |           |        
|                                                                      | Purchase of remaining minority interest                              |                         |                      | (1,521                               | )       |            |           |           |          |            |           |           |        
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|                                                                      |                                                                      |                         | Balance, end of year |                                      |         | 2,178,716  |           |            |          | 2,169,143  |           |            |         | 2,160,242  |        
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|Notes receivable from shareholders                                    |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|                                                                      | Balance, beginning of year                                           |                         |                      | (1,205                               | )       |            |           | (1,222     | )        |            |           |           |        
|                                                                      | Reclassification of vested portion of shareholder
    note           |                         |                      |                                     |         |            |           |           |          |            |           | (870       | )      
|                                                                      | Interest on shareholder notes                                        |                         |                      | (50                                  | )       |            |           | (8         | )        |            |           |           |        
|                                                                      | Repayment of shareholder notes                                       |                         |                      | 33                                   |         |            |           | 1,230      |          |            |           |           |        
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|                                                                      |                                                                      |                         | Balance, end of year |                                      |         | (1,222     | )         |            |          |           |           |            |         | (870       | )      
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|Unearned compensation                                                 |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|                                                                      | Balance, beginning of year                                           |                         |                      | (34,005                              | )       |            |           | (7,050     | )        |            |           | (59        | )      
|                                                                      | Unearned compensation related to stock options                       |                         |                      | (11,210                              | )       |            |           |           |          |            |           |           |        
|                                                                      | Amortization of unearned compensation                                |                         |                      | 38,165                               |         |            |           | 6,991      |          |            |           | 59         |        
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|                                                                      |                                                                      |                         | Balance, end of year |                                      |         | (7,050     | )         |            |          | (59        | )         |            |         |           |        
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|Accumulated deficit and other comprehensive
    income (loss)         |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|                                                                      | Balance, beginning of year                                           |                         |                      | (1,979,294                           | )       |            |           | (2,061,472 | )        |            |           | (2,177,638 | )      
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|                                                                      | Net loss                                                             |                         |                      | (79,464                              | )       |            |           | (117,911   | )        |            |           | (62,133    | )      
|                                                                      | Unrealized investment gains (losses)                                 |                         |                      | (790                                 | )       |            |           | (671       | )        |            |           | 1,461      |        
|                                                                      | Foreign currency translation adjustments                             |                         |                      | (1,924                               | )       |            |           | 2,416      |          |            |           | 1,696      |        
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|                                                                      |                                                                      | Comprehensive loss      |                      |                                      | (82,178 | )          |           |            | (116,166 | )          |           |            | (58,976 | )         
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|                                                                      |                                                                      |                         | Balance, end of year |                                      |         | (2,061,472 | )         |            |          | (2,177,638 | )         |            |         | (2,236,614 | )      
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           
|                                                                      |                                                                      |                         |                      | Total shareholders equity (deficit) |         | $          | 108,972   |            |          | $          | (8,554    | )          |         | $          | (77,242 | )
|                                                                      |                                                                      |                         |                      |                                      |         |            |           |            |          |            |           |           

The accompanying notes are an integral part of
these consolidated financial statements.

107



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##### Table of Contents



CRITICAL PATH, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                          |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |         |         |        | 
|--------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------- | -------- | ------- | ------- | ------- | -------- | ------- | ---- | ------- | ------- | ------- | ------ | 
|                                                          |                                                                                 |                                                        
|                                                          |                                                                                 | Year Ended December 31,                                
|                                                          |                                                                                 |                                                        
|                                                          |                                                                                 | 2001                                                    |                                                         | 2002     |         | 2003   
|                                                          |                                                                                 |                                                         |                                                         |          |         |        
|                                                          |                                                                                 |                                                        
|                                                          |                                                                                 | (In thousands)                                         
|Cash flow from operating activities:                      |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|                                                          | Net loss                                                                        |                                                         | $                                                       | (79,464  | )       |         | $       | (117,911 | )       |      | $       | (62,133 | )      
|                                                          | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                         |                                                         |          |         |         |         |          |         |      |         |         |        
|                                                          | Provision for doubtful accounts                                                 |                                                         |                                                         | 5,242    |         |         |         | 673      |         |      |         | 199     |        
|                                                          | Depreciation and amortization                                                   |                                                         |                                                         | 44,897   |         |         |         | 27,499   |         |      |         | 16,254  |        
|                                                          | Amortization of goodwill and other intangible
    assets                        |                                                         |                                                         | 54,029   |         |         |         | 43,295   |         |      |         |        |        
|                                                          | Stock-based costs and expenses                                                  |                                                         |                                                         | 38,135   |         |         |         | 9,997    |         |      |         | 85      |        
|                                                          | Impairment of long-lived assets                                                 |                                                         |                                                         | 26,645   |         |         |         |         |         |      |         |        |        
|                                                          | Equity in net loss of joint venture                                             |                                                         |                                                         | 1,866    |         |         |         | 1,408    |         |      |         |        |        
|                                                          | Change in fair-value of preferred stock instrument                              |                                                         |                                                         |         |         |         |         | 7,440    |         |      |         | 12,200  |        
|                                                          | Loss (gain) on investments                                                      |                                                         |                                                         | 702      |         |         |         | 1,530    |         |      |         | (549    | )      
|                                                          | Gain on retirement of convertible debt                                          |                                                         |                                                         | (180,882 | )       |         |         |         |         |      |         |        |        
|                                                          | Fair value of stock issued in settlement of
    litigation                      |                                                         |                                                         |         |         |         |         |         |         |      |         | 5,056   |        
|                                                          | Gain on release of funds held in escrow                                         |                                                         |                                                         |         |         |         |         |         |         |      |         | (3,750  | )      
|                                                          | Provision for restructured operations                                           |                                                         |                                                         | 7,905    |         |         |         | 461      |         |      |         | 579     |        
|                                                          | Accounts receivable                                                             |                                                         |                                                         | 6,229    |         |         |         | 3,408    |         |      |         | 8,266   |        
|                                                          | Other assets                                                                    |                                                         |                                                         | 3,555    |         |         |         | (132     | )       |      |         | (651    | )      
|                                                          | Accounts payable                                                                |                                                         |                                                         | (10,957  | )       |         |         | (696     | )       |      |         | (1,079  | )      
|                                                          | Accrued liabilities                                                             |                                                         |                                                         | (3,793   | )       |         |         | (2,528   | )       |      |         | (7,935  | )      
|                                                          | Deferred revenue                                                                |                                                         |                                                         | (5,340   | )       |         |         | 491      |         |      |         | (1,427  | )      
|                                                          |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|                                                          |                                                                                 | Net cash used in operating activities                   |                                                         |          | (91,231 | )       |         |          | (25,065 | )    |         |         | (34,885 | )     
|                                                          |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|Cash flow from investing activities:                      |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|                                                          | Notes receivable from officers                                                  |                                                         |                                                         | (1,699   | )       |         |         | 345      |         |      |         | 132     |        
|                                                          | Property and equipment purchases                                                |                                                         |                                                         | (11,189  | )       |         |         | (6,770   | )       |      |         | (12,225 | )      
|                                                          | Sales (purchases) of marketable securities,
    net                             |                                                         |                                                         | (9,702   | )       |         |         | 172      |         |      |         | 9,573   |        
|                                                          | Investments in unconsolidated entities, net                                     |                                                         |                                                         | (4,212   | )       |         |         |         |         |      |         |        |        
|                                                          | Payments for acquisitions, net of cash acquired                                 |                                                         |                                                         | (5,686   | )       |         |         | 4,511    |         |      |         |        |        
|                                                          | Proceeds from sale of investments                                               |                                                         |                                                         |         |         |         |         |         |         |      |         | 2,373   |        
|                                                          | Proceeds from the release of funds held in escrow                               |                                                         |                                                         |         |         |         |         |         |         |      |         | 3,750   |        
|                                                          | Restricted cash                                                                 |                                                         |                                                         | (2,459   | )       |         |         | (55      | )       |      |         | 2,729   |        
|                                                          |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|                                                          |                                                                                 | Net cash provided by (used in) investing
    activities |                                                         |          | (34,947 | )       |         |          | (1,797  | )    |         |         | 6,332   |       
|                                                          |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|Cash flow from financing activities:                      |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|                                                          | Proceeds from issuance of Preferred Stock, net                                  |                                                         |                                                         | 26,786   |         |         |         |         |         |      |         |        |        
|                                                          | Proceeds from issuance of Common Stock                                          |                                                         |                                                         | 2,570    |         |         |         | 1,779    |         |      |         | 1,121   |        
|                                                          | Proceeds from issuance of convertible debt                                      |                                                         |                                                         |         |         |         |         |         |         |      |         | 10,000  |        
|                                                          | Retirement of convertible notes                                                 |                                                         |                                                         | (48,734  | )       |         |         |         |         |      |         |        |        
|                                                          | Proceeds from line of credit                                                    |                                                         |                                                         |         |         |         |         |         |         |      |         | 4,900   |        
|                                                          | Principal payments against line of credit facility                              |                                                         |                                                         |         |         |         |         |         |         |      |         | (2,602  | )      
|                                                          | Proceeds from payments of shareholder notes
    receivable                      |                                                         |                                                         | 33       |         |         |         | 1,230    |         |      |         |        |        
|                                                          | Purchase of common stock                                                        |                                                         |                                                         | (67      | )       |         |         |         |         |      |         |        |        
|                                                          | Principal payments on note and lease obligations                                |                                                         |                                                         | (10,912  | )       |         |         | (3,790   | )       |      |         | (814    | )      
|                                                          |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|                                                          |                                                                                 |                                                         | Net cash provided by (used in) financing
    activities |          |         | (30,324 | )       |          |         | (781 | )       |         |         | 12,605 | 
|                                                          |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|Net decrease in cash and cash equivalents                 |                                                                                 |                                                         | (156,502                                                | )        |         |         | (27,643 | )        |         |      | (15,948 | )      
|Effect of exchange rates on cash and cash
    equivalents |                                                                                 |                                                         | (577                                                    | )        |         |         | 1,678   |          |         |      | 1,434   |        
|Cash and cash equivalents at beginning of year            |                                                                                 |                                                         | 216,542                                                 |          |         |         | 59,463  |          |         |      | 33,498  |        
|                                                          |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|Cash and cash equivalents at end of year                  |                                                                                 | $                                                       | 59,463                                                  |          |         | $       | 33,498  |          |         | $    | 18,984  |        
|                                                          |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|Supplemental cash flow disclosure:                        |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|                                                          | Cash paid for interest                                                          |                                                         | $                                                       | 17,633   |         |         | $       | 2,316    |         |      | $       | 2,850   |        
|                                                          | Cash paid for income taxes, net of refunds                                      |                                                         | $                                                       | 6,914    |         |         | $       | 2,578    |         |      | $       | 21      |        
|Non-cash investing and financing activities:              |                                                                                 |                                                         |                                                         |          |         |         |         |          |         |      |         |        
|                                                          | Property and equipment leases                                                   |                                                         | $                                                       | 1,413    |         |         | $       |         |         |      | $       | 126     |        
|                                                          | Retirement of notes payable through issuance of
    Preferred Stock             |                                                         | $                                                       | 64,630   |         |         | $       |         |         |      | $       |        |        

The accompanying notes are an integral part of
these consolidated financial statements.

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CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1  The Company and
Summary of Significant Accounting Policies

The Company

Critical Path, Inc. was incorporated in
California on February 19, 1997. Critical Path, along with
its subsidiaries (collectively referred to herein as the
Company), provides digital communications software
and services that enable enterprises, government agencies,
wireless carriers, and service providers to rapidly deploy
scalable solutions for messaging and identity management. Built
upon an open, extensible software platform, these solutions help
organizations expand the range of digital communications
services they provide, while helping to reduce overall costs.
Critical Paths messaging solutions  which
are available both as licensed software or hosted
services  provide integrated access to a broad
range of communication and collaboration applications from
wireless devices, Web browsers, desktop clients, and voice
systems. This provides new revenue opportunities for carriers
and service providers and helps enable them to attract new
subscribers, drive more usage, and retain subscribers longer.
For enterprises and governments, Critical Paths solutions
help to reduce burdens on helpdesks, simplify the deployment of
key security infrastructure, enable easier compliance with new
regulatory mandates, and reduce the cost and effort of deploying
modern messaging services to distributed organizations, mobile
users, deskless workers, suppliers and customers.

Liquidity

Since inception, the Company has incurred
aggregate consolidated net losses of approximately
$2.2 billion, which includes $1.3 billion related to
the impairment of long-lived assets, $444.5 million related
to non-cash charges associated with the Companys ten
acquisitions and $171.9 million related to non-cash
stock-based compensation expenses. With the Companys
history of losses, revenue generated from the sale of its
products and services may not increase to a level that exceeds
its operating expenses or could fluctuate significantly as a
result of changes in customer demand or acceptance of future
products. Accordingly, the Companys cash flow from
operations may continue to be negatively impacted.




Cash and cash equivalents totaled
$19.0 million at December 31, 2003. Of the
Companys cash and cash equivalents at December 31,
2003, $5.0 million is expected to support its outstanding
obligations to Silicon Valley Bank (See Note 10 
Credit Facility), which includes cash required in order to
support the line of credit provided by Silicon Valley Bank and
related letters of credit secured by the line of credit.
Additionally, at December 31, 2003, $7.6 million of
the Companys cash and cash equivalents was located in
accounts of the Companys subsidiaries outside the United
States as compared to $18.5 million at December 31,
2002. The laws of the country of incorporation of some of the
Companys non-U.S. subsidiaries limit the
Companys ability readily to move cash out of the country
and so the Company does not consider such cash readily available
for use in its domestic United States operations. For instance,
the Companys ability to use cash held by its German
subsidiary is limited to supporting the operations of the German
subsidiary without adverse tax consequences and local German
laws in some circumstances prevent the transfer of cash from
Germany to any other foreign or domestic account. Also, minimum
capitalization requirements for the Companys subsidiaries
subject to the laws of Germany, Ireland, Italy, Japan
and Switzerland limit the Companys ability to transfer
significant amounts of cash out of those countries. For these
reasons, the Company does not characterize any cash held by its
foreign subsidiaries to be readily available for use in the
United States. Accordingly, the Companys readily available
cash resources in the United States as of December 31, 2003
and 2002, were $6.4 million and $21.5 million,
respectively. During 2003, the Company used an average of
approximately $8.7 million of cash per quarter to fund the
Companys operating activities. Historically, the Company
has suffered recurring losses from operations and negative cash
flow from operations. Given this factor, in combination with the
Companys financial position in the fourth quarter of 2003,
the Company has recently consummated several financing
transactions in order to secure sufficient funding to meet the
Companys expected cash requirements for at least the next
twelve months.




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Recent Financing Transactions

On November 18, 2003, the Company entered
into a definitive agreement to issue an aggregate of
$10 million in principal amount of 10% Senior Secured
Convertible Notes to General Atlantic Partners 74, L.P., GAP
Coinvestment Partners II, L.P., GapStar, LLC and GAPCO
GmbH & Co. K.G., (the General Atlantic
Investors), and to convert the notes, plus $1 million
in accrued interest, into approximately 7.3 million shares
of the Companys Series E Preferred Stock. In the same
agreement, the Company agreed to exchange approximately
$32.8 million in face value of the Companys
5 3/4% convertible subordinated notes held by a group
of investors led by Cheung Kong Group and its Whampoa Limited
affiliates including Campina Enterprises Limited, Cenwell
Limited, Great Affluent Limited, Dragonfield Limited and Lion
Cosmos Limited (the Cheung Kong Investors) for
approximately 21.9 million shares of the Companys
Series E Preferred Stock. These notes and related interest
are convertible into shares of Series E Preferred Stock at
$1.50 per share only if the Company receives shareholder
approval.

In November 2003, the Company announced its
intention to make a rights offering to public shareholders of
record to purchase up to approximately $21 million of newly
issued Series E convertible preferred shares at a purchase
price of $1.50 per share. Existing holders of the
Companys Common Stock, as of the date of record, will have
the right to purchase approximately two shares of the new
Series E Preferred Stock for every three shares of Common
Stock they own as of the record date. The Company intends to
initiate this offering if and when the registration statement
filed with the Securities and Exchange Commission relating to
the rights offering is declared effective.

In January 2004, the Company issued
$15 million in principal amount of 10% Senior Secured
Convertible Notes to Permal U.S. Opportunities Limited,
Zaxis Equity Neutral, L.P., Zaxis Institutional Partners, L.P.,
Zaxis Offshore Limited, Zaxis Partners, L.P. and Passport Master
Fund, L.P. These notes are convertible into approximately
10 million shares of Series E Preferred Stock at
$1.50 per share only if the Company receives shareholder
approval. As a result, interest expense of approximately
$1.5 million will be recognized as of the date of
conversion resulting from the beneficial conversion feature
included in the Series E Preferred Stock. If the Company
does not obtain shareholder approval, these notes will be
convertible, at the option of each note holder, into shares of
the Companys Common Stock at $1.65 per share,
provided the note holder will not be able to convert its notes
into shares of Common Stock to the extent the note holder,
together with its affiliates, would own 9.9% or more of the
Companys Common Stock after conversion. If these notes do
not convert into Series E Preferred Stock or Common Stock,
they become due and payable on the fourth anniversary of their
issuance.

In March 2004, the Company issued
$18.5 million in principal amount of 10% Senior
Secured Convertible Notes to investment entities affiliated with
Crosslink Capital, Criterion Capital Management, Heights Capital
Management and Apex Capital. These notes are convertible into
approximately 12.3 million shares of Series E
Preferred Stock at $1.50 per share only if the Company
receives shareholder approval. If the Company does not obtain
shareholder approval, these notes will be convertible, at the
option of each note holder, into shares of the Companys
Common Stock at $2.18 per share, provided the note holder
will not be able to convert its notes into shares of Common
Stock to the extent the note holder, together with its
affiliates, would own 9.9% or more of the Companys Common
Stock after conversion. As a result, interest expense of
approximately $8.4 million will be recognized as of the
date of conversion resulting from the beneficial conversion
feature included in the Series E Preferred Stock. If these
notes do not convert into Series E Preferred Stock or
Common Stock, they become due and payable on the fourth
anniversary of their issuance.

Upon shareholder approval of the matters being
presented at a special meeting, the $43.5 million in
principal amount of 10% Senior Secured Convertible Notes,
plus interest, will automatically convert into approximately
29 million shares of Series E Preferred Stock at
$1.50 per share. Additionally upon such approval, the
$32.8 million in face value of its 5 3/4% convertible
subordinated notes due in April 2005 held by the Cheung Kong
Investors will automatically be converted into approximately
21.9 million shares of its Series E Preferred Stock.
The Series E Preferred Stock will be issued to these
investors only if Critical Path receives shareholder approval
and will rank senior in preference to all of the Companys
existing equity. These preferred shares will accrue dividends at
an annual rate of 5 3/4% of the purchase price of
$1.50 per share.

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In March 2004, the Company executed an amendment
with a group of investors led by the Cheung Kong Investors,
which would extend the maturity of the $32.8 million in
face value of 5 3/4% Convertible Subordinated Notes
held by the Cheung Kong Investors from April 1, 2005 to
April 1, 2006. The extension will only take place in the
event the Companys shareholders do not approve the
exchange of the 5 3/4% Convertible Subordinated Notes
held by the Cheung Kong Investors for approximately
21.9 million shares of the Companys Series E
Preferred Stock. In addition, in the event the maturity date is
extended to April 1, 2006, the interest rate on the
5 3/4% Convertible Subordinated Notes held by the
Cheung Kong Investors will increase to 7 1/2% for the
period beginning April 1, 2005 and ending April 1,
2006, and the Company will be required to pay fees totaling
$1.5 million.

In a separate agreement, members of the Cheung
Kong Investors have granted the Company an option, which the
Company may exercise in its sole discretion, to repurchase
approximately 10.9 million shares of the Series E
Preferred Stock held by the Cheung Kong Investors at
$1.50 per share. The Companys option expires 10
business days after the Cheung Kong Investors acquire shares of
the Series E Preferred Stock after the close of the
proposed rights offering of the preferred stock.




On January 30, 2004, the Company executed an
amendment with Silicon Valley Bank, which reduced the size of
the credit line to a maximum of $5.0 million and extended
the maturity date to October 31, 2004. Subsequently, on
March 12, 2004 the Company executed an additional amendment
with Silicon Valley Bank, which increased the size of the credit
line to a maximum of $6.0 million and extended the maturity
date to June 30, 2005. The credit facility continues to be
collateralized by all of the Companys personal property,
including intellectual property, and borrowings under the
current agreement bear a variable interest rate of between Prime
plus 1.5% and Prime plus 3.0%, which has historically ranged
from 5.25% to 6.25%, and is subject to certain covenants.
Interest is paid each month with principal due at maturity.
Initial commitment fees of $20,000 and $100,000 were charged
related to the January and March amendments, respectively.
Additionally, the facility carries an expedite fee of $50,000,
an unused facility fee of either 0.45% or 2.00%, based upon the
level of cash balances held at the bank, payable at the end of
each quarterly period in arrears, and an early termination fee
of $50,000 if the facility is canceled prior to August 1,
2004. In connection with the March amendment to the credit
facility, the Company agreed to issue warrants to purchase up to
100,000 shares of the Companys Common Stock to
Silicon Valley Bank. These warrants were fully exercisable upon
grant, had an exercise price of $2.07 per share and have an
expiration date of March 12, 2011.




The 10% Senior Secured Convertible Notes and
related interest become due and payable on the fourth
anniversary of their issuance. In addition, the notes also
become due and payable upon the consummation of a qualified
asset sale, a change of control or any financing or series of
financings that in the aggregate raises at least
$40 million. There are also certain other circumstances
that cause these notes to become due and payable which have been
disclosed in Note 11  Convertible Notes.

With the Companys history of operating
losses, its primary sources of capital have come from both debt
and equity financings that it has completed over the past
several years. With the proceeds from the recent financing
transactions discussed above, it believes that its cash, cash
equivalents and available line of credit as of the date of this
filing will be sufficient to maintain current and planned
operations for at least the next twelve months.

The Company is also seeking shareholder approval
to increase the number of authorized shares of common stock from
125 million to 200 million and preferred stock from
5 million to 75 million.

Basis of Presentation

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

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


Reverse stock split

The share and per share amounts presented in
these consolidated financial statements have been retroactively
restated to give effect to a one-for-four reverse stock split,
affected on August 1, 2003, of the Companys
authorized and outstanding common stock and for all shares of
Common Stock subject to stock options and warrants. In addition,
the conversion price of the Series D preferred stock
presented in these consolidated financial statements has been
retroactively restated as a result of the reverse stock split.
As of August 1, 2003, the total number of shares of Common
Stock outstanding was 81,595,042 shares and as of
immediately following the one-for-four reverse split, Critical
Path had 20,398,076 shares of Common Stock outstanding.

Reclassifications

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

Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and
expenses during the reporting period. These estimates are based
on information available as of the date of the financial
statements and actual results could differ from those estimates.

Acquisitions

The Company has accounted for all business
combinations using the purchase method of accounting. Results of
operations of the acquired businesses are included in the
Companys financial results from the date of the
acquisition. Assets and liabilities of the companies acquired
are recorded at their fair value at the acquisition date. The
excess of the purchase price over the fair value of separately
identified tangible and intangible assets acquired and
liabilities assumed are included in goodwill in the accompanying
consolidated balance sheets. The fair value of separately
identified intangible assets was determined by management based
upon accepted valuation methodologies and in consultation with
valuation advisers using various valuation methodologies.

Cash Equivalents and Restricted Cash

The Company considers all highly liquid
investments with an original maturity of three months or less to
be cash equivalents. Cash equivalents consist primarily of
deposits in money market funds. Restricted cash is composed of
amounts held on deposit that are required as collateral related
to certain lease and other obligations of the Company.

Investments

Short-term and long-term marketable securities
and long-term equity investments are accounted for in accordance
with Statement of Financial Accounting Standards
(SFAS) No. 115 Accounting for Certain
Investments in Debt and Equity Securities. This statement
requires that securities be classified as held to
maturity, available-for-sale or
trading, and the securities in each classification
be accounted for at either amortized cost or fair market value,
depending upon their classification. At December 31, 2003,
the Company was not holding any marketable securities or equity
investments. At December 31, 2002, the Company held short
and long-term marketable securities in low risk government
securities, agency and corporate bonds and classified these
investments as available-for-sale. Available-for-sale securities
are carried at fair market value,

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with unrealized gains and losses, net of tax,
reported as a component of other comprehensive income (loss), a
separate component of stockholders equity (deficit).


Realized gains or losses and charges for other
than temporary declines in value, if any, on available-for-sale
securities are reported in other income or expense as incurred.
The Company has periodically evaluated these investments for
other-than-temporary impairment. See also
Note 6  Investments.

Concentration of Credit Risk

Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash
and cash equivalents, restricted cash, investments and accounts
receivable. Cash and cash equivalents, restricted cash and
investments are deposited with financial institutions that
management believes are creditworthy. While the Companys
accounts receivable are derived from product and service
transactions with geographically dispersed companies that
operate in a number of horizontal markets, certain customers may
be negatively impacted as a result of an economic downturn or
other industry or market related conditions. The Company
performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses.

No individual customer accounted for ten percent
or more of the Companys accounts receivable at
December 31, 2002 and 2003 or net revenues in 2001, 2002
and 2003.

Fair Value of Financial Instruments

The Companys financial instruments,
including cash and cash equivalents, restricted cash,
investments in marketable securities, accounts and notes
receivable and accounts payable, are carried at cost, which
approximates fair value due to the short maturity of these
instruments. The fair value of the Companys convertible
subordinated notes is disclosed in
Note 11  Convertible Notes.

Derivative Instruments

The Company accounts for derivative instruments
in accordance with the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities and
its related interpretations and complies with
SFAS No. 138, Accounting for Certain Derivative
Instruments and Hedging Activities  an amendment
of FASB Statement No. 133. SFAS No. 133 and
SFAS No. 138 establish accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. The
Company records derivatives on the balance sheet at their fair
value in compliance with the standards set forth in
SFAS No. 133. Currently the Company has a non-hedged
derivative, which it issued during 2001 in connection with its
issuance of Series D Convertible Preferred Shares, and
accordingly, changes in its fair value are adjusted through the
statement of operations. See also
Note 15  Financing Transactions and
Preferred Stock.

Property and Equipment

Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the
straight-line method over the shorter of the estimated useful
lives of the assets or the lease term, generally three to five
years. Gains and losses on disposals are included in results of
operations at amounts equal to the difference between the net
book value of the disposed assets and the proceeds received upon
disposal. Expenditures for replacements and improvements are
capitalized, while expenditures for maintenance and repairs are
charged to operations as incurred.

Software Costs for Internal Use

The Company capitalizes costs related to software
for internal use. These costs primarily include purchased
software and qualifying external consulting fees and are
amortized over their estimated useful lives, generally three
years. The amortization expense is included in general and
administrative expenses. During 2001, 2002 and 2003,
approximately $1.5 million, $278,000 and $174,000,
respectively, of internal use software

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costs were capitalized, and amortization of
$1.0 million, $1.3 million and $1.1 million,
respectively, was charged to expense.


Software Costs for Products

Development costs related to software products
are expensed as incurred, as research and development costs,
until technological feasibility of the product has been
established. The Company has defined the establishment of
technological feasibility as the completion of a working model.
There is typically a relatively short time period between
technological feasibility and product release, and the amount of
costs incurred during such period is insignificant; as a result,
capitalization of software development costs has been infrequent
and insignificant. During 2000, approximately $800,000 was
capitalized related to software development costs. These costs
are being amortized over three years, with amortization of
approximately $267,000 recorded in 2001, 2002 and 2003,
respectively. There were no amounts capitalized during 2001,
2002 and 2003.

Goodwill

In July 2001, the FASB issued
SFAS No. 142, Goodwill and Other Intangible Assets,
which is effective for fiscal years beginning after
December 15, 2001. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the testing for
impairment of existing goodwill and other intangibles. The
standard also requires that goodwill be allocated to the
Companys reporting units for purposes of impairment
testing. The Company identified one reporting unit for the
purposes of this analysis: digital communications software and
services.

As of January 1, 2002, the Company adopted
SFAS No. 142 and, in accordance with paragraph 9,
accordingly reclassified $3.6 million of intangible assets
related to assembled workforce to goodwill. With this
reclassification added to the Companys existing goodwill
balance of $2.0 million as of December 31, 2001
approximately $5.6 million of goodwill was no longer being
amortized as of January 1, 2002. An additional goodwill
asset of approximately $1.0 million was recorded as part of
the Companys June 2002 acquisition of Critical Path Japan
(as discussed in Note 2  Acquisitions), bringing
the Companys goodwill balance to $6.6 million as of
December 31, 2002 and 2003. In lieu of amortization, the
Company is required to perform an impairment review of its
goodwill balance on at least an annual basis and upon the
initial adoption of SFAS No. 142. This impairment
review involves a two-step process as follows:



| |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Step 1  | The Company compares the fair value of its
    reporting unit to the carrying value, including goodwill, of the
    unit. If the carrying value, including goodwill, exceeds the
    units fair value, the Company moves on to step 2. If the
    reporting units fair value exceeds the carrying value, no
    further work is performed and no impairment charge is necessary.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Step 2  | The Company performs an allocation of the fair
    value of the reporting unit to its identifiable tangible and
    non-goodwill intangible assets and liabilities. This derives an
    implied fair value for the reporting units goodwill. The
    Company then compares the implied fair value of the reporting
    units goodwill with the carrying amount of the reporting
    units goodwill. If the carrying amount of the reporting
    units goodwill is greater than the implied fair value of
    its goodwill, an impairment charge would be recognized for the
    excess. Purchased technology and other identifiable intangible
    assets are carried at cost less accumulated amortization. The
    Company amortizes other identifiable intangibles on a
    straight-line basis over their estimated useful lives.

Finite-lived Intangibles and Long-lived
Assets

Finite-lived intangible assets are presented at
cost, net of accumulated amortization. Amortization is
calculated using the straight-line method over estimated useful
lives of the assets, which has historically been between 3 and
5 years. The Company will record an impairment charge on
finite-lived intangibles or long-lived

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assets when it determines that the carrying value
of intangibles and long-lived assets may not be recoverable.
Factors considered important which could trigger an impairment,
include, but are not limited to:




| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | significant under performance relative to
    expected historical or projected future operating results;                                 
|
| |  | significant changes in the manner of the
    Companys use of the acquired assets or the strategy for
    the Companys overall business;
|
| |  | significant negative industry or economic trends;                                                                                        
|
| |  | significant decline in the Companys stock
    price for a sustained period; and                                                         
|
| |  | the Companys market capitalization relative
    to net book value.                                                                      

Based upon the existence of one or more of the
above indicators of impairment, the Company measures any
impairment based on a projected discounted cash flow method
using a discount rate determined by the Companys
management to be commensurate with the risk inherent in the
Companys current business model. See also Note 7
 Property and Equipment, Note 8  Goodwill and
Other Intangible Assets and Note 17  Impairment of
Long-Lived Assets.

Revenue Recognition

The Company recognizes revenue related to the
sale of the Companys licensed software products, hosted
messaging and communication services, professional services and
post-contract customer maintenance and support services. Revenue
is recognized once the related products and services have been
delivered and collection of all fees is considered probable.

License Revenues

Software license.The Company derives software license revenues from perpetual and
term licenses for the Companys messaging and identity
management solutions. License revenues are recognized when
persuasive evidence of an arrangement exists, delivery of the
licensed software to the customer has occurred and the
collection of a fixed or determinable license fee is considered
probable.

The Companys revenue recognition policies
require that revenues recognized from software arrangements be
allocated to each element of the arrangement based on the fair
values of the elements, such as software products, post contract
customer support, installation, training or other services.
License software sales that involve multiple elements, including
software license and undelivered maintenance and support and
professional services, are recognized such that the Company
allocates revenue to the delivered elements of the arrangement
using the residual value method based on evidence of the fair
value of the undelivered elements. The vendor specific objective
evidence of fair values for the ongoing maintenance obligations
are based upon the prices paid for the separate renewal of these
services by the customer or upon substantive renewal rates
stated in the contractual arrangements. Vendor specific
objective evidence of the fair value of other services,
primarily professional services, is based upon substantive rates
stated in the contractual arrangements or upon separate sales of
these services at substantive rates.

If an arrangement includes specific customization
or modification services that are deemed essential to the
functionality of the product, the Company recognizes the entire
arrangement fee using the percentage of completion method. Under
this method, individual contract revenues are recorded based on
the percentage relationship of the contract costs incurred as
compared to managements estimate of the total cost to
complete the contract. If fair value cannot be determined for
more than one individual element of a multiple element
arrangement, revenue is recognized ratably over the term of the
agreement.

License fees are also received from resellers
under arrangements that do not provide product return or
exchange rights. Revenues from reseller agreements may include a
nonrefundable, advance royalty which is payable upon the signing
of the contract and license fees based on the contracted value
of the Companys products purchased by the reseller.
Guaranteed license fees from resellers, where no right of return
exists, are recognized when persuasive evidence of an
arrangement exists, delivery of the licensed software has
occurred

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and the collection of a fixed or determinable
license fee is considered probable. Non-guaranteed per-copy
license fees from resellers are initially deferred and are
recognized when they are reported as sold to end-users by the
reseller.


Service Revenues

Hosted messaging
services.The Company derives hosted
messaging revenues from fees for hosting services it offers
related to its messaging and collaboration solutions. These are
primarily based upon monthly contractual per unit rates for the
services involved, which are recognized on a monthly basis over
the term of the contract beginning with the month in which
service delivery starts.

Amounts billed or received in advance of service
delivery, including but not limited to branding and set-up fees,
are initially deferred and subsequently recognized on a ratable
basis over the expected term of the relationship beginning with
the month in which service delivery starts.

Professional
services.The Company derives
professional service revenues from fees primarily related to
training, installation and configuration services. The
associated revenues are recognized in the period in which the
services are performed.

Maintenance and
support.The Company derives
maintenance and support service revenues from fees for
post-contract customer support agreements associated with
product licenses. Such services typically include rights to
future update and upgrade product releases and dial-up and
on-site support services. Fees are deferred and recognized
ratably over the term of the support contract, generally one
year.

Advertising Expense

Advertising and promotion costs are expensed as
incurred. Costs associated with the development of print or
other media campaigns are deferred until the period that
includes the first commercial use of the media campaign. Costs
associated with industry trade shows and customer conferences
are deferred until the period that includes the applicable trade
show or conference. Advertising costs totaled $648,000, $353,000
and $49,000 during 2001, 2002 and 2003, respectively.

Research and Development

Research and development costs include expenses
incurred by the Company to develop and enhance its digital
communications software and services. Research and development
costs, including acquired in-process research and development
costs, are recognized as expense, when incurred.

Stock-Based Compensation

The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees and its
related interpretations and complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based
Compensation. Under APB No. 25, compensation expense for
fixed options is based on the difference, if any, on the date of
the grant, between the fair value of the Companys stock
and the exercise price of the option. The Company amortizes
stock-based compensation using the straight-line method over the
remaining vesting periods of the related options, which is
generally four years. The Company accounts for equity
instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task
Force (EITF) Issue No. 96-18. The shares
underlying warrants or options, which are unvested, are
remeasured at each reporting date until a measurement date
occurs, at which time the fair value of the warrant is fixed.
The related charge is amortized over the estimated term of the
relationship. In the event such remeasurement results in
increases or decreases from the initial fair value, which could
be substantial, these increases or decreases will be recognized
immediately, if the fair value of the shares underlying the
milestone has been previously recognized, or over the remaining
term, if not. Currently, all related amortization has been
recognized as advertising expense over the term of the estimated
benefit period. See also Note 8  Intangible Assets.

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In December 2002, the Financial Accounting
Standards Board (FASB) issued
SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure.
SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro forma effect in interim financial
statements. The transition and annual disclosure requirements of
SFAS No. 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure
requirements are effective for interim periods ending after
December 15, 2002. The Company adopted the disclosure
requirement of SFAS No. 148 on December 31, 2002.

Pro forma information regarding net loss and net
loss per share is required. This information is required to be
determined as if the Company had accounted for employee stock
options under the fair value method of Statement of Financial
Accounting Standards (SFAS) No. 123, as amended
by SFAS No. 148.

Had compensation cost been recognized based on
the fair value at the date of grant for options granted, during
2001, 2002, and 2003, the pro forma amounts of the
Companys net loss and net loss per share would have been
as follows:

|                                                                                                                                              |                                                                                                                                           |                                          |         |        |  |      |          |       |  |   |          |    | 
|--------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------- | ------ |  | ---- | -------- | ----- |  | - | -------- | -- | 
|                                                                                                                                              |                                                                                                                                           |                                         
|                                                                                                                                              |                                                                                                                                           | Year Ended December 31,                 
|                                                                                                                                              |                                                                                                                                           |                                         
|                                                                                                                                              |                                                                                                                                           | 2001                                     |         | 2002   |  | 2003
|                                                                                                                                              |                                                                                                                                           |                                          |         |        |  |     
|                                                                                                                                              |                                                                                                                                           |                                         
|                                                                                                                                              |                                                                                                                                           | (In thousands, except per share amounts)
|Net loss attributable to common
    shares  as reported                                                                                      |                                                                                                                                           | $                                        | (79,820 | )      |  | $    | (131,815 | )     |  | $ | (74,579  | ) 
|Add:                                                                                                                                          |                                                                                                                                           |                                          |         |        |  |      |          |       |  |   |          |   
|                                                                                                                                              | Stock-based employee compensation expense
    included in reported net loss attributable to common shares, net
    of related tax effects |                                          |         | 38,165 |  |      |          | 9,997 |  |   |          | 59 | 
|Deduct:                                                                                                                                       |                                                                                                                                           |                                          |         |        |  |      |          |       |  |   |          |   
|Total stock-based employee compensation expense
    determined under a fair value based method for all grants, net
    of related tax effects |                                                                                                                                           |                                          | (23,901 | )      |  |      | (68,658  | )     |  |   | (26,696  | ) 
|                                                                                                                                              |                                                                                                                                           |                                          |         |        |  |      |          |       |  |   |          |   
|Net loss attributable to common
    shares  pro forma                                                                                        |                                                                                                                                           | $                                        | (65,556 | )      |  | $    | (190,476 | )     |  | $ | (101,216 | ) 
|                                                                                                                                              |                                                                                                                                           |                                          |         |        |  |      |          |       |  |   |          |   
|Basic and diluted net loss per share attributable
    to common shares  as reported                                                          |                                                                                                                                           | $                                        | (4.32   | )      |  | $    | (6.78    | )     |  | $ | (3.73    | ) 
|                                                                                                                                              |                                                                                                                                           |                                          |         |        |  |      |          |       |  |   |          |   
|Basic and diluted net loss per share attributable
    to common shares  pro forma                                                            |                                                                                                                                           | $                                        | (3.54   | )      |  | $    | (9.80    | )     |  | $ | (5.06    | ) 
|                                                                                                                                              |                                                                                                                                           |                                          |         |        |  |      |          |       |  |   |          |   

The weighted average fair value of options
granted were $3.96, $4.41 and $2.99 during 2001, 2002 and 2003,
respectively. The Company calculated the fair value of each
option grant on the date of grant using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the
following assumptions:

|                          |  |                         |       |      |  |      |       |   |  |  |       |  
|------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  | 2001                    |       | 2002 |  | 2003
|                          |  |                         |       |      |  |     
|Risk-free interest rate   |  |                         | 4.0   | %    |  |      | 2.6   | % |  |  | 2.8   | %
|Expected lives (in years) |  |                         | 4.0   |      |  |      | 4.0   |   |  |  | 4.0   |  
|Dividend yield            |  |                         | 0.0   | %    |  |      | 0.0   | % |  |  | 0.0   | %
|Expected volatility       |  |                         | 250.0 | %    |  |      | 111.0 | % |  |  | 138.0 | %

Income Taxes

Income taxes are computed using an asset and
liability approach, which requires the recognition of taxes
payable or refundable for the current year and deferred tax
assets and liabilities for the future tax consequences of events
that have been recognized in the Companys consolidated
financial statements or tax returns. The measurement of current
and deferred tax assets and liabilities are based on provisions
of the enacted tax law; the effects of future changes in tax
laws or rates are not anticipated. Deferred tax assets are

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reduced, if necessary, by the amount of any tax
benefits that, based on available evidence, are more likely than
not to be realized.


Net Loss Per Share Attributed to Common
Shares

Basic net loss per share attributed to common
shares is computed by dividing the net loss attributable to
common shares for the period by the weighted average number of
common shares outstanding during the period. Shares subject to
repurchase by the Company and shares held in escrow in
connection with certain acquisition agreements are excluded from
the basic calculation. Diluted net loss per share attributed to
common shares is computed by dividing the net loss attributable
to common shares for the period by the weighted average number
of common and potential common shares outstanding during the
period, if the effect of each class of potential common shares
is dilutive. Potential common shares include restricted Common
Stock, shares held in escrow, Common Stock subject to repurchase
rights, and incremental Common and Preferred shares issuable
upon the exercise of stock options and warrants and upon
conversion of Series D Cumulative Redeemable Convertible
Participating Preferred Stock, the Senior Secured Convertible
Notes and the Convertible Subordinated Notes. See also
Note 19  Net Loss Per Share Attributed to Common
Shares.

Comprehensive Income (Loss)

The Company accounts for and reports
comprehensive income or loss and its components in its financial
statements. Comprehensive income (loss), as defined, includes
the Companys net income or loss and all other changes in
equity (net assets) during the period from non-owner sources.

Changes in accumulated other comprehensive income
(loss) during 2001, 2002 and 2003 were as follows (in thousands):

|                             |                                          |                                                         |        |             |       |       |        |        |        |   |        |        |        |  
|---------------------------- | ---------------------------------------- | ------------------------------------------------------- | ------ | ----------- | ----- | ----- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                             |                                          | Unrealized gain                                         |        |             |       |      
|                             |                                          | (loss) on                                               |        | Cumulative  |       |      
|                             |                                          | available-for-sale                                      |        | translation |       |      
|                             |                                          | investments                                             |        | adjustment  |       | Total
|                             |                                          |                                                         |        |             |       |      
|Balance at December 31, 2000 |                                          | $                                                       |       |             |       | $     | (74    | )      |        | $ | (74    | )     
|                             | Unrealized investment losses             |                                                         |        | (790        | )     |       |        |       |        |   |        | (790   | )     
|                             | Foreign currency translation adjustments |                                                         |        |            |       |       |        | (1,924 | )      |   |        | (1,924 | )     
|                             |                                          |                                                         |        |             |       |       |        |        |        |   |        |       
|                             |                                          | Total accumulated other comprehensive loss              |        |             | (790  | )     |        |        | (1,924 | ) |        |        | (2,714 | )
|Balance at December 31, 2001 |                                          | $                                                       | (790   | )           |       | $     | (1,998 | )      |        | $ | (2,788 | )     
|                             |                                          |                                                         |        |             |       |       |        |        |        |   |        |       
|                             | Unrealized investment losses             |                                                         |        | (671        | )     |       |        |       |        |   |        | (671   | )     
|                             | Foreign currency translation adjustments |                                                         |        |            |       |       |        | 2,416  |        |   |        | 2,416  |       
|                             |                                          |                                                         |        |             |       |       |        |        |        |   |        |       
|                             |                                          | Total accumulated other comprehensive income
    (loss) |        |             | (671  | )     |        |        | 2,416  |   |        |        | 1,745  |  
|Balance at December 31, 2002 |                                          | $                                                       | (1,461 | )           |       | $     | 418    |        |        | $ | (1,043 | )     
|                             |                                          |                                                         |        |             |       |       |        |        |        |   |        |       
|                             | Unrealized investment gains              |                                                         |        | 1,461       |       |       |        |       |        |   |        | 1,461  |       
|                             | Foreign currency translation adjustments |                                                         |        |            |       |       |        | 1,696  |        |   |        | 1,696  |       
|                             |                                          |                                                         |        |             |       |       |        |        |        |   |        |       
|                             |                                          | Total accumulated other comprehensive income            |        |             | 1,461 |       |        |        | 1,696  |   |        |        | 3,157  |  
|Balance at December 31, 2003 |                                          | $                                                       |       |             |       | $     | 2,114  |        |        | $ | 2,114  |       
|                             |                                          |                                                         |        |             |       |       |        |        |        |   |        |       

There were no tax effects allocated to any
components of other comprehensive income during 2001, 2002 or
2003.

Foreign Currency

The Company considers the local currencies of
each of its foreign operations to be the functional currency in
those operations. Assets and liabilities recorded in foreign
currencies are translated at the exchange rate on the balance
sheet date. Revenues and expenses are translated at average
rates of exchange prevailing during the period. Translation
adjustments are charged or credited to other comprehensive
income, a component of

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shareholders equity (deficit). Gains and
losses on foreign currency transactions are included in
non-operating income and expense. The Company recognized a net
gain from foreign currency transactions in the amount of
$947,000 in 2001, and net losses of $817,000 and $440,000 in
2002 and 2003, respectively.


Segment and Geographic Information

The Company does not currently manage its
business in a manner that requires it to report financial
results on a segment basis. The Company currently operates in
one segment: Digital communications software and services and
management uses one measure of profitability. See also
Note 20  Product and Geographic Information.

Recent accounting pronouncements

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments Hedging Activities. This statement amends
and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. SFAS
No. 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a
derivative as discussed in SFAS No. 133. In addition, it
clarifies when a derivative contains a financing component that
warrants special reporting in the condensed consolidated
statement of cash flows. The provisions of this standard are
effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated
after June 30, 2003. In addition, except as stated below,
all provisions of this statement should be applied
prospectively. The provisions of this statement that relate to
SFAS No. 133 implementation issues that have been effective
for fiscal quarters that began prior to June 15, 2003
should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions
relating to forward purchases or sales of when-issued securities
or other securities that do not yet exist should be applied to
existing contracts as well as new contracts entered into after
June 30, 2003. The adoption of SFAS No. 149 did not
have a material impact on the Companys financial position
and results of operations.

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

In May 2003, the EITF reached a consensus on EITF
Issue No. 03-05, Applicability of AICPA Statement of
Position 97-2, Software Revenue Recognition, to Non-Software
Deliverables in Arrangements Containing More-Than-Incidental
Software. EITF No. 03-05 addresses the applicability of
Statement of Position No. 97-2 regarding software and
non-software deliverables in a multiple element arrangement,
giving consideration to whether the deliverables are essential
to the functionality of one another. EITF Issue No. 03-05
is effective for interim periods beginning after August 13,
2003. The adoption of EITF Issue No. 03-05 did not have a
material impact on the Companys financial position and
results of operations.

In January 2003, the FASB issued FASB
Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51. FIN No. 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN No. 46 is effective immediately for
all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN
No. 46 must be applied for the first interim or annual
period beginning after June 15, 2003. In addition, FIN
No. 46 requires that the Company make disclosures in its
consolidated financial statements for the year ended
December 31, 2002

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when the Company believes it is reasonably
possible that it will consolidate or disclose information about
variable interest entities after FIN No. 46 becomes
effective. In December 2003, FASB issued a revised FIN
No. 46. The FASB deferred the effective date for VIEs that
are non-special purpose entities created before February 1,
2003, to the first interim or annual reporting period that ends
after March 15, 2004. At this time, the Company does not
believe it is reasonably possible that the Company will
consolidate or disclose information about variable interest
entities. However, the Company will continue to assess the
impact of FIN No. 46 on its consolidated financial
statements.


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

Note 2  Acquisition

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

Note 3  Retention Related
Bonuses

In connection with the acquisitions of dotOne,
Amplitude, Xeti, FaxNet, ISOCOR, and docSpace, during 1999
and 2000, the Company established a retention bonus program in
the aggregate amount of $20.7 million to provide incentives
for certain former employees of these companies to continue
their employment with the Company. Payments of bonuses to
designated employees occurred on the six-month, twelve-month or
eighteen-month anniversary date of the related acquisition,
depending on the program, unless the designated employee
voluntarily terminates employment with the Company prior to the
respective acquisitions applicable anniversary. A ratable
share of the adjusted eligible bonus amount has been accrued and
charged to compensation expense over the respective six, twelve
or eighteen month period commencing on the date the bonuses were
granted. There were no acquisition-related retention bonuses
granted during 2001, 2002 and 2003.

As of December 31, 2001, the aggregate,
adjusted eligible bonus totaled $1.9 million, and the
ratable charge to compensation expense for the year then ended
was $1.4 million. Based on the functions of the employees
scheduled to receive acquisition bonuses in 2001, this amount
was charged to operating expenses. During 2002, the charges to
compensation related to acquisition bonuses were insignificant
and there were no related charges in 2003. Additionally, as of
December 31, 2002 and 2003, no acquisition bonuses remained.

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Note 4  Strategic
Restructuring

The following tables summarize strategic
restructuring costs incurred by the Company during the three
years ended December 31, 2003:

|                                                            |       |                |   |         |  |         |      |            |  |             |      |                |   |   |      |      |   |   |   |   |  |   |     |     | 
|----------------------------------------------------------- | ----- | -------------- | - | ------- |  | ------- | ---- | ---------- |  | ----------- | ---- | -------------- | - | - | ---- | ---- | - | - | - | - |  | - | --- | --- | 
|                                                            |       | Liabilities at |   |         |  |         |      | Cash       |  |             |      | Liabilities at
|                                                            |       | December 31,   |   | Total   |  | Noncash |      | Receipts   |  |             |      | December 31,  
|Year ended December 31, 2001                                |       | 2000           |   | Charges |  | Charges |      | (Payments) |  | Adjustments |      | 2001          
|                                                            |       |                |   |         |  |         |      |            |  |             |      |               
|Workforce reduction                                         |       | $              |  |         |  | $       | 10.3 |            |  | $           | (1.3 | )              |   | $ | (8.9 | )    |   | $ |  |   |  | $ | 0.1 |    
|Facility and operations consolidation and other
    charges |       |                |  |         |  |         | 9.0  |            |  |             | (5.5 | )              |   |   | (1.6 | )    |   |   |  |   |  |   | 1.9 |    
|Non-core product and service sales and
    divestitures     |       |                |  |         |  |         | (1.0 | )          |  |             | (1.1 | )              |   |   | 2.3  |      |   |   |  |   |  |   | 0.2 |    
|                                                            |       |                |   |         |  |         |      |            |  |             |      |                |   |   |      |      |   |   |   |   |  |   |     |    
|                                                            | Total |                | $ |        |  |         | $    | 18.3       |  |             | $    | (7.9           | ) |   | $    | (8.2 | ) |   | $ |  |  |   | $   | 2.2 | 

|                                                            |       |                |     |         |  |         |     |            |  |             |      |                |   |   |      |      |   |   |   |   |  |   |     |     | 
|----------------------------------------------------------- | ----- | -------------- | --- | ------- |  | ------- | --- | ---------- |  | ----------- | ---- | -------------- | - | - | ---- | ---- | - | - | - | - |  | - | --- | --- | 
|                                                            |       | Liabilities at |     |         |  |         |     | Cash       |  |             |      | Liabilities at
|                                                            |       | December 31,   |     | Total   |  | Noncash |     | Receipts   |  |             |      | December 31,  
|Year ended December 31, 2002                                |       | 2001           |     | Charges |  | Charges |     | (Payments) |  | Adjustments |      | 2002          
|                                                            |       |                |     |         |  |         |     |            |  |             |      |               
|Workforce reduction                                         |       | $              | 0.1 |         |  | $       | 2.1 |            |  | $           |     |                |   | $ | (1.0 | )    |   | $ |  |   |  | $ | 1.2 |    
|Facility and operations consolidation and other
    charges |       |                | 1.9 |         |  |         | 1.1 |            |  |             | (0.4 | )              |   |   | (1.5 | )    |   |   |  |   |  |   | 1.1 |    
|Non-core product and service sales and
    divestitures     |       |                | 0.2 |         |  |         |    |            |  |             |     |                |   |   | 0.1  |      |   |   |  |   |  |   | 0.3 |    
|                                                            |       |                |     |         |  |         |     |            |  |             |      |                |   |   |      |      |   |   |   |   |  |   |     |    
|                                                            | Total |                | $   | 2.2     |  |         | $   | 3.2        |  |             | $    | (0.4           | ) |   | $    | (2.4 | ) |   | $ |  |  |   | $   | 2.6 | 

|                                                            |       |                |     |         |  |         |     |            |  |             |      |                |   |   |      |      |   |   |      |      |   |   |     |     | 
|----------------------------------------------------------- | ----- | -------------- | --- | ------- |  | ------- | --- | ---------- |  | ----------- | ---- | -------------- | - | - | ---- | ---- | - | - | ---- | ---- | - | - | --- | --- | 
|                                                            |       | Liabilities at |     |         |  |         |     | Cash       |  |             |      | Liabilities at
|                                                            |       | December 31,   |     | Total   |  | Noncash |     | Receipts   |  |             |      | December 31,  
|Year ended December 31, 2003                                |       | 2002           |     | Charges |  | Charges |     | (Payments) |  | Adjustments |      | 2003          
|                                                            |       |                |     |         |  |         |     |            |  |             |      |               
|Workforce reduction                                         |       | $              | 1.2 |         |  | $       | 6.0 |            |  | $           | (0.2 | )              |   | $ | (6.2 | )    |   | $ | (0.6 | )    |   | $ | 0.2 |    
|Facility and operations consolidation and other
    charges |       |                | 1.1 |         |  |         | 1.8 |            |  |             | (0.3 | )              |   |   | (1.7 | )    |   |   | (0.3 | )    |   |   | 0.6 |    
|Non-core product and service sales and
    Divestitures     |       |                | 0.3 |         |  |         | 0.3 |            |  |             |     |                |   |   | (0.3 | )    |   |   | (0.3 | )    |   |   |    |    
|                                                            |       |                |     |         |  |         |     |            |  |             |      |                |   |   |      |      |   |   |      |      |   |   |     |    
|                                                            | Total |                | $   | 2.6     |  |         | $   | 8.1        |  |             | $    | (0.5           | ) |   | $    | (8.2 | ) |   | $    | (1.2 | ) |   | $   | 0.8 | 

In April 2001, the Company announced a strategic
restructuring plan that involved reorganizing and refocusing
Critical Paths product and service offerings, a workforce
reduction, and a facilities and operations consolidation.
Additionally, the Company implemented an aggressive expense
management plan to further reduce operating costs while
maintaining strong customer service. The Company completed its
restructuring plan in 2001, including the divestiture of all
products and services deemed to be non-core products and
services to the continued operations of the company, a 44%
reduction in headcount, a 65% reduction in the number of
facilities and the implementation of other cost cutting
measures, resulting in a significant reduction in overall
operating expenses. The non-core products and services comprised
approximately 21% of total revenues in the year ended
December 31, 2001.

During 2001, the Company sold or discontinued all
of its non-core products and services and as a result of these
transactions recognized a net gain of $1.0 million for the
year ended December 31, 2001. The Company reduced its
headcount from 1,011 employees at March 31, 2001 to 562
employees at December 31, 2001. Charges related to the
headcount reduction consisted primarily of the payment of
severance and fringe benefits, and aggregated approximately
$10.3 million during 2001. In connection with these
restructuring actions, the Company reduced the number of
facilities it occupied from 77 at March 31, 2001 to 27 at
December 31, 2001. Lease termination and facility
consolidation related charges consisted primarily of lease
termination costs, future lease payments and related fees, and
aggregated approximately $9.0 million during 2001.

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The initiatives contemplated under these
restructurings were completed during 2003, and during the first
quarter of 2003, the Company reversed approximately
$1.2 million in restructuring expenses, which were
originally accrued in 2001 and 2002 associated with the
restructuring initiatives discussed above, as the Company
determined these amounts will not be paid in the future. The
reversal of these expenses is reflected in the
Adjustments column of the Strategic Restructuring
table presented above.

In May 2002, the Board of Directors approved a
restructuring plan to further reduce the Companys expense
levels consistent with the current business climate. In
connection with the plan, a restructuring charge of
$1.5 million was recognized in the second quarter of 2002.
This charge was comprised of approximately $1.2 million in
severance and related costs associated with the elimination of
approximately 39 positions and $300,000 in facilities lease
termination costs. The balance of the accrual at
December 31, 2003, of approximately $0.4 million is
expected to be utilized by the end of 2004.

In January 2003, The Company announced a
restructuring initiative designed to further reduce its expense
levels in an effort to achieve operating profitability assuming
no or moderate revenue growth. The plan includes the
consolidation of some office locations and a global workforce
reduction of approximately 175 positions, or approximately 30%
of the workforce. The headcount reduction was partially offset
by outsourcing approximately 75 positions to lower cost service
providers. The Company incurred aggregate charges of
approximately $8.0 million resulting from the cost
reduction plan, inclusive of $7.0 million in cash and
$1.0 million in non-cash expenses. Included in this plan
were approximately $1.7 million in charges incurred in the
fourth quarter of 2002, comprised of approximately
$0.7 million in severance and related costs and
$1.0 million in facilities lease termination costs. During
2003, cash payments totaling $6.5 million were made related
to the restructuring. At December 31, 2003, the balance of
the accrual was approximately $0.2 million and is expected
to be utilized by the end of the first quarter of 2004.

In November 2003, the Company announced that it
was restructuring certain of its facility lease obligations in
an effort to reduce its long-term cash obligations. In addition,
the Company identified an additional 16 positions, primarily
held by management-level employees, which were to be eliminated.
Costs totaling $1.9 million were recognized during the
fourth quarter of 2003 associated with these initiatives,
including $1.4 million in lease restructuring and
termination costs and $0.5 million in severance and related
headcount reduction costs. During the fourth quarter of 2003,
cash payments totaling $1.3 million were made associated
with the facility restructuring activities and $0.4 million
related to the headcount reductions. The remaining accrual of
$0.2 million associated with this restructuring is expected
to be utilized by the end of the first quarter of 2004. In
addition, the Company expects to incur approximately
$1.0 million in the first six months of 2004 related to
this initiative.

Note 5  Accounts
Receivable

|                                |                          |                |        |        |  |   |        |        | 
|------------------------------- | ------------------------ | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                                |                          |               
|                                |                          | December 31,  
|                                |                          |               
|                                |                          | 2002           |        | 2003  
|                                |                          |                |        |       
|                                |                          |               
|                                |                          | (In thousands)
|Accounts receivable             |                          | $              | 24,404 |        |  | $ | 18,534 |       
|Allowance for doubtful accounts |                          |                | (1,586 | )      |  |   | (1,654 | )     
|                                |                          |                |        |        |  |   |        |       
|                                | Accounts receivable, net |                | $      | 22,818 |  |   | $      | 16,880 | 
|                                |                          |                |        |        |  |   |        |       

Note 6  Investments

During 2003, the Company executed sales of its
remaining public and private investments. As a result, as of
December 31, 2003, the Company was not carrying any
investments on its balance sheet. The sale of the Companys
investments during 2003 resulted in a net gain of $549,000,
which was comprised of $2.4 million in aggregate cash
proceeds, the recognition of $1.5 million in unrealized
losses and the elimination of $357,000 in assets held as equity
investments.

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Investments carried by the Company as of
December 31, 2002, were as follows:

|                       |                               |       |       |             |  |           |      |            |   |   |    |    |  |   |       |       | 
|---------------------- | ----------------------------- | ----- | ----- | ----------- |  | --------- | ---- | ---------- | - | - | -- | -- |  | - | ----- | ----- | 
|                       |                               |       |       | Net         |  | Period    |      |           
|December 31, 2002      |                               | Cost  |       | Unrealized  |  | Income    |      | Estimated 
|(In thousands)         |                               | Basis |       | Gain (Loss) |  | (Expense) |      | Fair Value
|                       |                               |       |       |             |  |           |      |           
|Short-term investments |                               |       |       |             |  |           |      |            |   |   |    |    |  |   |       |      
|                       | Marketable securities         |       | $     | 5,583       |  |           | $    |           |   |   | $  |   |  |   | $     | 5,583 | 
|                       |                               |       |       |             |  |           |      |            |   |   |    |    |  |   |       |      
|Long-term investments  |                               |       |       |             |  |           |      |            |   |   |    |    |  |   |       |      
|                       | Marketable securities         |       | $     | 3,985       |  |           | $    | 5          |   |   | $  |   |  |   | $     | 3,990 | 
|                       | Marketable equity investments |       |       | 997         |  |           |      | (676       | ) |   |    | 36 |  |   |       | 357   | 
|                       |                               |       |       |             |  |           |      |            |   |   |    |    |  |   |       |      
|                       |                               | $     | 4,982 |             |  | $         | (671 | )          |   | $ | 36 |    |  | $ | 4,347 |      
|                       |                               |       |       |             |  |           |      |            |   |   |    |    |  |   |       |      

The Companys investments consisted of both
short-term and long-term investments. Short-term investments
were primarily comprised of low risk government securities and
corporate bonds. Long-term investments were primarily comprised
of strategic equity investments in corporate partners, certain
of which are publicly traded and marketable and certain of which
are privately held and non-marketable. The Companys
investments in marketable securities are stated at fair value,
which is based on quoted market prices. Investments in
non-marketable securities are stated at fair value, based on
initial cost of the investment and periodic review for
impairment. Adjustments to the fair value of these investments
are recorded as a component of other comprehensive income. All
investments are periodically evaluated for other-than-temporary
impairment.

During 2001 and 2002, the Company determined that
the impairment of certain of its investments were deemed to be
other-than-temporary and recorded write downs of $702,000 and
$1.5 million.

In June 2000, the Company established a joint
venture, Critical Path Pacific, Inc., with Mitsui and Co.,
Ltd., NTT Communications Corporation and NEC Corporation to
deliver advanced Internet messaging solutions to businesses in
Asia. The Company invested $7.5 million, acquiring a 40%
ownership interest in the joint venture. This investment was
accounted for using the equity method. During 2001 and 2002, the
Company recorded equity in net loss of joint venture of
approximately $1.9 million and $1.4 million,
respectively. On June 6, 2002, the Company acquired the
remaining 60% ownership interest in the joint venture and began
including the financial results of Critical Path Pacific in its
own consolidated results subsequent to the acquisition date. See
also Note 2  Acquisitions.

Note 7  Property and
Equipment

|                                                |  |                |         |      |  |   |          |  
|----------------------------------------------- |  | -------------- | ------- | ---- |  | - | -------- | -
|                                                |  |               
|                                                |  | December 31,  
|                                                |  |               
|                                                |  | 2002           |         | 2003
|                                                |  |                |         |     
|                                                |  |               
|                                                |  | (In thousands)
|Computer equipment and software                 |  | $              | 104,474 |      |  | $ | 119,336  |  
|Furniture and fixtures                          |  |                | 9,456   |      |  |   | 9,313    |  
|Leasehold improvements                          |  |                | 2,035   |      |  |   | 2,030    |  
|                                                |  |                |         |      |  |   |          |  
|                                                |  |                | 115,965 |      |  |   | 130,679  |  
|Less: Accumulated depreciation and amortization |  |                | (97,823 | )    |  |   | (115,858 | )
|                                                |  |                |         |      |  |   |          |  
|                                                |  | $              | 18,142  |      |  | $ | 14,821   |  
|                                                |  |                |         |      |  |   |          |  

At December 31, 2002 and 2003 property and
equipment included $5.1 million and $5.6 million of
assets under capital leases, respectively, and accumulated
amortization totaled $3.1 million and $4.5 million at
December 31, 2002 and 2003, respectively. All assets under
capital leases relate to computer equipment and software.

Depreciation and amortization expense totaled
$43.0 million, $27.2 million and $16.3 million
during 2001, 2002 and 2003, respectively.

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Note 8  Goodwill and Other
Intangible Assets

At December 31, 2003, the Company was
carrying goodwill of $6.6 million, which is no longer being
amortized, in accordance with SFAS No. 142. All acquired
intangible assets were fully amortized as of December 31,
2002. During the second quarter of 2002, the Company recorded
goodwill of approximately $1.0 million associated with its
acquisition of the remaining 60% ownership interest in Critical
Path Pacific, Inc. See also Note 2  Acquisitions.

The Company performed its initial goodwill
impairment test upon adoption on January 1, 2002, as
required by SFAS No. 142, at which time the goodwill was
not impaired. In September 2003, the Company performed its
annual impairment review, at which time the goodwill was not
impaired. The results of Step 1 of the goodwill impairment
analysis showed that goodwill was not impaired as the market
value of the Companys one reporting unit exceeded its
carrying value, including goodwill. Accordingly, Step 2 was not
performed. The market value of the reporting unit was estimated
by multiplying the number of shares of Company stock outstanding
on the analysis date by the most recent stock market closing
price. The Company will continue to test for impairment on an
annual basis and 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. See also Note 1  The Company
and Summary of Significant Accounting Policies.

There was no amortization expense in 2003.
Amortization expense was $54.1 million and
$43.3 million in 2001 and 2002, respectively. Included in
amortization expense was amortization of goodwill totaling
$643,000 in 2001, with the remaining amortization expense
related to other intangible assets. Based on the types of other
identifiable intangibles acquired, during 2001 and 2002
amortization expense of $21.3 million and
$18.5 million was allocated to cost of net revenues,
respectively, and amortization expense of $32.7 million and
$24.8 million was allocated to operating expenses,
respectively. The identifiable intangible assets which existed
during 2001, 2002 and 2003 primarily related to existing
technology for some of the Companys licensed products,
which were acquired in 2000, and certain amounts related to
assembled workforce, which were acquired in 1999 and 2000.
Intangible assets were fully amortized as of the end of 2002.
See also Note 17  Impairment of Long-Lived Assets.

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

|                                                                         |  |                         |         |      |  |      |          |   |  |   |         |  
|------------------------------------------------------------------------ |  | ----------------------- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                                         |  |                        
|                                                                         |  | Year Ended December 31,
|                                                                         |  |                        
|                                                                         |  | 2001                    |         | 2002 |  | 2003
|                                                                         |  |                         |         |      |  |     
|Net loss attributable to common
    shares                               |  |                         |         |      |  |      |          |   |  |   |         |  
|Reported net loss attributable to common shares                          |  | $                       | (79,820 | )    |  | $    | (131,815 | ) |  | $ | (74,579 | )
|Amortization of goodwill                                                 |  |                         | 4,688   |      |  |      |         |   |  |   |        |  
|                                                                         |  |                         |         |      |  |      |          |   |  |   |         |  
|Net loss attributable to common shares, as
    adjusted                  |  | $                       | (75,132 | )    |  | $    | (131,815 | ) |  | $ | (74,579 | )
|                                                                         |  |                         |         |      |  |      |          |   |  |   |         |  
|Net loss per share attributable to common
    shares  basic and diluted |  |                         |         |      |  |      |          |   |  |   |         |  
|Reported net loss per share attributable to
    common shares            |  | $                       | (4.32   | )    |  | $    | (6.78    | ) |  | $ | (3.73   | )
|Amortization of goodwill per share                                       |  |                         | 0.26    |      |  |      |         |   |  |   |        |  
|                                                                         |  |                         |         |      |  |      |          |   |  |   |         |  
|Net loss per share attributable to common shares,
    as adjusted        |  | $                       | (4.06   | )    |  | $    | (6.78    | ) |  | $ | (3.73   | )
|                                                                         |  |                         |         |      |  |      |          |   |  |   |         |  

2003 Warrants

Equity Office Management LLC

In November 2003, the Company entered into an
agreement with one of its landlords, Equity Office Management
LLC, pursuant to which the lease covering the Companys
Santa Monica facility was

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restructured. As part of the agreement, Equity
Office Management LLC agreed to early terminate the
Companys lease obligation in exchange for $381,000 in cash
and warrants to purchase 25,000 shares of Common Stock. The
warrants were fully vested upon issuance and are exercisable
over a five year period beginning on December 1, 2003, at a
price of $2.49 per share.


Using the Black-Scholes option pricing model and
assuming a term of five years and expected volatility of 138%,
the fair value of the warrants on the effective date of the
agreement approximated $48,000, which was recorded in
restructuring and other expenses in the fourth quarter of 2003.

1999 Warrants

ICQ

In January 1999, the Company entered into an
agreement with ICQ, Inc., a subsidiary of AOL Time Warner,
pursuant to which the Company provides email hosting services
that are integrated with ICQs instant messaging service
provided to ICQs customers. As part of the agreement, ICQ
agreed to provide sub-branded advertising for the Company in
exchange for warrants to purchase 2,442,766 shares of
Series B Preferred Stock, issuable upon attainment of each
of five milestones.

As of April 9, 2000, all five milestones had
been attained and all related warrants were exercised during
2000 in two net exercises of 766,674 and 1,441,067 shares.
Using the Black-Scholes option-pricing model and assuming a term
of seven years and expected volatility of 90%, the final revised
aggregate fair value of all vested warrants was
$93.8 million, which was being amortized to advertising
expense using the straight-line method over four years.
Aggregate charges to stock-based expenses of $14.7 million
and $14.7 million were recorded to operating expenses
during 2001 and 2002, respectively, related to these warrants.
The value of these warrants was fully amortized at
December 31, 2002.

Qwest Communications Corporation

In October 1999, the Company entered into an
agreement with Qwest Communications Corporation, a
telecommunications company, pursuant to which the Company agreed
to provide email hosting services to Qwests customers. As
part of the agreement, Qwest agreed to provide sub-branded
advertising for Critical Path in exchange for warrants to
purchase up to a maximum of 3,534,540 shares of Common
Stock upon attainment of each of six milestones.

The shares underlying the milestones for which
achievement was considered probable were remeasured at each
subsequent reporting date, beginning at December 31, 1999,
until each sub-branded Qwest mailbox registration threshold was
achieved and the related warrant shares vest, at which time the
fair value attributable to each tranche of the warrant was
fixed. In the event such remeasurement resulted in an increase
or decrease from the initial fair value, these increases or
decreases were recognized immediately, if the fair value of the
shares underlying the milestone had been previously recognized,
or over the remaining term, if not.

In October 1999, the first of the six milestones
had been attained. Using the Black-Scholes option-pricing model
and assuming a term of 5 years and expected volatility of
90%, the final revised aggregate fair value of the vested
warrants associated with the first milestone approximated
$22.2 million, which was amortized to advertising expense
using the straight-line method over three years. The Company
expects that future changes in the trading price of the
Companys Common Stock at the end of each quarter, and at
the time certain milestones are considered probable and
achieved, may cause additional substantial changes in the
ultimate amount of the related stock-based charges.

As of December 31, 2001, only the first of
the six milestones had been attained. None of the remaining
milestones are considered probable and as a result, the fair
value of the warrants relating to the shares underlying the
second through sixth milestones has not been recognized. During
2001 and 2002, $4.6 million and $4.6 million,
respectively, was charged to stock-based operating expense
related to the vested warrants. The value of these warrants was
fully amortized at December 31, 2002 and accordingly no
expense was recognized related to these warrants during 2003.

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Worldsport Network Ltd.

In December 1999, the Company entered into an
agreement with Worldsport Network Ltd., the sole and exclusive
provider of Internet solutions for the General Association of
International Sports Federations (GAISF) and a
majority of the international federations it recognizes. Under
the terms of the agreement, Worldsport offers the Companys
web-based email and calendaring services to the GAISF network
and its members. As part of the agreement, Worldsport agreed to
provide sub-branded advertising for the Company in exchange for
warrants to purchase up to a 1.25% equity interest in the
Company on a fully diluted basis upon attainment of each of five
milestones based on the number of email boxes for which
Worldsport registers and provides sub-branding. The warrants are
exercisable for five years after becoming vested. Any warrants
not vested within five years of the date of the agreement will
be canceled. Worldsport ceased operations and filed for
bankruptcy during 2000 and the Company continues to believe the
warrants will ultimately expire unvested and unexercised.

Lessor Warrants

In December 1999, the Company entered into an
agreement with one of its lessors, in connection with an office
lease, pursuant to which the lessor was issued warrants to
purchase up to a maximum of 25,000 shares of the
Companys Common Stock. The warrants may be exercised
beginning January 1, 2000 through December 20, 2006 at
a price of $90.00 per share. The warrants vest at the
beginning of each month on a straight-line basis in the amount
of 521 shares per month. At December 31, 2003, the
warrants remained unexercised.

Using the Black-Scholes option pricing model and
assuming a term of six years and expected volatility of 90%, the
fair value of the warrants on the effective date of the
agreement approximated $2.0 million, which was being
amortized to general and administrative expenses using the
straight-line method over ten years beginning January 2000.
During both 2000 and 2001, approximately $200,000 was charged to
stock-based expense related to the vested warrants. In March
2002, the lease was terminated and the remaining value of
$1.6 million was recognized to stock-based expense.

Telco

In January 2000, docSpace entered into an
agreement with a major telecommunications company
(Telco) pursuant to which docSpace would provide
secure messaging services to the Telcos customers. As part
of the agreement, Telco agreed to provide marketing, publicity,
and promotional services to docSpace. As a result of the
completion of the Companys acquisition of docSpace, the
Company assumed warrants that allowed Telco to purchase up to a
maximum of 349,123 shares of the Companys Common
Stock upon attainment of each of three milestones.

Subsequent to the acquisition, the Company
entered into discussions with Telco to modify their
relationship. Accordingly, the vesting provisions of the
proposed agreement were modified to reflect the requirements of
the new relationship. As of December 31, 2003, none of the
vesting milestones of the original agreement had been attained
and none of the milestones are considered probable. Accordingly
no deferred compensation associated with the warrants has been
recognized. The Company expects that future changes in the
trading price of the Companys Common Stock at the end of
each quarter, and at the time certain milestones are achieved,
may cause substantial changes in the ultimate amount of the
related stock-based charges.

Note 9  Related Party
Transactions

General Atlantic Partners

In November 2003, the Company issued
$10 million in 10% Senior Secured Convertible Notes to
General Atlantic Partners, which are convertible into
7.3 million shares of Series E Preferred Stock. See
Note 11  Convertible Notes.

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Cheung Kong Group

In November 2003, the Company executed an
agreement to exchange approximately $32.8 million in face
value of its 5 3/4% Notes, which were held by a group
of investors led by Cheung Kong Group and its Whampoa Limited
affiliates, for approximately 21.9 million shares of
Series E Preferred Stock. The conversion of the
5 3/4% Notes and the issuance of the Series E
Preferred Stock will be affected upon shareholder approval. See
Note 11  Convertible Notes.

Vectis Group, LLC

In March 2001, the Company entered into certain
agreements with Vectis Group, LLC (Vectis Group) to
engage Vectis Group to act as an advisor to the Company with
respect to various strategic alternatives the Company was
exploring and to assist with other management related services.
As part of the agreement, Vectis Group agreed to provide
consulting services to the Company in exchange for a monthly
retainer fee, potential transaction  based fees
associated with certain strategic asset sales and investments in
Critical Path and immediately exercisable warrants to purchase
500,000 shares of the Companys Common Stock with an
exercise price of $2.00 per share, issuable upon execution
of the agreement. Using the Black-Scholes option-pricing model
and assuming a term of three years, the term of the agreement,
and expected volatility of 215%, the initial and final fair
value of the warrant on the effective date of the agreement
approximated $732,000, which was recognized upon the execution
of the agreement in March 2001, because the relationship was
terminable at any time. During the term of the agreement, the
Company paid Vectis Group an aggregate of approximately
$1.1 million in retainer fees and expenses, paid monthly
over the life of the agreements, and approximately
$3.1 million in transactional fees, which included
approximately $2.75 million in connection with the
preferred stock financing transaction in November 2001, in which
Vectis Group participated as one of several investors in this
transaction led by General Atlantic Partners and its affiliates.
See also Note 15  Financing Transactions
and Preferred Stock. William McGlashan, Jr., a principal in
Vectis Group, and a member of the Board of Directors of the
Company, was appointed interim President and Chief Operating
Officer of the Company in April 2001 and was later appointed
Vice Chairman and Chief Executive Officer. Effective
September 30, 2001, the Company terminated its agreements
with Vectis Group for consulting and other transactional
services. In connection with the termination of the agreements,
certain other employees of Vectis Group became employees of
Critical Path. The Company paid to Vectis a total of
approximately $12,500 for expense reimbursement in February
2002. Although the agreements were terminated, certain
obligations under the agreement survived, including the
transaction fee paid in connection with the Companys
financing transaction in 2001 and related indemnification
obligations. The total potential remaining fees payable
aggregate between zero and $135,000.

Release of The docSpace Company Escrow
Funds

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

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

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Notes receivable from shareholders

During 1998, the Company issued a full recourse
note to a shareholder and former Chief Executive Officer,
Douglas Hickey, equal to $1.06 million.
Mr. Hickeys full recourse note accrues interest at
the rate of 4.51% per annum and is secured by shares of the
Companys Common Stock owned by Mr. Hickey. In
February 2001, Mr. Hickey terminated his employment with
the Company. In connection with the termination, the repayment
of the $1.06 million note receivable and accrued interest
was extended to May 9, 2002. Mr. Hickey repaid this
note in full with interest in March 2002.

Notes receivable from officers

During 2000, the Company issued a note receivable
to a former Chief Financial Officer, Lawrence Reinhold, equal to
$1.7 million. Mr. Reinholds full recourse note
accrued interest at the rate of 6.0% per annum and both
principal and interest were scheduled to be forgiven over a
specified period. During Mr. Reinholds employment
with Critical Path, approximately $270,000 of principal and
interest was forgiven, consistent with the terms of the note,
and charged to operating expenses. The repayment of the
outstanding loan was subject to certain change of control and
employment termination criteria. In August 2001,
Mr. Reinhold terminated his employment with the Company. In
connection with the termination all outstanding principal and
interest totaling $1.5 million was forgiven by the Company
and charged to operating expenses.

In connection with his employment agreement, in
October 2001 the Company advanced a loan to and held a note
receivable from Pierre Van Beneden, President, totaling
$350,000. Mr. Van Benedens loan was interest free for
the first year and was forgiven in monthly installments over the
first year of Van Benedens employment, resulting in a
compensation charge to operating expense ratably over the first
twelve months of his employment. As of October 8, 2002, the
one-year anniversary of his employment with the Company, the
note had been fully forgiven. Mr. Van Benedens
employment terminated shortly thereafter.

During 2001 and in connection with his employment
agreement, the Company advanced a loan to and held a note
receivable from David Hayden, Executive Chairman and a Director
of the Company, in the amount of $1.5 million. The full
recourse note accrues interest at the rate of 6.75% per annum
and could be repaid by the achievement of performance-based
milestones described in Mr. Haydens employment
agreement and performance loan agreement. The loan was also
subject to forgiveness upon certain change of control events. In
February 2002, the Board approved an amendment of
Mr. Haydens employment agreement that eliminated the
original performance-based milestones in favor of a single
performance-based milestone tied to a change of control event.
In addition, the Board increased the amount available under the
loan agreement by an additional $450,000, which was funded in
March 2002. The loan amount was secured by a first priority
security interest in all of Mr. Haydens shares and
options in the Company, with all other terms of the loan and
other agreements unchanged. In July 2002, in connection with the
settlement of the terms and conditions of Mr. Haydens
termination of employment with the Company, some of the terms of
the loan were altered as described in this section below under
Termination Agreement.

In December 2001, the Board approved a fully
secured loan to William McGlashan, Jr., the Companys
Chief Executive Officer, of up to $4.0 million in
connection with the purchase of a principal residence in the
San Francisco Bay Area. In May 2002, the Compensation
Committee of the Board and Mr. McGlashan agreed to amend
the agreement in order to reduce the amount of the loan
commitment to $1.5 million. As of December 31, 2002,
no portion of the loan commitment had yet been funded.

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

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portion of the purchase price representing the
purchase price of the vested shares. As of
December 31, 2003, approximately $24,000 interest had
accrued.


In accordance with EITF Issue No. 00-23, the
early exercise of these options is not considered a substantive
exercise, for accounting purposes, until the repurchase right
lapses. Accordingly, the total exercise price of these options
was initially recognized as an asset, in Other assets, and as a
liability, in Capital lease and other obligations. These
balances have been reclassified to shareholders deficit,
in Notes receivable from shareholders, Common Stock and Paid in
Capital, as the right of repurchase lapses. One third lapsed in
May 2003, and one thirty-sixth lapses monthly thereafter. As of
December 31, 2003, $870,000 has been reclassified into
Shareholders Deficit.

Termination Agreements

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

In October 2002, Pierre Van Beneden terminated
his employment as president of the Company, but continued
through January 2003 as a consultant. In connection with a
separation agreement and release, Mr. Van Beneden agreed to
provide consulting services to the Company on a commissioned
basis and shall receive the benefits to which he was entitled
under his employment agreement. Such employment agreement
benefits, which were paid in January 2003 upon the completion of
the consulting term, included a lump sum payment of $337,500,
representing nine months base salary, accelerated vesting on a
portion of his option grants, triggering a charge of $17,000 to
stock-based expenses, and commissions of $50,000. These payments
reflect all cash obligations of the Company to Mr. Van
Beneden and accordingly no additional payments will be made in
connection with the consulting services portion of his
termination agreement. As an additional benefit under the
separation agreement, Mr. Van Beneden was granted an
extension until January 17, 2004 to exercise his option
grants. Mr. Van Beneden and the Company executed a mutual
release of all claims.

In February 2003, Laureen DeBuono terminated her
employment as executive vice president and chief financial
officer of the Company, but continued through June 2003 as a
consultant. In connection with a separation agreement and
release, Ms. DeBuono received a lump sum payment of
$208,000, representing four months base salary, and a $25,000
payment intended to cover reimburseable expenses incurred during
her tenure with the Company. Ms. DeBuono was paid $125,000
associated with the consulting work performed through June 2003.
As an additional benefit under the separation agreement,
Ms. DeBuono was granted an extension until
December 31, 2004, to exercise her option grants, resulting
in a charge of $92,000 to stock-based expenses.

In August 2003, Robert Allen Shipp terminated his
employment as president of the Company, but continued through
December 2003 as a consultant. In connection with a separation
agreement and release, Mr. Shipp was paid a lump sum
payment of $262,500, representing nine months base salary. The
consulting

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services to be performed by Mr. Shipp were
to be performed on a commissioned basis and no amounts had been
paid or remained to be earned as of December 31, 2003.


Consulting Agreements

In April 2002, the Company retained the services
of CTD, LLC (CTD), an operational planning
consulting company. The founder and president of CTD is Patrick
Tracy Currie, who subsequently became the Companys
Executive Vice President, Operations and General Manager of
Hosted Operations following the termination of the consulting
arrangement with CTD as described below. Mr. Currie and his
spouse share full ownership of CTD. Under the terms of the
Statement of Work entered into between the Company and CTD, CTD
received payments for its services based on daily rates as well
as reimbursement of costs associated with the work performed. In
connection with this consulting arrangement, the Company paid to
CTD an aggregate of approximately $320,000 in 2003.

In August 2002, the Company retained the services
of The Cohen Group, an international strategic consulting
company. The chairman and chief executive officer of The Cohen
Group is William S. Cohen, a former member of the Board of
Directors of the Company. Under the agreement, The Cohen Group
received a $150,000 retainer fee to be credited against a
sliding scale of earned sales and referral commissions on
transactions resulting in license revenue for the Company. The
agreement is for a one year renewable term, with reimbursement
for specified expenses up to a cap of 5% of the retainer and a
provision for extension in the event the retainer fee is not
earned during the term. This agreement was not renewed in 2003.

In August 2002, the Company hired R.B.
Webber & Company, strategic management consultants, to
prepare an executive level research and forecast presentation on
the enterprise messaging market. The agreement provided for a
flat fee of $85,000 over a two month period for the services of
several consultants of R.B. Webber and Company, with
reimbursement for expenses capped at 5% of the fee. Jeffrey
Webber, a member of the Board of Directors of the Company, is a
partner of R.B. Webber and Company. Mr. Webber shall also
provide consulting services under the agreement.

Note 10  Credit
Facility




In September 2002, the Company entered into a
$15.0 million one-year line of credit with Silicon Valley
Bank, to be utilized for working capital and general corporate
operations. The credit facility was amended on March 25,
2003 and again on July 18, 2003, as a result of
non-compliance with the financial covenants of the facility. The
Company regained compliance with the covenants in the credit
facility upon execution of the line of credit agreement on
July 18, 2003 and extended the maturity of the credit
facility to January 30, 2004. In December 2003, the Company
did not comply with a certain financial covenant and it
subsequently received a letter from Silicon Valley Bank on
December 17, 2003 waiving such covenant violation. The
credit facility is collateralized by all of the Companys
personal property, including intellectual property, and
borrowings under the current agreement bear a variable interest
rate of Prime plus 2.0%, which has ranged from 5.25% to 6.25%,
and is subject to certain covenants. Interest is paid each month
with principal due at maturity. Commitment fees related to the
credit facility included an initial commitment fee of 0.50%, or
$75,000, and additional commitment fees of $35,000 for each
amendment. The facility carries an additional fee based on
unused credit of 0.45% payable at the end of each quarterly
period in arrears and an early termination fee of 1.0% of the
total credit facility through maturity. During the first quarter
of 2003, the Company drew $4.9 million against the line of
credit and repaid $2.6 million during the fourth quarter of
2003. As of December 31, 2003 a $2.3 million balance
remained outstanding. Additionally, during the year the Company
reduced letters of credit held under the credit facility from
$3.0 million at December 31, 2002 to $2.7 million
at December 31, 2003. All associated interest and fees are
included as a component of interest expense.







On January 30, 2004, the Company executed an
amendment with Silicon Valley Bank, which reduced the size of
the credit line to a maximum of $5.0 million and extended
the maturity date to October 31, 2004. Subsequently, on
March 12, 2004 the Company executed an additional amendment
with Silicon Valley Bank, which increased the size of the credit
line to a maximum of $6.0 million and extended the maturity
date to June 30, 2005. Additionally, the line of credit
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Bank of $3.0 million. The Company does not
classify this as restricted cash as it is legally unrestricted.
The credit facility continues to be collateralized by all of the
Companys personal property, including intellectual
property, and borrowings under the current agreement bear a
variable interest rate of between Prime plus 1.5% and Prime plus
3.0%, which has historically ranged from 5.25% to 6.25%, and is
subject to certain covenants. Interest is paid each month with
principal due at maturity. Initial commitment fees of $20,000
and $100,000 were charged related to the January and March
amendments, respectively. Additionally, the facility carries an
expedite fee of $50,000, an unused facility fee of either 0.45%
or 2.00%, based upon the level of cash balances held at the
bank, payable at the end of each quarterly period in arrears,
and an early termination fee of $50,000 if the facility is
canceled prior to August 1, 2004. In connection with the
March 2004 amendment to the credit facility, the Company agreed
to issue warrants to purchase up to 100,000 shares of its
Common Stock to Silicon Valley Bank. These warrants were fully
exercisable upon grant, had an exercise price of $2.07 per
share and have an expiration date of March 12, 2011.





Note 11  Convertible
Notes

5 3/4% Convertible Subordinated
Notes

During 2000, the Company issued
$300.0 million of five-year, 5 3/4% Convertible
Subordinated Notes (5 3/4% Notes) due
April 2005, to qualified institutional buyers in reliance on
Rule 144A under the Securities Act of 1933. Holders may
convert the 5 3/4% Notes into shares of Common Stock
at any time before their maturity or the business day before
their redemption or repurchase by the Company. The conversion
rate is 9.8546 shares per $1,000 principal amount of
5 3/4% Notes subject to adjustment in certain
circumstances. This rate is equivalent to a conversion price of
approximately $101.48 per share. On or after the third
business day after April 1, 2003, through March 31,
2004, the Company has the option to redeem all or a portion of
the 5 3/4% Notes that have not been previously
converted at the redemption price equal to 102.30% of the
principal amount. During the period from April 1, 2004
through March 31, 2005, the Company has the option to
redeem all or a portion of the 5 3/4% Notes that have
been previously converted at the redemption price equal to
101.15% of the principal amount. Thereafter the redemption price
is equal to 100% of the principal amount. The
5 3/4% Notes are non-callable for three years. In the
event of a Change in Control, as defined in
5 3/4% Notes Offering Circular, the
5 3/4% Notes holders have the option of requiring the
Company to repurchase any 5 3/4% Notes held at a price
of 100% of the principal amount of the 5 3/4% Notes
plus accrued interest to the date of repurchase.

The Company incurred approximately
$10.8 million in debt issuance costs, consisting primarily
of underwriting discount and legal and other professional fees.
These costs have been capitalized and will be recognized as a
component of interest expense on a straight-line basis, which
approximates the effective interest method, over the five-year
term of the 5 3/4% Notes. During 2001, 2002 and 2003,
the Company recorded interest expense related to the
amortization of the debt issuance costs of $1.5 million,
$275,000 and $275,000, respectively.

Interest is payable on April 1 and
October 1 of each year. As of December 31, 2001, 2002
and 2003, there was approximately $600,000, $556,000 and
$556,000 in interest payable, respectively. During 2001, 2002
and 2003, the Company recorded interest expense related to the
5 3/4% Notes of $12.1 million, $2.2 million
and $2.2 million, respectively. The 5 3/4% Notes
are subordinated in right of payment to all senior debt of the
Company and effectively subordinated to all existing and future
debt and other liabilities of the Companys subsidiaries.

During 2001, the Company retired
$261.4 million of face value of the 5 3/4% Notes,
which resulted in an extraordinary gain on retirement of
$179.3 million, inclusive of $6.8 million in
write-downs of related debt issuance costs. The Company used
cash of $53.1 million and equity in order to retire the
5 3/4% Notes, inclusive of approximately
$4.4 million in accrued interest. See also
Note 15  Financing Transactions and Preferred
Stock. As of December 31, 2001, 2002 and 2003 the total
balance outstanding was $38.4 million. These
5 3/4% Notes are carried at cost and had an
approximate fair value at December 31, 2003 of
$35.8 million.

In November 2003, the Company executed an
agreement to exchange approximately $32.8 million in face
value of its 5 3/4% Notes, which were held by a group
of investors led by Cheung Kong Investors, for

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approximately 21.9 million shares of
Series E Preferred Stock. Upon shareholder approval,
approximately $32.8 million face value of
5 3/4% Convertible Subordinated Notes held by the
Cheung Kong Investors will be exchanged for approximately
21.9 million shares of Series E Preferred Stock. As a
result, a charge equal to the fair value of the Series E
Preferred Stock less the carrying value of the related Notes,
net of unamortized issuance costs, will be recorded to arrive at
net loss and net loss attributable to common shareholders as of
the date of the exchange.


In March 2004, the Company executed an amendment
with the Cheung Kong Investors, which would extend the maturity
of the $32.8 million in face value of
5 3/4% Notes held by the Cheung Kong Investors from
April 1, 2005 to April 1, 2006. The extension will
only take place in the event the Companys shareholders do
not approve the exchange of the 5 3/4% Notes held by
the Cheung Kong Investors for approximately 21.9 million
shares of the Companys Series E Preferred Stock. In
addition, in the event the maturity date is extended to
April 1, 2006, the interest rate on the
5 3/4% Notes held by the Cheung Kong Investors will
increase to 7 1/2% for the period beginning April 1,
2005 and ending April 1, 2006, and the Company will be
required to pay fees totaling $1.5 million.

10% Senior Secured Convertible
Notes

In November 2003, the Company issued
$10 million in 10% Senior Secured Convertible Notes to
the General Atlantic Investors. These notes have the following
carrying value at December 31, 2003:

|                                                      |                                                            |              |       |        | 
|----------------------------------------------------- | ---------------------------------------------------------- | ------------ | ----- | ------ | 
|                                                      |                                                            | December 31,
|                                                      |                                                            | 2003        
|                                                      |                                                            |             
|10% Senior Secured Convertible Notes                  |                                                            | $            | 9,250 |       
|Amount allocated to derivative instrument             |                                                            |              | 750   |       
|Accretion on 10% Senior Secured Convertible
    Notes |                                                            |              | 16    |       
|                                                      |                                                            |              |       |       
|                                                      | Carrying value of 10% Senior Secured
    Convertible Notes |              | $     | 10,016 | 
|                                                      |                                                            |              |       |       

At issuance, the senior secured convertible note
issued to General Atlantic Investors was deemed to have an
embedded derivative, related to the acceleration of any unearned
interest upon conversion prior to the first anniversary of its
issue date. The fair value of this derivative, which was fixed
at $750,000 at issuance, was recorded as a reduction in the
carrying amount of the convertible secured note and will be
accreted over the initial year of the four year term. As a
result, the Company recorded accretion of approximately $16,000
to interest expense during 2003.

Upon shareholder approval, the $10 million
in principal amount of senior secured convertible notes held by
the General Atlantic Partners, plus interest, will convert into
7.3 million shares of Series E convertible preferred
stock at $1.50 per share. As a result, interest expense of
approximately $5.7 million will be recognized as of the
date of conversion resulting from the beneficial conversion
feature included in the Series E convertible preferred
stock. Interest expense of $100,000 was recognized on the debt
during 2003 and remained payable as of December 31, 2003.
These notes, which are carried at their accreted cost of
$10.0 million, had an approximate fair market value of
$10.0 million as of December 31, 2003.

In January 2004, the Company issued
$15 million in principal amount of 10% Senior Secured
Convertible Notes to Permal U.S. Opportunities Limited,
Zaxis Equity Neutral, L.P., Zaxis Institutional
Partners, L.P., Zaxis Offshore Limited, Zaxis
Partners, L.P. and Passport Master Fund, L.P. These notes
are convertible into approximately 10 million shares of
Series E Preferred Stock at $1.50 per share only if
the Company receives shareholder approval. As a result, interest
expense of approximately $1.5 million will be recognized as
of the date of conversion resulting from the beneficial
conversion feature included in the Series E Preferred
Stock. If the Company does not obtain shareholder approval,
these notes will be convertible, at the option of each note
holder, into shares of the Companys Common Stock at
$1.65 per share, provided the note holder will not be able
to convert its notes into shares of Common Stock to the extent
the note holder, together with its affiliates, would own 9.9% or
more of the Companys Common Stock after conversion. If
these notes do not convert into Series E Preferred Stock or
Common Stock, they become due and payable on the fourth
anniversary of their issuance.

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In March 2004, the Company issued
$18.5 million in principal amount of 10% Senior
Secured Convertible Notes to investment entities affiliated with
Crosslink Capital, Criterion Capital Management, Heights Capital
Management and Apex Capital. These notes are convertible into
approximately 12.3 million shares of Series E
Preferred Stock at $1.50 per share only if the Company
receives shareholder approval. If the Company does not obtain
shareholder approval, these notes will be convertible, at the
option of each note holder, into shares of the Companys
Common Stock at $2.18 per share, provided the note holder
will not be able to convert its notes into shares of Common
Stock to the extent the note holder, together with its
affiliates, would own 9.9% or more of the Companys Common
Stock after conversion. As a result, interest expense of
approximately $8.4 million will be recognized as of the
date of conversion resulting from the beneficial conversion
feature included in the Series E Preferred Stock. If these
notes do not convert into Series E Preferred Stock or
Common Stock, they become due and payable on the fourth
anniversary of their issuance.

The 10% Senior Secured Convertible Notes
become due and payable on the consummation of a qualified asset
sale, a change of control or any financing or series of
financings that in the aggregate raises at least
$40 million. Additionally, the notes become due and payable
when declared due and payable by a holder upon the occurrence of
an event of default, which include, subject to some exceptions:
(1) the Companys failure to pay any amounts due under
notes when they are due and payable, (2) the Companys
default on any indebtedness with a principal amount of at least
$500,000, (3) the Companys voluntary or involuntary
bankruptcy, (4) any judgment for the payment of money of
more than $500,000, (5) the attachment by its lenders of
any of its assets, or (6) the occurrence of any event
having a material adverse effect on the Companys business,
operations, assets, properties or condition.

The 10% senior secured convertible notes
also contain a financial covenant that requires the Company to
maintain a minimum monthly average operating cash flow, over any
given fiscal quarter, for its operations in the Americas of
negative $3.0 million. Additionally, the Company may not
incur, create or assume indebtedness or liens under the notes,
with specified exceptions. Also, with some exceptions, under the
notes it may not: (1) merge with another entity,
(2) make any restricted payments, including dividends,
distributions and the redemption any of its options or capital
stock, (3) enter into any transactions with any affiliates,
(4) make investments, (5) change the nature of the
Companys business, (6) permit the Companys
domestic subsidiaries to hold real or personal property in
excess of specified amounts or (7) create any new
subsidiaries.

If the Company breaches any representation or
warranty or fail to abide by any of its covenants, including the
foregoing covenants, then the 10% Senior Secured
Convertible Notes may become immediately due and payable. If
these notes do not convert into Series E Preferred Stock or
Common Stock, the principal and related interest will become due
and payable on the fourth anniversary of their issuance.

Note 12  Income
Taxes

The Company did not provide any deferred federal
or state income tax benefit for any of the periods presented
because it has experienced operating losses since inception. The
Company has provided a full valuation allowance on its net
deferred tax assets, consisting primarily of net operating loss
carryforwards, because of uncertainty regarding its
realizability.

At December 31, 2003, the Company had
approximately $337 million of federal and $165 million
of state net operating loss carryforwards available to offset
future taxable income. Federal and state net operating loss
carryforwards expire in varying amounts through 2021 for federal
and 2008 for state purposes. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of
net operating losses that the Company may utilize in any one
year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
These carryforwards will begin to expire at various times
starting in 2013 and 2006 for federal and state tax purposes,
respectively.

Since inception, the Company has incurred several
ownership changes which have limited the Companys ability
to utilize loss carryforwards as defined in IRC
Section 382. Based on the most current change, the losses
are subject to a limitation of $324 million per year. The
Company believes the limitation should not have a material
effect on the future utilization of the losses.

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At December 31, 2003, the Company also had
research and development credit carryforwards of approximately
$15.9 million for federal and state purposes. The research
and development credit carryforwards expire through 2021 for
federal purposes, and do not expire for state purposes.

Loss before provision for income taxes consists
of the following (in thousands):

|         |       |      |         |         |   |      |          |          |   |   |         |         |  
|-------- | ----- | ---- | ------- | ------- | - | ---- | -------- | -------- | - | - | ------- | ------- | -
|         |       | 2001 |         | 2002    |   | 2003
|         |       |      |         |         |   |     
|Domestic |       | $    | (67,000 | )       |   | $    | (114,578 | )        |   | $ | (51,613 | )      
|Foreign  |       |      | (5,258  | )       |   |      | (2,354   | )        |   |   | (9,664  | )      
|         |       |      |         |         |   |      |          |          |   |   |         |        
|         | Total |      | $       | (72,258 | ) |      | $        | (116,932 | ) |   | $       | (61,277 | )
|         |       |      |         |         |   |      |          |          |   |   |         |        

The components of the provision for income taxes
are as follows (in thousands):

|         |  |              |       |      |  |      |       |   |  |   |     | 
|-------- |  | ------------ | ----- | ---- |  | ---- | ----- | - |  | - | --- | 
|         |  |             
|         |  | December 31,
|         |  |             
|         |  | 2001         |       | 2002 |  | 2003
|         |  |              |       |      |  |     
|Current: |  |              |       |      |  |      |       |   |  |   |     | 
|Federal  |  | $            | 1,600 |      |  | $    | (800  | ) |  | $ | 50  | 
|Foreign  |  |              | 5,606 |      |  |      | 1,779 |   |  |   | 806 | 
|         |  |              |       |      |  |      |       |   |  |   |     | 
|         |  | $            | 7,206 |      |  | $    | 979   |   |  | $ | 856 | 
|         |  |              |       |      |  |      |       |   |  |   |     | 

Deferred tax assets (liabilities) consist of
the following (in thousands):

|                          |                                  |              |          |         |   |   |          |         | 
|------------------------- | -------------------------------- | ------------ | -------- | ------- | - | - | -------- | ------- | 
|                          |                                  |             
|                          |                                  | December 31,
|                          |                                  |             
|                          |                                  | 2002         |          | 2003   
|                          |                                  |              |          |        
|Deferred tax assets       |                                  |              |          |         |   |   |          |        
|                          | Net operating loss carryforwards |              | $        | 111,288 |   |   | $        | 128,912 | 
|                          | Tax credits                      |              |          | 15,918  |   |   |          | 15,841  | 
|                          | Fixed assets                     |              |          | 7,043   |   |   |          | 4,568   | 
|                          | Intangible assets                |              |          |        |   |   |          | 4,283   | 
|                          | Accrued liabilities              |              |          | 1,762   |   |   |          | 1,486   | 
|                          |                                  |              |          |         |   |   |          |        
|Total deferred tax assets |                                  | $            | 136,011  |         |   | $ | 155,090  |        
|Deferred tax liability    |                                  |              |          |         |   |   |          |        
|                          | Intangible assets                |              | $        | (3,492  | ) |   | $        |        | 
|                          |                                  |              |          |         |   |   |          |        
|                          |                                  | $            | (3,492   | )       |   | $ |         |        
|                          |                                  |              |          |         |   |   |          |        
|Gross deferred tax assets |                                  | $            | 132,518  |         |   | $ | 155,090  |        
|                          |                                  |              |          |         |   |   |          |        
|Valuation allowance       |                                  | $            | (132,518 | )       |   | $ | (155,090 | )      
|                          |                                  |              |          |         |   |   |          |        
|Net deferred tax assets   |                                  | $            |         |         |   | $ |         |        
|                          |                                  |              |          |         |   |   |          |        

The net increases in the valuation allowance for
2001, 2002 and 2003 were $9.5 million, $28.7 million
and $22.6 million, respectively.

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Reconciliation of the statutory federal income
tax rate to the Companys effective tax rate:

|                                 |  |              |     |      |  |      |     |    |  |  |     |   
|-------------------------------- |  | ------------ | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2001         |     | 2002 |  | 2003
|                                 |  |              |     |      |  |     
|Tax at federal statutory rate    |  |              | (34 | )%   |  |      | (34 | )% |  |  | (34 | )%
|State, net of federal benefit    |  |              | (2  | )%   |  |      | (3  | )% |  |  | (5  | )%
|Stock-based expenses             |  |              | 17  | %    |  |      | 0   | %  |  |  | 0   | % 
|Research and development credits |  |              | (2  | )%   |  |      | (1  | )% |  |  | (1  | )%
|Change in valuation allowance    |  |              | 16  | %    |  |      | 26  | %  |  |  | 33  | % 
|Foreign taxes                    |  |              | 5   | %    |  |      | 5   | %  |  |  | 7   | % 
|Warrant amortization             |  |              | 9   | %    |  |      | 5   | %  |  |  | 0   | % 
|Other                            |  |              | 1   | %    |  |      | 4   | %  |  |  | 1   | % 
|                                 |  |              |     |      |  |      |     |    |  |  |     |   
|Provision for income taxes       |  |              | 9   | %    |  |      | 1   | %  |  |  | 1   | % 
|                                 |  |              |     |      |  |      |     |    |  |  |     |   

Note 13  Commitments and
Contingencies

Leases

The Company leases office space and equipment
under noncancelable operating and capital leases with various
expiration dates through 2014. Rent expense during 2001, 2002
and 2003, totaled $5.4 million, $4.8 million and
$5.3 million, respectively. Future minimum lease payments
under noncancelable operating and capital leases are as follows:

|                                   |                                                |                |       |           |   |   |        |       | 
|---------------------------------- | ---------------------------------------------- | -------------- | ----- | --------- | - | - | ------ | ----- | 
|                                   |                                                | Capital        |       | Operating
|                                   |                                                | Leases         |       | Leases   
|                                   |                                                |                |       |          
|                                   |                                                |               
|                                   |                                                | (In thousands)
|Year Ending December 31            |                                                |                |       |           |   |   |        |      
|                                   | 2004                                           |                | $     | 1,055     |   |   | $      | 4,805 | 
|                                   | 2005                                           |                |       | 660       |   |   |        | 4,214 | 
|                                   | 2006                                           |                |       | 432       |   |   |        | 4,076 | 
|                                   | 2007                                           |                |       |          |   |   |        | 1,366 | 
|                                   | 2008 and beyond                                |                |       |          |   |   |        | 5,134 | 
|                                   |                                                |                |       |           |   |   |        |      
|Total minimum lease payments       |                                                | $              | 2,147 |           |   | $ | 19,595 |      
|                                   |                                                |                |       |           |   |   |        |      
|Less: Amount representing interest |                                                |                | (59   | )         |   |   |        |      
|                                   |                                                |                |       |           |   |   |        |      
|                                   | Present value of capital lease obligations     |                | $     | 2,088     |   |   |        |       | 
|                                   | Less: Current portion                          |                |       | (1,015    | ) |   |        |       | 
|                                   |                                                |                |       |           |   |   |        |      
|                                   | Long-term portion of capital lease obligations |                | $     | 1,073     |   |   |        |       | 
|                                   |                                                |                |       |           |   |   |        |      

Equipment Lease Lines

In 1998, the Company entered into three separate
financing agreements that provided for the acquisition of up to
$6.5 million in equipment and $1.5 million in software
and tenant improvements. The first of these agreements provided
for acquisitions of up to $2.0 million in equipment through
April 30, 1999; the second agreement for acquisitions of up
to $3.5 million in equipment and $1.5 million in
software and tenant improvements through May 1, 1999; and
the third agreement for acquisitions of up to $1.0 million
in equipment through March 31, 2001. Amounts financed under
these agreements were payable over three-year periods, in
monthly installments of principal and interest, with interest
accruing at rates between 6.30% and 7.00% per annum.
Approximately $1.0 million was collateralized by the
related equipment acquired. In connection with two of the
agreements, the Company issued warrants to purchase a total of
339,522 shares of Series A Preferred Stock at a
purchase price of $0.72 per share. The Company estimated
fair value of these warrants at date of issuance of $186,000 was
amortized to interest expense over the term of the related lease

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obligation. The obligation payable by the Company
under these financing agreements of $2.4 million at
December 31, 2001 was paid in full in January 2002 and the
remaining unamortized balance was expensed.


In connection with the Companys acquisition
of Critical Path Pacific in June 2002, the Company assumed a
capital lease with a termination date of August 2006. The
capital lease obligation totaled $1.9 million and
$1.6 million at December 31, 2002 and 2003,
respectively.

Other Contractual Obligations

The Company entered into other contractual
obligations which total $10.3 million at December 31,
2003. 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 4 years, including $7.7 million in 2004.

Service Level Agreements

Net revenues are derived from contractual
relationships that typically have one to three year terms.
Certain agreements require minimum performance standards
regarding the availability and response time of email 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.On December 24,
2003, the Company was named in a lawsuit filed by former
shareholders of Remedy Corporation against current and former
officers and directors of Peregrine Systems, Inc.,
Peregrines former accountants, some of Peregrines
customers, including the Company, and various other unnamed
defendants. The complaint alleges that the Company, as
Peregrines customer, engaged in a series of fraudulent
transactions with Peregrine that were not accounted for by
Peregrine in conformity with GAAP and that this substantially
inflated the value of Peregrine securities issued as
consideration in Remedys merger with Peregrine in August
2001. The complaint alleges causes of action for fraud and
deceit, negligent misrepresentation, violations of California
Corporations Code provisions regarding sales of securities by
means of false statements or omissions, violations of California
Corporations Code provisions regarding securities sales made on
the basis of undisclosed, material inside information, common
law conspiracy to commit fraud, and common law aiding and
abetting the commission of fraud. The complaint seeks an
unspecified amount of compensatory and punitive damages, along
with rescission of the Peregrine securities purchased in the
Remedy merger, interest and attorneys fees. The Company believes
the claims are without merit and intends to defend itself
vigorously. On February 23, 2004, the Company filed a
demurrer and a motion to strike the complaint, both of which are
currently scheduled to be heard on April 9, 2004. Because
the litigation is at an early stage, the outcome cannot be
predicted with any certainty.

Securities Action in Northern District of
California.On April 30, 2002,
MBCP PeerLogic LLC and other named plaintiffs filed suit in the
U.S. District Court for the Southern District of
New York against the Company and certain of the
Companys former officers. The plaintiff shareholders had
opted out of a shareholder litigation settlement that was
approved by the U.S. District Court for the Northern
District of California. On November 25, 2003, the Company
entered into settlement of these claims, approved by the United
States District Court for the Northern District of California,
pursuant to which the Company agreed to issue
553,914 shares of Common Stock and 188,587 shares of
Series D Preferred Stock in exchange for a release of
plaintiffs claims, and recorded a charge of
$5.1 million related to the value of these issuances as
stock-based expense  general and administrative in the
fourth quarter of 2003. The Company also agreed to

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exchange 69,149 shares of Series D
Preferred Stock for 733,333 shares of Series E
Preferred Stock if the Company obtains shareholder approval of
the matters being submitted to a vote of the Companys
shareholders at a special meeting. The plaintiffs claims
against the Company were voluntarily dismissed with prejudice,
and without costs or attorneys fees to any party. The
Companys counterclaims against plaintiffs were also
dismissed with prejudice, and without costs or attorneys
fees to any party.


Derivative Actions in Northern District of
California.Beginning on
February 5, 2001, Critical Path was named as a nominal
defendant in a number of derivative actions, purportedly brought
on the Companys behalf, filed in the Superior Court of the
State of California and in the U.S. District Court for the
Northern District of California. The derivative complaints
alleged that certain of the Companys former officers and
directors breached their fiduciary duties, engaged in abuses of
control, were unjustly enriched by sales of the Companys
Common Stock, engaged in insider trading in violation of
California law or published false financial information in
violation of California law. This case was fully and finally
settled in December 2003 and approved by the Court. The
settlement involved a monetary recovery by the Company of
$330,000.

Securities Class Action in Southern
District of New York.Beginning
on July 18, 2001, a number of securities class action
complaints were filed against the Company, and certain of the
Companys former officers and directors and underwriters
connected with the Companys initial public offering of
Common Stock in the U.S. District Court for the Southern
District of New York (In re Initial Public Offering Sec.
Litig.). The purported class action complaints were filed by
individuals who allege that they purchased 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 stock during the specified period. Similar
complaints have been filed against 55 underwriters and more
than 300 other companies and other individuals. The over
1,000 complaints have been consolidated into a single
action. The Company has reached an agreement in principle with
the plaintiffs to resolve the cases. The proposed settlement
involves no monetary payment by the Company and no admission of
liability. However, it is subject to approval by the Court,
which has not yet occurred.

Securities and Exchange Commission
Investigation.In 2001, the Securities
and Exchange Commission (the SEC) investigated the
Company and certain of the Companys former officers,
employees and directors with respect to non-specified accounting
matters, financial reports, other public disclosures and trading
activity in the Companys securities. The SEC concluded its
investigation of the Company in January 2002 and, without
admitting or denying liability, the Company consented to a cease
and desist order and an administrative order as to violation of
certain non-fraud provisions of the federal securities laws. The
investigation has also thus far resulted in charges being filed
against five former officers and employees. The Company believes
that the investigation of the Companys former officers and
employees may continue. While the Company continues to fully
cooperate with any requests with respect to such investigation,
the Company does not know the status of such investigation.

Lease Dispute.In
July 2000, PeerLogic, Inc. signed a lease for office space
in San Francisco, California. In December 2000, Critical
Path acquired PeerLogic as a wholly owned subsidiary. After
review, the Company determined that local zoning laws likely
prohibited a business such as the Company or PeerLogic from
occupying the leased premises, and promptly sought a zoning
determination from the San Francisco Zoning Administrator
to resolve the matter. The Zoning Administrator determined that
the Companys proposed use of the leased premises was not
permitted, but the landlord appealed this determination and
prevailed before the San Francisco Board of Appeals. In
July 2002, the Company filed a Petition for Writ of Mandamus
with the San Francisco Superior Court, seeking reversal of
the San Francisco Board of Appeals decision. In June
2003, the Court granted the Companys petition and
subsequently entered a judgment and writ remanding the matter to
the San Francisco Board of Appeals and directing the Board
of Appeals to make a new determination consistent with its
judgment. The landlord subsequently appealed the Superior
Courts ruling.

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In April 2002, the landlord filed suit in
San Francisco Superior Court against the Company alleging,
among other things, breach of the lease and tort claims related
to the lease transaction. In its complaint, the landlord sought
unspecified damages for back rent, attorneys fees, treble
damages under certain statutes, and unspecified punitive
damages. In August 2003, the Company filed the Companys
answer to the second amended complaint and a cross-complaint
against the landlord, under which the Company seek compensatory
damages and unspecified punitive damages for the landlords
failure to disclose the zoning restrictions on the leased
premises before the lease was signed. In early February 2004,
the Company reached an agreement in principle with the landlord
to fully and finally settle this litigation as well as the
zoning dispute described above in exchange for $100,000 in cash
and a warrant to purchase 100,000 shares of the
Companys Common Stock at a purchase price equal to current
fair market value as of the date of settlement. However, a final
written settlement agreement has not yet been executed. At
December 31, 2003, the Company had accrued sufficient
amounts to cover the cost of the proposed settlement.

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

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

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

Note 14  Minority Interest in
Subsidiary

In connection with the Companys acquisition
of Isocor Corporation in January 2000, it acquired a 72.87%
interest in CP Italia. In March 2001, the Company acquired the
remaining outstanding 27.13% interest in CP Italia for
approximately $4.2 million. Until March 2001, when CP
Italia became a wholly-owned subsidiary of the Company, the
Company consolidated the operating results of CP Italia and
recorded minority interest in net income, which was
insignificant in 2001.

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Note 15  Financing
Transactions and Preferred Stock

The carrying value of the Series D Preferred
Stock at December 31 was determined as follows:

|                                                                                                     |                               |                |        |         |   |   |        |         |  
|---------------------------------------------------------------------------------------------------- | ----------------------------- | -------------- | ------ | ------- | - | - | ------ | ------- | -
|                                                                                                     |                               | 2002           |        | 2003   
|                                                                                                     |                               |                |        |        
|                                                                                                     |                               |               
|                                                                                                     |                               | (In thousands)
|Series D Preferred Stock  2001
    Transaction                                                      |                               | $              | 55,000 |         |   | $ | 55,000 |        
|Series D Preferred Stock  MBCP
    Peerlogic                                                        |                               |                |       |         |   |   | 3,755  |        
|Less: Issuance costs                                                                                 |                               |                | (3,075 | )       |   |   | (3,075 | )      
|                                                                                                     |                               |                |        |         |   |   |        |        
|Series D Preferred Stock, net of issuance
    costs                                                  |                               |                | 51,925 |         |   |   | 55,680 |        
|Less amounts allocated to:                                                                           |                               |                |        |         |   |   |        |        
|                                                                                                     | Common stock warrants         |                |        | (5,250  | ) |   |        | (5,250  | )
|                                                                                                     | Beneficial conversion feature |                |        | (41,475 | ) |   |        | (41,475 | )
|Add liquidation preference                                                                           |                               |                | 7,440  |         |   |   | 19,640 |        
|Add amortization and accretion                                                                       |                               |                | 14,260 |         |   |   | 26,706 |        
|                                                                                                     |                               |                |        |         |   |   |        |        
|Carrying value of Series D Preferred Stock
    and embedded change-in-control feature at December 31 |                               | $              | 26,900 |         |   | $ | 55,301 |        
|                                                                                                     |                               |                |        |         |   |   |        |        

The accretion on redeemable convertible preferred
stock totaled $356,000, $13.9 million and
$12.4 million during 2001, 2002 and 2003, respectively.
During 2001, the accretion was comprised of $121,000 in accrued
dividends and accretion of $235,000. During 2002, the accretion
on redeemable convertible preferred shares was comprised of
$4.4 million in accrued dividends and accretion of
$9.5 million. During 2003, the accretion on redeemable
convertible preferred shares was comprised of $4.9 million
in accrued dividends and accretion of $7.5 million.

Series D 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 million shares of its
Series D Cumulative Redeemable Convertible Participating
Preferred Stock (Series D Preferred Stock), in
a private offering, resulting in gross cash proceeds of
approximately $30 million, and the simultaneous retirement
of approximately $65 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
625,000 shares of the Companys Common Stock in
connection with this offering.

The Series D Preferred Stock issued in the
financing transaction ranks senior to all of the Companys
Preferred and 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
5 3/4% Notes retired in connection with the offering.
The principal terms of the preferred stock include 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  that 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 Company received net cash proceeds associated
with the issuance of the Series D Preferred Stock of
approximately $27 million, which was net of a
$2.75 million transaction fee paid to Vectis Group LLC and
approximately $200,000 in related legal and accounting fees. At
issuance, the total amount of these costs was 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 million.
The value of the beneficial conversion feature, at issuance, was
initially recorded

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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.


The purchase agreement provides for a
preferential return of equity to the Series D Preferred
Stockholders, before any return of equity to the common
shareholders, and also provides 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 10% Senior Secured Convertible
Notes, the Company agreed to seek 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.

At December 31, 2001, 2002 and 2003, the
estimated fair value of the liquidation preference was
$5.2 million, $12.6 million and $24.8 million,
respectively, and was allocated to that feature and recorded as
a separate component of the Series D Preferred Stock. In
accordance with the provisions of SFAS No. 133,
Accounting for Derivative Instruments, the Company is required
to adjust the carrying value of the preference to its fair value
at each balance sheet date and recognize any change since the
prior balance sheet date as a component of operating income. Net
charges to other expense during 2002 and 2003 of
$7.4 million and $12.2 million, respectively, were
recognized as a result of the increase in value of the
liquidation preference.

The warrants are exercisable at any time after
November 8, 2002 until November 8, 2006 at an exercise
price of $4.20, and convert into one share of the Companys
Common Stock. A portion of the proceeds received for the
Series D Preferred Stock was allocated to the warrants and
the preferred stock, based upon their relative fair market
values. As a result of this allocation, approximately
$5.25 million of the proceeds were allocated to the
warrants, 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
10% Senior Secured Convertible Notes, the Company agreed to
seek shareholder approval to amend the warrants to reduce the
exercise price per share from $4.20 to $1.50.

Accretion on redeemable convertible preferred
shares and valuation of liquidation preference

In connection with the financing transaction
completed during December 2001, the Company received gross cash
proceeds of approximately $30 million and retired
approximately $65 million in face value of the
Companys outstanding convertible subordinated notes in
exchange for shares of the Companys Series D
Preferred Stock.

During 2001, 2002 and 2003, the accretion on
preferred stock totaled $356,000, $13.9 million and
$12.4 million, respectively. The accretion during 2001 was
comprised of $121,000 in accrued dividends and accretion of
$235,000. During 2002 the accretion on preferred stock was
comprised of $4.4 million in accrued dividends and
accretion of $9.5 million. During 2003 the accretion on
preferred stock was comprised of $4.9 million in accrued
dividends and accretion of $7.5 million.

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.
See also Note 13  Commitments and Contingencies.
These shares have all of the same rights and preferences as the

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Series D Preferred Stock issued to the 2001
Investors. Additionally, 69,149 of these shares are
automatically convertible into Series E preferred stock to
the extent such preferred stock is issued in the future (refer
to 2003 Transaction below). Upon conversion of the Series D
preferred stock issued to MBCP PeerLogic, LLC and its affiliates
into Series E preferred stock, a charge will be recorded
equal to the fair value of the Series E preferred stock
less the carrying value of the Series D preferred stock
will be recorded, as of the date of the exchange, to arrive at
net loss attributable to common shareholders.


2003 Financing Transaction

On November 18, 2003, the Company issued
$10 million in principal amount 10% Senior Secured
Convertible Notes to the General Atlantic Investors. These
notes, plus $1 million in accrued interest, will convert,
subject to shareholder approval, into approximately
7.3 million shares of its Series E Preferred Stock.

In the same transaction, the Company agreed to
exchange approximately $32.8 million in face value of its
5 3/4% Notes held by the Cheung Kong Investors for
approximately 21.9 million shares of its Series E
convertible Preferred Stock. The Series E Preferred Stock
will be issued to these investors only if Critical Path receives
shareholder approval.

In November 2003, the Company announced its
intention to make a rights offering to public shareholders of
record to purchase up to approximately $21 million of newly
issued Series E Preferred Stock at a purchase price of
$1.50 per share. Existing holders of its Common Stock, as
of the date of record, will have the right to purchase
approximately two shares of the new Series E Preferred
Stock for every three shares of Common Stock they own as of the
record date. The Company intends to initiate this offering
during the second quarter of 2004. Upon shareholder approval,
the issuance of Series E Preferred Stock pursuant to the
proposed rights offering will result in a beneficial conversion
feature if the fair value of the Common Stock into which the
Series E Preferred Stock is convertible upon issuance is
greater than $1.50 per share. The amount of the beneficial
conversion feature is recorded in additional paid-in capital and
reduces the carrying value of the Series E Preferred Stock.
The Series E Preferred Stock carrying value will be
increased for the beneficial conversion feature amount through a
charge to arrive at net loss attributable to common shareholders
over a four year period from the date of issuance using the
effective interest method.

The Series E Preferred Stock will rank
senior in preference to all existing equity shares of the
Company. These preferred shares will accrue dividends at an
annual rate of 5 3/4% of the purchase price of
$1.50 per share. See Note 11  Convertible
Notes.

In addition, the Company announced that upon
shareholder approval, it will amend the terms of the
Series D Preferred Stock, discussed in Series D
Preferred Stock above. As a result of these amendments the
Company will record a charge, as of the date of the amendment,
equal to the incremental fair value of the amended Series D
Preferred Stock resulting from the modifications to the terms of
the Series D Preferred Stock to arrive at net loss
attributable to common shareholders with the offset to the
Series D Preferred Stock carrying value.

2004 Financing Transactions

In January 2004, the Company signed definitive
agreements for the sale of an additional $15 million in
10% Senior Secured Convertible Notes to a group of
investors, including Apex Capital, LLC and Passport Capital,
LLC. Investment entities affiliated with Apex Capital, LLC have
invested $11.25 million and an entity affiliated with
Passport Capital, LLC has invested $3.75 million. These
notes will, subject to shareholder approval, immediately convert
into approximately 10 million shares of newly issued
Series E preferred shares. See Note 11 
Convertible Notes.

In March 2004, the Company issued an additional
$18.5 million in principal amount of 10% senior
secured convertible notes to investment entities affiliated with
Crosslink Capital, Criterion Capital Management, Heights Capital
Management and Apex Capital. These notes will, subject to
shareholder approval, immediately convert into approximately
12.3 million shares of newly issued Series E
convertible preferred stock. See Note 11 
Convertible Notes.

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Note 16  Shareholders
Equity (Deficit)

Changes in shares of Common Stock outstanding
were:

|                                                   |                                        |                                 |        |      |        |      |        |     |        |  |        |     |        | 
|-------------------------------------------------- | -------------------------------------- | ------------------------------- | ------ | ---- | ------ | ---- | ------ | --- | ------ |  | ------ | --- | ------ | 
|                                                   |                                        |                                
|                                                   |                                        | Year Ended December 31,        
|                                                   |                                        |                                
|                                                   |                                        | 2001                            |        | 2002 |        | 2003
|                                                   |                                        |                                 |        |      |        |     
|                                                   |                                        |                                
|                                                   |                                        | (In thousands)                 
|Common Stock Shares outstanding, beginning of year |                                        |                                 | 18,534 |      |        |      | 19,145 |     |        |  | 20,032 |    
|                                                   | Issuance of Common Stock               |                                 |        | 128  |        |      |        | 296 |        |  |        | 666 |       
|                                                   | Exercise of stock options and warrants |                                 |        | 492  |        |      |        | 591 |        |  |        | 380 |       
|                                                   | Purchase of Common Stock               |                                 |        | (9   | )      |      |        |    |        |  |        |    |       
|                                                   |                                        |                                 |        |      |        |      |        |     |        |  |        |    
|                                                   |                                        | Shares outstanding, end of year |        |      | 19,145 |      |        |     | 20,032 |  |        |     | 21,078 | 
|                                                   |                                        |                                 |        |      |        |      |        |     |        |  |        |    

Incorporation and Authorized Capital

The Companys Articles of Incorporation, as
amended, authorize the Company to issue 125 million shares
of Common Stock at $0.001 par value, and 5 million
shares of Preferred Stock, at $0.001 par value. The holders
of Preferred Stock have various voting and dividend rights as
well as preferences in the event of liquidation.

Stock Purchase Rights

In February 1998, the Company entered into stock
purchase agreements with three founders and sold
965,908 shares of the Companys Common Stock at
$0.08 per share. Under the terms of the stock purchase
agreements, the Company had the right to purchase the shares of
Common Stock at the original issue price in the event any one of
the founders ceased to be an employee of the Company. These
repurchase rights lapsed by 25% on the first anniversary of the
vesting start date and ratably each month thereafter for
36 months. On September 1, 1999, 20,127 shares
were repurchased in connection with the early termination of one
of the founders. In connection with the issuance of these
shares, the Company recorded unearned compensation of $1,306,000
that was being recognized over the periods in which the
Companys repurchase rights lapse. During 2001, $106,000
was recognized as compensation expense and the original unearned
compensation amount was fully amortized as of March 31,
2001.

In October 1998, an officer exercised stock
options to purchase 318,671 shares of the Companys
Common Stock at a price of $3.36 per share. Under the terms
of the option, the Company had the right to repurchase the
unvested shares of Common Stock at the original issue price in
the event the officer ceased to be an employee of the Company.
The repurchase rights lapsed ratably each month for
48 months. In connection with the option grant preceding
this transaction, the Company recognized unearned compensation
totaling $3.8 million that is included in the aggregate
unearned compensation charges discussed below. In February 2001,
this officers employment was terminated and the unvested
portion of these stock options was accelerated, and resulted in
a $732,000 charge to stock-based expenses in the first quarter
of 2001. At December 31, 2001, 2002 and 2003, no shares of
Common Stock were subject to repurchase rights.

Employee Stock Purchase Plan

During 1999, the Board of Directors adopted and
the shareholders approved the 1999 Employee Stock Purchase Plan
(ESPP). The Company authorized 150,000 shares
for issuance at inception. The number of shares of Common Stock
reserved under the ESPP increases annually on January 1 of
each year beginning in 2000 by an amount equal to 1% of the
Companys issued and outstanding Common Stock. However,
such increases are limited to 250,000 additional shares each
year. Employees generally will be eligible to participate in the
ESPP if the Company customarily employs them for more than
20 hours per week and more than five months in a calendar
year and they are not 5% or greater shareholders. Under the
ESPP, eligible employees may select a rate of payroll deduction
up to 15% of their compensation subject to certain maximum
purchase limitations per period and other statutory limitations.
The ESPP was implemented in a series of overlapping twenty-four
month offering periods beginning on the effective date of the
Companys initial public offering

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with subsequent offering periods beginning on the
first trading day on or after May 1 and November 1 of
each year. Purchases will occur on each April 30 and
October 31 (the Purchase Dates) during each
participation period. Under the ESPP, eligible employees have
the opportunity to purchase shares of Common Stock at a purchase
price equal to 85% of the fair market value per share of Common
Stock on either the start date of the offering period or the
Purchase Date of the related purchase period, whichever is less.
Stock purchases under the ESPP in 2001, 2002 and 2003 were
122,274, 295,748 and 113,106 shares, respectively, at a
price of $5.12 and $3.12 per share in 2001, $3.12 and
$1.56 per share in 2002, and $3.40 and $3.21 per share
in 2003. As of December 31, 2003, 274,539 shares were
available under the ESPP for future issuance.


The estimated weighted-average value of purchase
rights granted under the ESPP during 2001, 2002 and 2003 was
$2.24, $1.52 and $0.46 per share. The fair value of each
stock purchase right granted under the ESPP is estimated using
the Black-Scholes option valuation method, with the following
weighted-average assumptions:

|                        |  |      |           |      |  |      |           |   |  |  |           |  
|----------------------- |  | ---- | --------- | ---- |  | ---- | --------- | - |  |  | --------- | -
|                        |  | 2003 |           | 2002 |  | 2001
|                        |  |      |           |      |  |     
|Expected life of option |  |      | 6  months |      |  |      | 6  months |   |  |  | 6  months |  
|Risk-free interest rate |  |      | 1.6       | %    |  |      | 2.60      | % |  |  | 3.01      | %
|Dividend yield          |  |      | 0.00      | %    |  |      | 0.00      | % |  |  | 0.00      | %
|Volatility              |  |      | 138       | %    |  |      | 250       | % |  |  | 128       | %

The aggregate fair value of purchase rights
granted in 2003, 2002 and 2001 was approximately $52,000,
$446,000 and $928,000, respectively.

Stock Options

During 1998 and 1999, the Companys Board of
Directors adopted the 1998 Stock Option Plan and the 1999
Nonstatutory Stock Option Plan, respectively (together, the
Option Plans and each a Plan). The 1998
Plan provides for the granting of options to purchase up to
10,197,185 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,
and the 1999 Plan provides for the granting of up to
7,062,500 shares of common stock to non-executive officer
employees or the initial employment grant for executive
officers. In November 2001, the Board approved an increase of
2,812,500 to the number of option shares reserved for grant to
non-executive officer employees under the 1999 Plan. 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. At December 31, 2003 the total number of
shares of common stock available for option grants was 4,309,977
and 1,822,553 under the 1998 Plan and the 1999 Plan,
respectively.

The Company has, in connection with the
acquisition of various companies, assumed the stock option plans
of each acquired company. At December 31, 2002 and 2003, a
total of 97,045 shares and 80,542 shares,
respectively, of the Companys Common Stock were reserved
for issuance upon exercise of outstanding options issued under
the assumed plans, and the related options are included in the
table below.

Options under the 1998 Plan may be granted at
prices no less than 85% of the estimated fair market value of
the shares on the date of grant as determined by the Board of
Directors, provided, however, that (i) the exercise price
of an ISO may not be less than 100% of the fair market value of
the shares on the date of grant, and (ii) the exercise
price of an ISO granted to a 10% shareholder may not be less
than 110% of the fair market value of the shares on the date of
grant. Option grants under the Companys Option Plans
generally vest 25% per year and are generally exercisable
for a maximum period of ten years from the date of grant.

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Changes in stock options outstanding, granted,
exercisable, canceled and available, during 2001, 2002 and 2003
under the option plans are identified below. The Company only
grants new options from the 1998 Plan and 1999 Plan, accordingly
the Options or Awards Available under the 1998 and 1999 Plans
information provided below includes only stock option
information related to these plans and no information related to
any of the other acquired or assumed stock option plans (options
in thousands).

|                                 |                            |                     |       |                           |         |                  |        |       |        |   |        |       |        | 
|-------------------------------- | -------------------------- | ------------------- | ----- | ------------------------- | ------- | ---------------- | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                 |                            |                     |       |                          
|                                 |                            | Options or Awards   |       | Outstanding Option Grants
|                                 |                            | Available           |       |                          
|                                 |                            | Under the 1998      |       | Number of                 |         | Weighted Average
|                                 |                            | And 1999 Plans      |       | Shares                    |         | Exercise Price  
|                                 |                            |                     |       |                           |         |                 
|Outstanding December 31, 2000    |                            |                     | 3,728 |                           |         |                  | 5,379  |       |        | $ | 170.56 |      
|                                 |                            |                     |       |                           |         |                  |        |       |        |   |        |      
|                                 | Additional shares reserved |                     |       | 6,812                     |         |                  |        |       |        |   |        |       |       
|                                 |                            | Granted and assumed |       |                           | (10,567 | )                |        |       | 10,567 |   |        | $     | 3.96   | 
|                                 |                            | Exercised           |       |                           |         |                  |        |       | (494   | ) |        | $     | 4.32   | 
|                                 |                            | Canceled            |       |                           | 5,145   |                  |        |       | (5,381 | ) |        | $     | 111.36 | 
|                                 |                            |                     |       |                           |         |                  |        |       |        |   |        |      
|Outstanding December 31, 2001    |                            |                     | 5,118 |                           |         |                  | 10,071 |       |        | $ | 35.56  |      
|                                 |                            |                     |       |                           |         |                  |        |       |        |   |        |      
|                                 | Additional shares reserved |                     |       | 2,500                     |         |                  |        |       |        |   |        |       |       
|                                 |                            | Granted and assumed |       |                           | (5,220  | )                |        |       | 5,220  |   |        | $     | 5.28   | 
|                                 |                            | Exercised           |       |                           |         |                  |        |       | (595   | ) |        | $     | 4.88   | 
|                                 |                            | Canceled            |       |                           | 1,881   |                  |        |       | (1,903 | ) |        | $     | 39.92  | 
|                                 |                            |                     |       |                           |         |                  |        |       |        |   |        |      
|Outstanding December 31, 2002    |                            |                     | 4,279 |                           |         |                  | 12,793 |       |        | $ | 23.96  |      
|                                 |                            |                     |       |                           |         |                  |        |       |        |   |        |      
|                                 | Additional shares reserved |                     |       | 2,500                     |         |                  |        |       |        |   |        |       |       
|                                 |                            | Granted and assumed |       |                           | (3,441  | )                |        |       | 3,441  |   |        | $     | 2.99   | 
|                                 |                            | Exercised           |       |                           |         |                  |        |       | (380   | ) |        | $     | 2.36   | 
|                                 |                            | Canceled            |       |                           | 2,795   |                  |        |       | (2,833 | ) |        | $     | 32.72  | 
|                                 |                            |                     |       |                           |         |                  |        |       |        |   |        |      
|Outstanding December 31, 2003    |                            |                     | 6,133 |                           |         |                  | 13,021 |       |        | $ | 17.07  |      
|                                 |                            |                     |       |                           |         |                  |        |       |        |   |        |      
|Outstanding Options Exercisable: |                            |                     |       |                           |         |                  |        |       |        |   |        |      
|                                 | December 31, 2001          |                     |       |                           |         |                  |        | 1,990 |        |   | $      | 74.68 |       
|                                 | December 31, 2002          |                     |       |                           |         |                  |        | 5,862 |        |   | $      | 35.24 |       
|                                 | December 31, 2003          |                     |       |                           |         |                  |        | 6,896 |        |   | $      | 27.01 |       

The following table summarizes information about
stock options outstanding at December 31, 2003 (options in
thousands):

|                |                |                     |  |                     |        |                |  |             |      |                |  |   |        |  |  |  |       |  |  |   |        | 
|--------------- | -------------- | ------------------- |  | ------------------- | ------ | -------------- |  | ----------- | ---- | -------------- |  | - | ------ |  |  |  | ----- |  |  | - | ------ | 
|                |                |                     |  |                     |        |               
|                |                | Options Outstanding |  |                    
|                |                |                     |  | Options Exercisable
|                |                |                     |  | Weighted            |        |                |  |            
|                |                |                     |  | Average             |        | Weighted       |  |             |      | Weighted      
|Range of        |                | Number              |  | Remaining           |        | Average        |  | Number      |      | Average       
|Exercise Prices |                | Outstanding         |  | Contractual Life    |        | Exercise Price |  | Exercisable |      | Exercise Price
|                |                |                     |  |                     |        |                |  |             |      |               
|$               | 0.00- $   1.60 |                     |  |                     | 1,547  |                |  |             | 7.56 |                |  |   | 1.46   |  |  |  | 1,341 |  |  |   | 1.45   | 
|$               | 1.72- $   2.36 |                     |  |                     | 1,504  |                |  |             | 8.54 |                |  |   | 2.09   |  |  |  | 641   |  |  |   | 2.19   | 
|$               | 2.39- $   2.88 |                     |  |                     | 899    |                |  |             | 9.66 |                |  |   | 2.56   |  |  |  | 53    |  |  |   | 2.83   | 
|$               | 2.92- $   3.12 |                     |  |                     | 1,877  |                |  |             | 9.31 |                |  |   | 3.12   |  |  |  | 313   |  |  |   | 3.12   | 
|$               | 3.15- $   3.52 |                     |  |                     | 1,517  |                |  |             | 8.74 |                |  |   | 3.46   |  |  |  | 443   |  |  |   | 3.49   | 
|$               | 3.56- $   4.36 |                     |  |                     | 1,400  |                |  |             | 7.25 |                |  |   | 4.00   |  |  |  | 1,169 |  |  |   | 4.04   | 
|$               | 4.40- $   6.32 |                     |  |                     | 1,563  |                |  |             | 7.89 |                |  |   | 4.85   |  |  |  | 1,121 |  |  |   | 4.78   | 
|$               | 6.52- $ 10.24  |                     |  |                     | 1,702  |                |  |             | 8.16 |                |  |   | 8.68   |  |  |  | 935   |  |  |   | 8.86   | 
|$               | 10.28-$342.80  |                     |  |                     | 1,012  |                |  |             | 6.58 |                |  |   | 172.61 |  |  |  | 880   |  |  |   | 183.89 | 
|                |                |                     |  |                     |        |                |  |             |      |                |  |   |        |  |  |  |       |  |  |   |        | 
|                |                |                     |  |                     | 13,021 |                |  |             | 8.22 |                |  | $ | 17.07  |  |  |  | 6,896 |  |  | $ | 27.01  | 
|                |                |                     |  |                     |        |                |  |             |      |                |  |   |        |  |  |  |       |  |  |   |        | 

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Preferred Stock Rights Agreement

On March 19, 2001 pursuant to a Preferred
Stock Rights Agreement (the Rights Agreement)
between the Company and Computershare Trust Company, Inc.,
as Rights Agent (the Rights Agent), the
Companys Board of Directors (i) declared a dividend
of one right (a Right) to purchase one
one-thousandth share of the Companys Series C
Participating Preferred Stock (Series C
Preferred) for each outstanding share of Common Stock, par
value $0.001 per share (Common Shares), of the
Company, and (ii) authorized the issuance to each holder of
Exchangeable Shares (as defined below) of one Right for each
exchangeable Share held. An Exchangeable Share is a
share of Class A Non-Voting Preferred Shares of Critical
Path Messaging Co., an unlimited liability company existing
under the laws of the Province of Nova Scotia and a wholly-owned
subsidiary of the Company. Each Exchangeable Share is
exchangeable for one Common Share. The Rights were issued on
May 15, 2001 (the Record Date), to shareholders
of record as of the close of business on that date. Each Right
entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series C Preferred at an
exercise price of $25.00 (the Purchase Price),
subject to adjustment.

The Rights will become exercisable following the
tenth day after a person or group announces the acquisition of
15% or more of the Companys common stock or announces
commencement of a tender or exchange offer, the consummation of
which would result in ownership by the person or group of 15% or
more of the common stock of the Company. The Company will be
entitled to redeem the Rights at $0.01 per Right at any
time on or before the fifth day following acquisition by a
person or group of 15% or more of the Companys common
stock. The Rights will expire on the earlier of May 15,
2011 or exchange or redemption of the Rights.



| |                                  
| | ---------------------------------
| | Unearned stock-based compensation

In connection with certain stock option grants
and Common Stock issuances to employees, directors and advisors
during 1998 and 1999, the Company recognized unearned
compensation totaling $19.9 million and $22.3 million,
respectively, which is being amortized over the vesting periods
of the related options. In March 2001, the Company granted
employee stock options with exercise prices below market value
on the date of grant in connection with a program designed to
provide incentives for current employees of the Company to
continue their employment. The Company issued stock options
representing an aggregate of 12.9 million shares, vesting
monthly over a 2-year period, and recognized unearned
compensation related to the program totaling $21.4 million,
which were subsequently reduced as a result of employee
terminations throughout 2001 and 2002. Amortization expense
recognized during 2001, 2002 and 2003 totaled approximately
$38.2 million, $10.0 million and $59,000,
respectively. Based on the functions of the employees and
consultants participating in the related option grants, during
2001, 2002 and 2003, expenses of $4.1 million,
$1.2 million and $17,000, respectively, were allocated to
cost of net revenues and the remaining expenses were allocated
to operating expenses. The Company periodically assesses
unearned compensation and adjusts the remaining unamortized
balance for employee terminations and resignations.

In February 2002, the Court gave preliminary
approval to the settlement of the principal class action
litigation. In June 2002, the Court entered its final approval
of the settlement. In connection with the settlement, the
Company agreed to issue warrants to purchase up to
850,000 shares of the Companys common stock at
$10.00 per share, and recorded a charge of $697,000 to
operating expense related to the fair value of these warrants.
The Company is currently finalizing the terms of the settlement
of the derivative litigation associated with the same period.

During 2001, 2002 and 2003, the Company incurred
stock-based charges of approximately $1.7 million, $17,000
and $181,000, respectively, in connection with certain severance
agreements for terminated employees and consulting arrangements.
These charges were included in operating expenses based on the
functions of the related employees and consultants.

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Note 17  Impairment of
Long-Lived Assets

In April 2001, the Company announced a
restructuring plan that involved reorganizing its product and
service offerings, including eliminating various product and
service lines associated with the following acquisitions:
dotOne, Fabrik (Connect Service), FaxNet, and Netmosphere. As a
result of the restructuring, the Company abandoned all of the
technology associated with the products and services and all
employees originally acquired from dotOne, Fabrik, FaxNet and
Netmosphere were terminated. As a result, the Company determined
that an impairment analysis was required during the second
quarter of 2001.

The Company believed that the termination of the
product and service lines indicated that the carrying amount of
long-lived assets may not be recoverable and therefore an
impairment review was required under SFAS No. 121.
When it was determined the carrying value of intangible assets
may not be recoverable, the Company measured for impairment
based on a projected discounted cash flow method using a
discount rate commensurate with the risk inherent in the current
business model. As no future revenues were to be recognized from
the product and service lines that were eliminated, which
represented separate asset groupings under
SFAS No. 121, all of the remaining intangible assets
associated with the product and service lines were written off
in their entirety. As a result of its assessment, the Company
recorded a $14.2 million impairment charge in the second
quarter of 2001.

In the fourth quarter of 2001, as a result of the
Companys consolidation of its facilities and asset base
related to its previous restructurings, the Company performed an
assessment of its property and equipment balances that related
to its existing hosted messaging business line. As a result of
this assessment, the Company specifically identified assets that
it determined were not going to be utilized in the ongoing
business and took an impairment charge related to these assets.
As a result of this assessment, the Company recorded an
additional impairment charge of $12.4 million in the fourth
quarter of 2001.

The following table summarizes the classification
of the impairment-related charges recorded for each major asset
category for the year ended December 31, 2001 (in
thousands):

|                       |                                 |      |        |        | 
|---------------------- | ------------------------------- | ---- | ------ | ------ | 
|Asset category         |                                 | 2001
|                       |                                 |     
|Existing Technology    |                                 | $    | 4,207  |       
|Property and Equipment |                                 |      | 12,447 |       
|                       |                                 |      |        |       
|                       | Charged to cost of net revenues |      |        | 16,654 | 
|                       |                                 |      |        |       
|Customer Base          |                                 |      | 8,703  |       
|Workforce              |                                 |      | 1,288  |       
|                       | Charged to operating expense    |      |        | 9,991  | 
|                       |                                 |      |        |       
|                       | Total impairment charge         |      | $      | 26,645 | 
|                       |                                 |      |        |       

The Company classified the impairment of existing
technology and property and equipment to cost of net revenues,
and the impairment of other intangible assets as other operating
expense. The impairment charges were allocated to these
classifications to conform to the classifications of the
amortization charges associated with these assets. The
amortization and impairment charges relating to existing
technology and the impaired property and equipment were charged
to cost of net revenues as the Company believes these were the
only costs that were directly related to the generation of its
revenues.

Note 18  Defined Contribution
Plan

The Company maintains a defined contribution
plan, the Critical Path 401(k) Plan, under which its employees
are eligible to participate. Participants may make voluntary
contributions based on a percentage of their compensation,
within certain limitations. Under the plan, discretionary
contributions may be made by the Company. Participants are fully
vested in the Companys contributions after a specified
number of years of service, as defined under the plan. No
contributions have been made by the Company since its inception.

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Note 19  Loss Per Share
Attributed to Common Shares

Net loss per share is calculated as follows:

|                                                                     |                                                                        |                                          |   |         |   |      |   |          |   |  |   |         |  
|-------------------------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------- | - | ------- | - | ---- | - | -------- | - |  | - | ------- | -
|                                                                     |                                                                        |                                         
|                                                                     |                                                                        | Year Ended December 31,                 
|                                                                     |                                                                        |                                         
|                                                                     |                                                                        | 2001                                     |   | 2002    |   | 2003
|                                                                     |                                                                        |                                          |   |         |   |     
|                                                                     |                                                                        |                                         
|                                                                     |                                                                        | (In thousands, except per share amounts)
|Net loss attributed to common shares                                 |                                                                        |                                          |   |         |   |      |   |          |   |  |   |        
|                                                                     | Net loss                                                               |                                          | $ | (79,464 | ) |      | $ | (117,911 | ) |  | $ | (62,133 | )
|                                                                     | Accretion on mandatorily redeemable preferred
    stock                |                                          |   | (356    | ) |      |   | (13,904  | ) |  |   | (12,446 | )
|                                                                     |                                                                        |                                          |   |         |   |      |   |          |   |  |   |        
|                                                                     | Net loss attributable to common shares                                 |                                          | $ | (79,820 | ) |      | $ | (131,815 | ) |  | $ | (74,579 | )
|Weighted average shares outstanding                                  |                                                                        |                                          |   |         |   |      |   |          |   |  |   |        
|                                                                     | Weighted average shares outstanding                                    |                                          |   | 18,787  |   |      |   | 19,664   |   |  |   | 20,239  |  
|                                                                     | Weighted average shares subject to repurchase
    agreements           |                                          |   | (47     | ) |      |   | (133     | ) |  |   | (133    | )
|                                                                     | Weighted average shares held in escrow related to
    acquisitions     |                                          |   | (245    | ) |      |   | (86      | ) |  |   | (86     | )
|                                                                     |                                                                        |                                          |   |         |   |      |   |          |   |  |   |        
|                                                                     | Shares used in computation of basic and diluted
    net loss per share |                                          |   | 18,495  |   |      |   | 19,445   |   |  |   | 20,020  |  
|Basic and diluted net loss per share
    attributed to common shares |                                                                        |                                          |   |         |   |      |   |          |   |  |   |        
|                                                                     | Net loss attributable to common shares                                 |                                          | $ | (4.32   | ) |      | $ | (6.78    | ) |  | $ | (3.73   | )
|                                                                     |                                                                        |                                          |   |         |   |      |   |          |   |  |   |        

At December 31, 2001, 2002 and 2003, there
were 22,301,530, 29,107,283 and 32,514,782, 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.

Note 20  Product and
Geographic Information

Revenue information on a product basis is as
follows:

|             |                  |                               |         |      |        |      |        |   |        |   |        |   |        | 
|------------ | ---------------- | ----------------------------- | ------- | ---- | ------ | ---- | ------ | - | ------ | - | ------ | - | ------ | 
|             |                  |                              
|             |                  | Year Ended December 31,      
|             |                  |                              
|             |                  | 2001                          |         | 2002 |        | 2003
|             |                  |                               |         |      |        |     
|             |                  |                              
|             |                  | (In thousands)               
|Net revenues |                  |                               |         |      |        |      |        |   |        |   |        |  
|             | Software license |                               |         |      |        |      |        |   |        |   |        |   |       
|             |                  | Messaging solutions           |         | $    | 11,822 |      |        | $ | 16,663 |   |        | $ | 6,932  | 
|             |                  | Identity management solutions |         |      | 9,822  |      |        |   | 15,944 |   |        |   | 10,102 | 
|             |                  | Other                         |         |      | 9,316  |      |        |   | 2,569  |   |        |   | 5,070  | 
|             | Service          |                               |         |      |        |      |        |   |        |   |        |   |       
|             |                  | Hosted messaging              |         |      | 37,467 |      |        |   | 24,893 |   |        |   | 19,444 | 
|             |                  | Fax messaging(1)              |         |      | 6,354  |      |        |   |       |   |        |   |       | 
|             |                  | Maintenance and support       |         |      | 16,819 |      |        |   | 15,471 |   |        |   | 18,434 | 
|             |                  | Professional services         |         |      | 12,573 |      |        |   | 11,593 |   |        |   | 12,315 | 
|             |                  |                               |         |      |        |      |        |   |        |   |        |  
|             |                  | $                             | 104,173 |      |        | $    | 87,133 |   |        | $ | 72,297 |  
|             |                  |                               |         |      |        |      |        |   |        |   |        |  



---



|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Fax messaging was discontinued in connection with
    the 2001 restructuring. See also Note 4 
    Strategic Restructuring and Employee Severance.

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Information regarding revenues by location of
invoicing and long-lived assets attributable to the
Companys primary geographic regions are as follows:

|             |               |                         |         |        |  |      |        |        |  |   |        |        | 
|------------ | ------------- | ----------------------- | ------- | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|             |               |                        
|             |               | Year Ended December 31,
|             |               |                        
|             |               | 2001                    |         | 2002   |  | 2003
|             |               |                         |         |        |  |     
|             |               |                        
|             |               | (In thousands)         
|Net revenues |               |                         |         |        |  |      |        |        |  |   |        |       
|             | United States |                         | $       | 62,928 |  |      | $      | 40,461 |  |   | $      | 27,114 | 
|             | Italy         |                         |         | 14,205 |  |      |        | 15,458 |  |   |        | 17,284 | 
|             | Ireland       |                         |         | 14,564 |  |      |        | 13,104 |  |   |        | 7,031  | 
|             | Other         |                         |         | 12,476 |  |      |        | 18,110 |  |   |        | 20,868 | 
|             |               |                         |         |        |  |      |        |        |  |   |        |       
|             |               | $                       | 104,173 |        |  | $    | 87,133 |        |  | $ | 72,297 |       
|             |               |                         |         |        |  |      |        |        |  |   |        |       

|                  |               |              |        |        |  |      |        |        |  |   |        |        | 
|----------------- | ------------- | ------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                  |               |             
|                  |               | December 31,
|                  |               |             
|                  |               | 2001         |        | 2002   |  | 2003
|                  |               |              |        |        |  |     
|Long-lived assets |               |              |        |        |  |      |        |        |  |   |        |       
|                  | United States |              | $      | 77,248 |  |      | $      | 17,366 |  |   | $      | 14,821 | 
|                  | Other         |              |        | 5,695  |  |      |        | 776    |  |   |        |       | 
|                  |               |              |        |        |  |      |        |        |  |   |        |       
|                  |               | $            | 82,943 |        |  | $    | 18,142 |        |  | $ | 14,821 |       
|                  |               |              |        |        |  |      |        |        |  |   |        |       

Note 21  Quarterly
Financial Data (Unaudited)

Quarterly Results of Operations (In
thousands)

|                                                                         |  |       |         |           |  |       |         |           |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ----- | ------- | --------- |  | ----- | ------- | --------- |  | - | ------- | - |  | - | ------- | -
|2002                                                                     |  | First |         | Second(1) |  | Third |         | Fourth(1)
|                                                                         |  |       |         |           |  |       |         |          
|Net revenues                                                             |  | $     | 23,689  |           |  | $     | 22,442  |           |  | $ | 19,168  |   |  | $ | 21,834  |  
|Gross profit                                                             |  |       | 5,992   |           |  |       | 4,847   |           |  |   | 1,656   |   |  |   | 4,216   |  
|Loss from operations                                                     |  |       | (26,027 | )         |  |       | (29,876 | )         |  |   | (26,965 | ) |  |   | (22,526 | )
|Net loss                                                                 |  |       | (26,011 | )         |  |       | (35,567 | )         |  |   | (26,012 | ) |  |   | (30,321 | )
|Net loss attributable to common shares                                   |  |       | (29,217 | )         |  |       | (38,828 | )         |  |   | (29,612 | ) |  |   | (34,158 | )
|Net loss per share attributable to common
    shares  basic and diluted |  |       | (1.53   | )         |  |       | (2.00   | )         |  |   | (1.51   | ) |  |   | (1.74   | )

|                                                                         |  |       |         |           |  |       |         |           |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ----- | ------- | --------- |  | ----- | ------- | --------- |  | - | ------- | - |  | - | ------- | -
|2003                                                                     |  | First |         | Second(3) |  | Third |         | Fourth(4)
|                                                                         |  |       |         |           |  |       |         |          
|Net revenues                                                             |  | $     | 18,034  |           |  | $     | 18,136  |           |  | $ | 16,165  |   |  | $ | 19,962  |  
|Gross profit                                                             |  |       | 4,578   |           |  |       | 6,014   |           |  |   | 5,431   |   |  |   | 7,990   |  
|Loss from operations(2)                                                  |  |       | (15,811 | )         |  |       | (10,942 | )         |  |   | (10,508 | ) |  |   | (13,610 | )
|Net loss                                                                 |  |       | (23,201 | )         |  |       | (8,137  | )         |  |   | (15,577 | ) |  |   | (15,218 | )
|Net loss attributable to common shares                                   |  |       | (26,866 | )         |  |       | (10,976 | )         |  |   | (18,602 | ) |  |   | (18,135 | )
|Net loss per share attributable to common
    shares  basic and diluted |  |       | (1.36   | )         |  |       | (0.55   | )         |  |   | (0.92   | ) |  |   | (0.90   | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating expenses for 2002, include a
    $3.2 million charge related to costs incurred as a result
    of restructuring actions taken by the Company in the second
    ($1.6 million) and fourth ($1.6 million) quarters of
    2002. See also Note 4  Strategic Restructuring.                                                                                                                                                                                                                                                                                                                    
|   
|(2) | Operating expenses for 2003, include an
    $8.1 million charge related to costs incurred as a result
    of restructuring actions taken by the Company in the first
    ($4.4 million), second ($0.9 million), third
    ($1.0 million) and fourth ($1.8 million) quarters of
    2003. This charge was partially offset by the first quarter 2003
    reversal of approximately $1.2 million in restructuring
    expenses, which were accrued during 2001 and 2002, as the
    Company does not anticipate these amounts will be paid in the
    future. See also Note 4  Strategic Restructuring.

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|    |                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Non-operating expense for 2003, includes an
    extraordinary gain of $3.8 million associated with the
    early release of escrow funds related to The docSpace Company
    acquisition in the second quarter of 2003. See also
    Note 9  Related Party Transactions.
|   
|(4) | Operating expenses for 2003, include a
    $5.1 million charge related to the settlement of a
    shareholder matter in the fourth quarter of 2003. See also
    Note 13  Commitments and Contingencies.                                                                

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SCHEDULE II

CRITICAL PATH, INC.

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)


Allowance for doubtful accounts

|                        |  |              |       |            |  |             |       |            |  |   |        |   |  |   |       | 
|----------------------- |  | ------------ | ----- | ---------- |  | ----------- | ----- | ---------- |  | - | ------ | - |  | - | ----- | 
|                        |  |              |       | Additions  |  |             |       |           
|                        |  | Balance at   |       | Charged to |  |             |       | Balance at
|                        |  | Beginning of |       | Costs and  |  | Deductions- |       | End of    
|Year Ended December 31, |  | Period       |       | Expenses   |  | Write-offs  |       | Period    
|                        |  |              |       |            |  |             |       |           
|2003                    |  | $            | 1,586 |            |  | $           | 199   |            |  | $ | (131   | ) |  | $ | 1,654 | 
|2002                    |  | $            | 1,182 |            |  | $           | 673   |            |  | $ | (269   | ) |  | $ | 1,586 | 
|2001                    |  | $            | 3,525 |            |  | $           | 5,242 |            |  | $ | (7,585 | ) |  | $ | 1,182 | 

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SIGNATURES




Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused
this amendment to its Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, State of
California, on the 16th day of April, 2004.






| |                    
| | -------------------
| | Critical Path, Inc.



| |     |                   
| | --- | ------------------
| | By: | /s/ JAMES A. CLARK

| |                             
| | ----------------------------
| |                             
| | James A. Clark              
| | Executive Vice President and
| | Chief Financial Officer     




Pursuant to the requirements of the Securities
Exchange Act of 1934, this amendment to its Annual Report on
Form 10-K has been signed below by the following persons in
the capacities and on the dates indicated.







|                                                       |  |                                                                                                           |  |                |  | 
|------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                       |  |                                                                                                           |  |               
|Name                                                   |  | Title                                                                                                     |  | Date          
|                                                       |  |                                                                                                           |  |               
|                                                      
|/s/ WILLIAM E. MCGLASHAN, JR.William E. McGlashan, Jr. |  | Chairman of the Board                                                                                     |  | April 16, 2004
|                                                      
|/s/ MARK FERRERMark Ferrer                             |  | Chief Executive Officer
    (Principal Executive Officer)                                                 |  | April 16, 2004
|                                                      
|/s/ JAMES A. CLARKJames Clark                          |  | Executive Vice President and Chief Financial
    Officer (Principal
    Financial and Accounting Officer) |  | April 16, 2004
|                                                      
|*Peter Currie                                          |  | Director                                                                                                  |  | April 16, 2004
|                                                      
|*Ross Dove                                             |  | Director                                                                                                  |  | April 16, 2004
|                                                      
|*William E. Ford                                       |  | Director                                                                                                  |  | April 16, 2004
|                                                      
|*Frost R. R. Prioleau                                  |  | Director                                                                                                  |  | April 16, 2004
|                                                      
|*Steven R. Springsteel                                 |  | Director                                                                                                  |  | April 16, 2004
|                                                      
|By:                                                    |  | /s/ WILLIAM E. MCGLASHANWilliam E. McGlashanAs Attorney-in-Fact                                           |  |                |  | 




151