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________________________________________________________________________________


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

FORM 10-K

|                                                 |  |                                                                                             
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------
|(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,
    2002
|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)




---

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 stock held
by non-affiliates of the Registrant was approximately
$77,690,340 as of June 28, 2002, based on the closing price
of the Common Stock as reported on the Nasdaq National Market
for that date.

There were 80,142,745 shares of the
Registrants Common Stock issued and outstanding on
March 15, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10 (as to Section 16(a) Beneficial
Ownership Reporting Compliance), 11, 12 and 13 of Part III
incorporate by reference information from Critical Path,
Inc.s definitive Proxy Statement, to be filed with the
Securities and Exchange Commission, in connection with the
solicitation of proxies for the 2003 Annual Meeting of
Shareholders scheduled to be held on May 29, 2003.



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TABLE OF CONTENTS



|              |                                                                                                        |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I       
|              | Item 1.Business                                                                                       
|              | Item 2.Properties                                                                                     
|              | Item 3.Legal Proceedings                                                                              
|              | Item 4.Submission of Matters to a Vote of Security Holders                                            
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Shareholder Matters                         
|              | Item 6.Selected Financial Data                                                                        
|              | Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations          
|              | Item 7A.Quantitative and Qualitative Disclosures About Market Risk                                    
|              | Item 8.Financial Statements and Supplemental Data                                                     
|              | Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III     
|              | Item 10.Directors and Executive Officers of the Registrant                                            
|              | Item 11.Executive Compensation                                                                        
|              | Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13.Certain Relationships and Related Party Transactions                                          
|              | Item 14.Controls and Procedures                                                                       
|PART IV      
|              | Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|Exhibit 10.27
|Exhibit 10.28
|Exhibit 10.29
|Exhibit 10.30
|Exhibit 10.31
|Exhibit 10.32
|Exhibit 10.33
|Exhibit 10.35
|Exhibit 10.36
|Exhibit 10.38
|Exhibit 21.1 
|Exhibit 23.1 
|Exhibit 99.1 
|Exhibit  99.2



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CRITICAL PATH, INC.

INDEX

|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I  
|Item 1.  |  | Business                                                                                  |  |      | 3  | 
|Item 2.  |  | Properties                                                                                |  |      | 19 | 
|Item 3.  |  | Legal                                                                                     |  |      | 19 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 21 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Shareholder Matters                 |  |      | 21 | 
|Item 6   |  | Selected Financial Data                                                                   |  |      | 22 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 23 | 
|Item 7A  |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 60 | 
|Item 8.  |  | Financial Statements and Supplemental Data                                                |  |      | 60 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 60 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                        |  |      | 61 | 
|Item 11. |  | Executive Compensation                                                                    |  |      | 63 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 63 | 
|Item 13. |  | Certain Relationships and Related Party
    Transactions                                  |  |      | 63 | 
|Item 14. |  | Controls and Procedures                                                                   |  |      | 63 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |      | 64 | 



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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, and estimate
and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods
and include statements regarding our future strategic,
operational and financial plans, anticipated or projected
revenues, expenses and operational growth, markets and potential
customers for our products and services, plans related to sales
strategies and global sales efforts, the anticipated benefits of
our strategic alliances, growth of our competition, our ability
to compete, investments in product development, the adequacy of
our current facilities, our litigation strategy, use of future
earnings, the features, benefits and performance of our current
and future products and services, plans to reduce operating
costs through continued expense reduction, anticipated effects
of restructuring and retirement of debt, and our belief as to
our ability to successfully emerge from the restructuring and
refocusing of our operations, are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. Factors that might cause future
results to differ materially from those projected in the
forward-looking statements include, but are not limited to,
difficulties of forecasting future results due to our limited
operating history, failure to meet sales and revenue forecasts,
evolving business strategy and the emerging nature of the market
for our products and services, finalization of pending class
action, derivative or other litigation, 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, 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 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 frequently reducing
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
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 compliance
with new regulatory mandates, and help reduce

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the cost and effort of deploying modern messaging
services to distributed organizations, mobile users, deskless
workers, suppliers, and customers.


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 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.

Recent Developments

Restructuring Actions.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.

Most recently, in January 2003, we announced a
restructuring initiative designed to further reduce our expense
levels in an effort to achieve operating profitability assuming
little revenue growth. The cost-reduction plan targets a
reduction in operating expenses, excluding special charges,
amortization and depreciation, of approximately $22 million
annually. Quarterly operating expenses, excluding special
charges, amortization and depreciation are targeted to be
approximately $21 million to $22 million by mid-year
2003. The plan includes the consolidation of some office
locations and a global workforce reduction of approximately 175
positions, or approximately 30% of the workforce. The headcount
reduction is partially offset by outsourcing approximately 75
positions to lower cost service providers. We anticipate an
aggregate charge of approximately $7.5 million resulting
from the cost reduction plan, inclusive of cash and non-cash
expenses. We expect to incur the charge through the first half
of 2003.

Nasdaq Stock Market De-Listing
Proceedings.On December 30,
2002, we announced that we had received notification from the
Nasdaq National Market that we were out of compliance with the
minimum bid price requirement of $1.00 a share set forth in
Marketplace Rule 4450(a)(5) for the continued listing of
its common stock on the Nasdaq National Market and that we had
requested a hearing on the matter before the Nasdaq Listing
Qualifications Panel. On January 30, 2003, we appeared
before the panel to present a plan to re-establish compliance.
In advance of the hearing, our board of directors approved a
resolution to solicit shareholder approval for a reverse stock
split of our common stock if needed, and we filed a preliminary
proxy statement in anticipation of such action. Shortly
thereafter, the Nasdaq Stock Market announced proposed rules
changes providing for longer time periods for both delisting
actions related to minimum bid price and for regaining
compliance for continued listing. As a result of the hearing and
recent rules changes proposed by Nasdaq, we have been granted
additional time to regain compliance with the minimum bid price
listing requirements pending review and approval of the rules by
the SEC.

Management and Board Changes.In May 2002, David Hayden resigned as
executive chairman and as a director. Following the resignation
of Mr. Hayden, William McGlashan, Jr., our chief executive
officer and a member of our board of directors, was named
chairman of the board in June 2002. Later in June 2002, Klaus
Esser, a general partner at private equity firm General Atlantic
Partners and former chairman of Mannesmann AG, was appointed to
our board of directors to fill the vacancy created by
Mr. Haydens departure. In July 2002, William S.
Cohen, former United States Secretary of Defense, joined our
board of directors to fill the other remaining vacancy. In
October 2002, Pierre Van Beneden terminated his employment as
our president and Robert Allen Shipp was hired as his successor.
In February 2003, Laureen DeBuono stepped down as our chief
financial officer and Paul Bartlett, formerly our executive vice
president of corporate development, was appointed as her
successor. Also in February 2003, Mr. Esser resigned from
our board of directors. That director vacancy was filled by the
appointment of Wm. Christopher Gorog, chairman, president and
chief executive officer of Roxio, Inc., in March 2003.

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Global Messaging Alliance Formed with the
Hewlett-Packard Company.In October
2002, we announced the formation of a global managed messaging
service alliance with HP, in which we will outsource our data
center operations to HP and jointly market a new managed
messaging service. As part of the alliance, we will continue to
provide messaging applications management services and product
development, with both companies marketing and selling the
hosted messaging service and providing integration services.
Both companies began offering the new managed messaging service
during the first quarter of 2003 with the data center migrations
expected to be completed by the end of the second quarter of
2003.

Acquisition of Japanese Joint Venture.On June 6, 2002, we acquired the
remaining 60% ownership interest in our Japanese joint venture
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. Following the acquisition, we began including the
financial results of this new wholly-owned subsidiary, Critical
Path Japan, in our own consolidated results.

Securities Class Action and Shareholder
Derivative Litigation in Northern District of California.Beginning on February 2, 2001, a
number of securities class action complaints were filed against
us, and certain of our current and former officers and directors
in the United States District Court for the Northern District of
California. The complaints were filed as purported class actions
by individuals who allege that they purchased our common stock
during a purported class period and sought an unspecified amount
in damages; the alleged class periods varied among the
complaints. The complaints were consolidated into a single
action which alleged that, during the period from
September 26, 2000 to February 1, 2001, Critical Path
and certain of our former officers made false or misleading
statements of material fact about our financial statements,
including our revenues, revenue recognition policies, business
operations and prospects for the year 2000 and beyond. In
addition, on September 24, 2001, certain former
shareholders of PeerLogic, Inc. filed a putative class action in
the Superior Court of the State of California alleging that
Critical Path breached representations and warranties made in
connection with the acquisition of PeerLogic. The complaint
sought an unspecified amount in damages. We subsequently removed
the PeerLogic action to the United States District Court for the
Northern District of California. On November 8, 2001, we
announced that we had reached an agreement to settle the
principal class action cases. 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,
we agreed to issue warrants to purchase up to 850,000 shares of
common stock at $10.00 per share, and recorded a change of
$697,000 to operating expense related to the fair value of these
warrants. We are currently finalizing the terms of the
settlement of the derivative litigation associated with the same
period. PeerLogic shareholders who opted out of the settlement
have alleged damages in excess of $200 million and
litigation is ongoing with respect to these claims.

Securities and Exchange Commission
Investigation.In 2001, the Securities
and Exchange Commission (SEC) 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 with no
imposition of fines or penalties 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
resulted in charges being filed against four of our former
officers and employees. We believe that investigation and
potential prosecution of former officers and employees may
continue; and while we continue to fully cooperate with any
requests with respect to such investigation, we do not know the
status of such investigation.

Critical Paths Business

Market Overview

We believe digital communications, email, text
messaging, instant messaging, collaborative calendaring, online
document sharing, and multimedia have become mission-critical
tools in todays business environment. In many enterprises,
employees from corporate offices through retail branches and
factory floors receive company communications 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

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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.


Making it easier for people to manage time,
relationships and resources can have a significant impact on
increasing the demand for digital communications. 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. We believe
new approaches are required 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 technology 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, 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 communications and
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
a 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, including
messaging, that crosses internal as well as external
organizational boundaries often depends upon having accurate,
reliable information about each users identity,
preferences, and rights to particularly 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.

Critical Paths Solutions and
Products

We deliver digital communications software and
services that are designed to enable enterprises, government
agencies, wireless carriers, and service providers to rapidly
deploy highly scalable solutions for messaging and identity
management. Built upon an open, extensible software platform,
these solutions help organizations expand the range of digital
communications services they provide, while frequently reducing
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
designed to enable 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.

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 that can simplify and accelerate deployment and
protect investments.

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With high scalability and reliability that has
succeeded in many of the most 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
industry-leading 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 a 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 and phone numbers, 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
allow our customers the ability to deploy our solutions in a
manner best suited for their needs. Our licensed software and
professional consultants enable customers to 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, are designed to
enable customers to outsource implementation and operation to
proven messaging experts. 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, enable carriers and
service providers to market a wide breadth of integrated and
messaging services that can increase revenues from consumers and
business users. Our customizable messaging applications can be
accessed from a wide variety of devices, providing
differentiation that helps 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
protect existing investments and allow for easier adaptation to
future needs. In addition, as a result of scalability and
reliability as well as streamlined account manageability, our
messaging solutions help carriers and service providers cut both
capital and operating costs.

The following is a list of our messaging
applications and services:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Email
    Provides reliable 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
    several with installations serving more than 10 million
    subscribers, we are recognized for scalability and reliability,
    advanced functionality and integrated anti-virus/anti-spam
    protection.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mobile Messaging Assists wireless carriers to
    create new revenue opportunities and higher volumes of traffic
    through integrated email, text messaging, instant 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 accelerate and simplify deployments,
    drive usage and consumption of data traffic, increase loyalty
    and reduce customer churn.                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Premium Multimedia Messaging Service
    (MMS) Enhancements Allows
    wireless carriers to extend MMS solutions from our strategic
    alliances 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.                                                                                                                                                                                                                                                                                                          
|
| |  | Unified Communications Allows wireless carriers and
    service providers to offer premium services that combine our
    rich digital messaging applications with voicemail and faxmail
    from other companies with whom we have strategic alliances.
    Provide highly scalable, centralized message store for all types
    of messages that support customizable classes of service and
    allows easy integration of third-party services with our broad
    family of messaging and identity management solutions.                                                                                                                                                                                                                                                                                                                                  
|
| |  | 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 Hewlett
    Packard, we combine our effective 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, available both as licensed software and as hosted
services, 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. Our software works in conjunction with
existing on-premise messaging systems, allowing organizations to
provide the most appropriate level of service and functionality
to each set of users while reducing administrative burdens and
overall costs. In addition, with built-in support for portal
integration, our messaging solutions help organizations extend
communications beyond corporate walls to strengthen
relationships with customers and partners.

The following is a list of our messaging
solutions for enterprises and governments:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enterprise Messaging Suite Allows enterprises and
    governments potentially to reduce overall messaging costs and
    extend messaging capabilities to remote and geographically
    dispersed employees, as well as to business partners, suppliers
    and customers. This suite is designed to provide a streamlined,
    integrated platform for strategic messaging and collaboration
    services, such as mobile access, portal integration and web
    services. Includes integrated email, centralized address books,
    calendaring, file sharing, dynamic alerts, and synchronization
    accessible via traditional standards-based desktop clients,
    wireless devices, voice systems and web browsers. Interoperates
    with existing messaging systems, allowing incremental deployment
    and ensuring that each group of users is provided the most
    appropriate set of features at the lowest cost.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Managed 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 with
    minimal capital expenses or deployment headaches. Delivered in
    concert with HP, we combine our effective 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 enable
    hassle-free operations that scale smoothly as the number and
    needs of users grow. Our Managed 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 helpdesk 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 access to systems can be quickly granted, and just as
quickly revoked, and that user profiles can be managed and
leveraged across distributed, often global, infrastructure. With
our solutions, customers can deploy new applications faster and
grow or reduce their user populations without compromising
service quality.

Our identity management solutions are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Data & Directory Integration Allows organizations to cut
    costs and improve the accuracy of information by consolidating
    critical data that is 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 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 Allows 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, PKI,
    web access control, and consistent personalization of
    applications.                                                                                                                                                                                                                                                                                                                        
|
| |  | User Provisioning Allows 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. Allow employees, contractors,
    partners and customers to be granted access to crucial
    information resources, or have access removed, quickly and
    accurately.                                                                                                                                                                                                                                                           
|
| |  | Password Synchronization Allows organizations to improve
    security and reduce helpdesk calls by deploying a single
    password 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. Automating such labor-intensive tasks reduces errors
    and frees up helpdesk staff for other activities, leading to
    cost savings.                                                                                                                                                                                                                                           

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All Solutions
Delivered Via an Integrated Software Platform

All of 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.                                                                                                                                                 
|
| |  | Identity managementthat consolidates and integrates 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.                                                                                                                         
|
| |  | Immense scalability and proven
    reliability.Our platform is used in
    demanding carrier, service provider, enterprise, and government
    environments domestically and internationally, including
    multiple installations that serve over 10 million users
    each.                                                 
|
| |  | Lowest total cost of ownership at
    scale.Our efficient use of resources,
    even in large installations allows customers to take greater
    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 that differentiates offerings,
    stimulates usage and provides extensibility for future services.
    The Presentation Server provides single sign-on, an integrated
    user interface, dynamic tailoring according to classes of
    service selected, 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 drive traffic and create new
    revenue opportunities. Provides access to our email and address
    book applications from SMS phones and                                                                                                                                                                                                                                                                                       

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

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 instant 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 reduce complexity of
deployments, we can simplify on-going support and reduce the
total cost of ownership.

Our messaging application products are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.
    Industry-leading scalability enables more users to be supported
    on as little as one- fourth as much hardware as competing
    products. 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 stimulates greater usage, improves loyalty and
    simplifies deployment.
|
| |  | Critical Path Calendar Server Standards-based calendaring
    application that helps both basic and advanced users effectively
    manage schedules and tasks. Sophisticated collaboration features
    enable group scheduling and allow shared access to calendars and
    task lists, stimulating 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!®,
    MSN®, or Critical Path Instant Messaging. Provides a
    premium end-user service that increases the value of information
    stored in other applications.                                                                                                                                                                                                             
|
| |  | Critical Path Instant Messaging and Presence
    Server Secure instant messaging
    with presence detection, encryption, wireless phone/ PC
    interoperability and support for the latest industry standards
    that enables carriers to build communities of subscribers to
    drive airtime and increase loyalty.                                                                                                                                                                                                                                                                                                                     

Identity
Management Products

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

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Our identity management products are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 is unique in its
    breadth of pre-built connectors and its support for
    industry-standard languages such as Java, Perl, XML and DSML, as
    well as key mainframe and database systems. This frees customers
    from having to learn proprietary scripting languages and enables
    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.                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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 messaging solutions, available as licensed software
    and as hosted services, enable enterprises to 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  that work together to share and process data.
    With a proven ability to scale up to more than 10 million
    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 to create premium services that attract new
    subscribers,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | increase loyalty and retain subscribers longer.
    The extensibility and ease of deployment of our software enables
    providers to reliably and incrementally roll out new services as
    their business expands. Our industry-leading 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 agencies to reduce significantly,
    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 provide access to a greater range
of markets and customers by increasing the breadth of offerings
that incorporate our products and services.

Current strategic alliances fall into three
primary categories: solutions integrators, systems integrators
and solution providers:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Solutions Integrators We are allied with a select
    group of companies who act as both a system integrator and a
    solution provider for their customers. These integrators combine
    our products and their own along with extensive consulting
    services to deliver broad and deep world-class solutions to
    their customers. We actively assist these companies in marketing
    and selling our offerings. Strategic alliance partners in this
    category include: Hewlett-Packard Company, SAIC, and EMC
    Corporation.
|
| |  | Systems Integrators For many large
    telecommunications carriers and enterprises, 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 the leading systems integrators in the
    industry, including Cap Gemini Ernst & Young, Accenture,
    Bearingpoint, EDS Corporation, PriceWaterhouseCoopers LLP, and
    Deloitte & Touche.      
|
| |  | Solution Providers Our technology is embedded into
    the solutions sold by a variety of companies. 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., Nokia
    Corporation, CTI Square Ltd., Mediagate 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, Los Angeles,
Washington D.C., Boston and a variety of other cities throughout
the United States. Internationally we have members of our sales
organization

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located in Brazil, Canada, Denmark, France,
Germany, India, Ireland, Italy, Japan, Malaysia, 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
(GSIs), Independent Software Vendors (ISVs), Original Equipment
Manufacturers (OEMs) and Hardware vendors that have strong
industry backgrounds and market presence in their respective
markets and geographic regions. In addition, we maintain
relationships to resell its products and services throughout
most of Asia and Latin America.

Marketing
Strategies.Our global marketing team
is focused on 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 a single 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 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 customers can 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:



| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
|
| |  | total cost of ownership and operation.                                                                                                                                                                                              

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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 highly scalable, open
systems-based digital communications software that integrates
easily 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 hundreds
of thousands to tens of 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 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 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

We believe we offer the industrys most
scalable, most reliable messaging infrastructure. Our Messaging
Server, a highly scalable, standards-based, messaging server
enables services from Email to Unified Messaging and next
generation Multimedia Messaging Services through its powerful
native IMAP mail store and SMTP

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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),
anti-virus and anti-spam.


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 Instant Messaging and Presence
offers highly scalable instant messaging for personal computers,
web, and mobile devices using the new Wireless Village industry
standard. 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 such as messaging
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
the join engine, with plug-ins that connect to various business
systems, including the various components of the Critical Path
Communications Platform. Our Meta-Directory comes with the
connectors for industrys widest range of systems including
Sybases SQL Server, Microsofts Exchange, Lotus
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 and XML, 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.

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
strong service level agreements, 24x7 helpdesk support, and easy
expansion around the globe.

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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 enabling
organizations to quickly transition to the new standards-based
email service with minimal down-time and degradation to their
existing internal systems. In addition, it can be used by
customers and partners to facilitate automatic account sign-ups
from web sites, typically in less than three minutes.

Data Centers.Our
hardware for operating production services currently is located
in three data centers, although we are in the process of
migrating our data center operations and management to HP. With
multiple 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 backbone architecture and interconnect strategy consists of
multiple clear channel OC-3 and DS-3 circuits. We currently have
bilateral peering arrangements in place with over 35 networks.
Our data centers feature redundant systems for power, raised
floors, 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 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 guard against unsolicited commercial email and Virus
Scanning to prevent the spread of Internet viruses and worms.
Our message filtering technology has been enhanced with
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 $31.0 million in research and
development in 2000, $30.7 million in 2001 and
$19.6 million in 2002 and stock-based compensation expense
of $3.4 million in 2000, $3.7 million in 2001, and
$1.2 million in 2002. Additionally, we incurred $3.7
million of in-process research and development expense in 2000
related to technologies acquired through two of our
acquisitions. 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

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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.

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, 2002, we had 577 employees,
including 182 in operations, 144 in sales and marketing, 163 in
research and development and 88 in general corporate and
administration. In January 2003, we announced additional
restructuring resulting in a reduction in force, which will take
place over the first half of 2003, of approximately 175
employees or 30 percent of the workforce as of
December 31, 2002. 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

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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-Blilely 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 to the Consolidated Financial
Statements in Item 8, which is incorporated 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.




Item 2. Properties

Our corporate headquarters as well as primary
operations and development activities are located in one office
building in San Francisco, California. The Company currently
occupies a total of 63,467 square feet in this building, under a
lease that expires on March 25, 2012.

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.




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.

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 Critical Path and certain of its former officers. The
plaintiff shareholders had opted out of a shareholder litigation
settlement that was approved by the U.S. District Court for the
Northern District of California. The

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complaint alleged breach of contract, unjust
enrichment, common law fraud and violations of federal
securities laws and seeks compensatory and punitive damages in
an unnamed amount but in excess of $200 million. The case
has been transferred to the U.S. District Court for the Northern
District of California. Litigation in this matter is ongoing.


Securities and Exchange Commission
Investigation.In 2001, the Securities
and Exchange Commission (the SEC) investigated
Critical Path and certain 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 with no imposition of fines or penalties and,
without admitting or denying liability, the Company consented to
a cease and desist order and an administrative order as to
violation of certain non-fraud provisions of the federal
securities laws. The investigation has also thus far resulted in
charges being filed against five former officers and employees.
We believe that the investigation of former officers and
employees may continue; and while we continue to fully cooperate
with any requests with respect to such investigation, we do not
know the status of such investigation.

Derivative Actions in Northern District of
California.Beginning on
February 5, 2001, Critical Path was named as a nominal
defendant in a number of derivative actions, purportedly brought
on 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 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. We are currently
working with plaintiffs counsel to finalize execution of
the terms of the settlement of this matter.

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 former officers
and directors and underwriters connected with the initial public
offering of our common stock in the U.S. District Court for the
Southern District of New York (In re Initial Public Offering
Sec. Litig.). The purported class action complaints were
filed by individuals who allege that they purchased common stock
at the initial public offering of common stock between
March 26, 1999 and December 6, 2000. The complaints
allege generally that the Prospectus under which such securities
were sold contained false and misleading statements with respect
to discounts and commissions received by the underwriters. The
over 1,000 complaints have been consolidated into a single
action. The complaints seek an unspecified amount in damages on
behalf of persons who purchased our stock during the specified
period. Similar complaints have been filed against 55
underwriters and more than 300 other companies and other
individuals. Pretrial motions and discovery was stayed pending a
ruling on a motion to dismiss the claims by defendants. On
February 19, 2003, the court issued an opinion refusing to
dismiss claims against the defendants in the case except in
certain limited circumstances which did not apply to Critical
Path or its then officers and directors.

Lease Dispute.In
July 2000, PeerLogic, Inc. signed a lease for office space in
San Francisco, California. In December 2000, we acquired
PeerLogic as a wholly-owned subsidiary. After review, we
determined that local zoning laws likely prohibited a business
such as our 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 proposed use of the
leased premises was not permitted, but the landlord appealed
this determination and prevailed before the San Francisco Board
of Appeals. We requested a rehearing on the matter, which the
Board of Appeals denied. In April 2002, the landlord filed suit
in San Francisco Superior Court against us alleging, among other
things, breach of the lease. In its complaint, the landlord
sought unspecified compensatory damages for back rent,
attorneys fees, treble damages under relevant statutes,
and unspecified punitive damages. A number of the
landlords claims of damages were struck by the court in
response to our motion to strike. The landlord filed an amended
complaint in September 2002. In January 2003, the court again
dismissed a number of the landlords claims, including all
requests for punitive damages. In a related matter in July 2002,
we filed a separate Petition for Writ of Administrative Mandamus
with the San Francisco Superior Court, requesting that the Board
of Appeals decision be reversed and/or remanded for
rehearing by the Board of Appeals, with instructions from the
court. Litigation in this matter is also ongoing.

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




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 reported on the Nasdaq National Market.

|                             |                                                                |      |   |       |  |  |   |      | 
|---------------------------- | -------------------------------------------------------------- | ---- | - | ----- |  |  | - | ---- | 
|                             |                                                                | High |   | Low  
|                             |                                                                |      |   |      
|Year Ended December 31, 2001 |                                                                |      |   |       |  |  |   |     
|                             | First Quarter (from January 1, 2001 to
    March 31, 2001)     |      | $ | 26.13 |  |  | $ | 1.56 | 
|                             | Second Quarter (from April 1, 2001 to
    June 30, 2001)       |      | $ | 2.00  |  |  | $ | 0.84 | 
|                             | Third Quarter (from July 1, 2001 to
    September 30, 2001)    |      | $ | 1.16  |  |  | $ | 0.26 | 
|                             | Fourth Quarter (from October 1, 2001 to
    December 31, 2001) |      | $ | 2.83  |  |  | $ | 0.51 | 
|                            
|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 | 

As of March 25, 2003, there were
approximately 1,318 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

On 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 850,000 warrants to purchase shares of our
Common Stock to shareholder plaintiffs. These warrants were
fully exercisable upon grant, had an exercise price of $10.00
per share and have an expiration date of June 18, 2005.

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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, 1998, 1999, 2000,
2001 and 2002, and selected consolidated balance sheet data as
of December 31, 1998, 1999, 2000, 2001 and 2002, 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,
|                                                                          |                                                  |                        
|                                                                          |                                                  | 1998                    |         | 1999  |   | 2000(1) |          | 2001(2) |   | 2002(4)
|                                                                          |                                                  |                         |         |       |   |         |          |         |   |        
|Consolidated Statement of Operations
    Data:                            |                                                  |                         |         |       |   |         |          |         |   |         |            |        |   |   |          |       |   |   |          |      
|Net revenues                                                              |                                                  | $                       | 897     |       |   | $       | 16,157   |         |   | $       | 135,653    |        |   | $ | 104,173  |       |   | $ | 87,133   |      
|Gross profit (loss)                                                       |                                                  |                         | (1,449  | )     |   |         | (5,400   | )       |   |         | 13,732     |        |   |   | (18,868  | )     |   |   | 16,711   |      
|Operating expenses                                                        |                                                  |                         | (9,999  | )     |   |         | (117,850 | )       |   |         | (1,831,449 | )      |   |   | (222,830 | )     |   |   | (122,105 | )    
|                                                                          |                                                  |                         |         |       |   |         |          |         |   |         |            |        |   |   |          |       |   |   |          |      
|Loss from operations (5)                                                  |                                                  |                         | (11,448 | )     |   |         | (123,250 | )       |   |         | (1,817,717 | )      |   |   | (241,698 | )     |   |   | (105,394 | )    
|Non-operating income (expenses) (3)                                       |                                                  |                         | (13     | )     |   |         | 6,309    |         |   |         | (28,235    | )      |   |   | 169,440  |       |   |   | (11,538  | )    
|                                                                          |                                                  |                         |         |       |   |         |          |         |   |         |            |        |   |   |          |       |   |   |          |      
|Loss before income taxes                                                  |                                                  |                         | (11,461 | )     |   |         | (116,941 | )       |   |         | (1,845,952 | )      |   |   | (72,258  | )     |   |   | (116,932 | )    
|Provision for income taxes                                                |                                                  |                         |        |       |   |         |         |         |   |         | (6,513     | )      |   |   | (7,206   | )     |   |   | (979     | )    
|                                                                          |                                                  |                         |         |       |   |         |          |         |   |         |            |        |   |   |          |       |   |   |          |      
|Net loss                                                                  |                                                  | $                       | (11,461 | )     |   | $       | (116,941 | )       |   | $       | (1,852,465 | )      |   | $ | (79,464  | )     |   | $ | (117,911 | )    
|Accretion on mandatorily redeemable preferred
    stock                   |                                                  | $                       |        |       |   | $       |         |         |   | $       |           |        |   | $ | (356     | )     |   | $ | (13,904  | )    
|                                                                          |                                                  |                         |         |       |   |         |          |         |   |         |            |        |   |   |          |       |   |   |          |      
|Net loss attributable to common shares                                    |                                                  | $                       | (11,461 | )     |   | $       | (116,941 | )       |   | $       | (1,852,465 | )      |   | $ | (79,820  | )     |   | $ | (131,815 | )    
|                                                                          |                                                  |                         |         |       |   |         |          |         |   |         |            |        |   |   |          |       |   |   |          |      
|Net loss per share attributable to common
    shares  basic and diluted: |                                                  |                         |         |       |   |         |          |         |   |         |            |        |   |   |          |       |   |   |          |      
|                                                                          | Net loss per share attributable to common shares |                         | $       | (2.94 | ) |         | $        | (3.93   | ) |         | $          | (30.67 | ) |   | $        | (1.08 | ) |   | $        | (1.69 | )
|                                                                          |                                                  |                         |         |       |   |         |          |         |   |         |            |        |   |   |          |       |   |   |          |      
|Weighted average shares  basic and
    diluted                           |                                                  |                         | 3,899   |       |   |         | 29,770   |         |   |         | 60,399     |        |   |   | 73,981   |       |   |   | 77,782   |      
|                                                                          |                                                  |                         |         |       |   |         |          |         |   |         |            |        |   |   |          |       |   |   |          |      

|                                                 |  |                 |        |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         |  
|------------------------------------------------ |  | --------------- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | -
|                                                 |  |                
|                                                 |  | At December 31,
|                                                 |  |                
|                                                 |  | 1998            |        | 1999 |  | 2000 |         | 2001 |  | 2002
|                                                 |  |                 |        |      |  |      |         |      |  |     
|Consolidated Balance Sheet Data:                 |  |                 |        |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         |  
|Cash, cash equivalents and marketable securities |  | $               | 14,791 |      |  | $    | 75,932  |      |  | $    | 216,542 |  |  | $ | 69,165  |  |  | $ | 43,071  |  
|Working capital                                  |  | $               | 12,524 |      |  | $    | 76,060  |      |  | $    | 186,777 |  |  | $ | 57,983  |  |  | $ | 19,961  |  
|Goodwill and other intangible assets             |  | $               |       |      |  | $    | 474,297 |      |  | $    | 124,094 |  |  | $ | 48,641  |  |  | $ | 6,613   |  
|Total assets                                     |  | $               | 20,663 |      |  | $    | 673,805 |      |  | $    | 497,610 |  |  | $ | 199,952 |  |  | $ | 104,006 |  
|Convertible subordinated notes payable           |  | $               |       |      |  | $    |        |      |  | $    | 300,000 |  |  | $ | 38,360  |  |  | $ | 38,360  |  
|Capital lease obligations, long-term portion     |  | $               | 2,454  |      |  | $    | 5,669   |      |  | $    | 4,687   |  |  | $ | 1,149   |  |  | $ | 1,332   |  
|Mandatorily redeemable preferred stock           |  | $               |       |      |  | $    |        |      |  | $    |        |  |  | $ | 5,556   |  |  | $ | 26,900  |  
|Shareholders equity (deficit)                   |  | $               | 15,358 |      |  | $    | 616,992 |      |  | $    | 113,104 |  |  | $ | 108,972 |  |  | $ | (8,554  | )




|    |                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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      

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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 taken by the
    Company in the second and fourth quarters of 2002. See also
    Note 4 of Notes to Consolidated Financial Statements 
    Restructuring and Employee Severance.                                                              
|   
|(5) | Included in operating expenses in 1998, 1999,
    2000 and 2001 were goodwill amortization charges of zero,
    $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.                                                                                                                                    




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, and estimate
and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods
and include statements regarding our future strategic,
operational and financial plans, anticipated or projected
revenues, expenses and operational growth, markets and potential
customers for our products and services, plans related to sales
strategies and global sales efforts, the anticipated benefits of
our strategic alliances, growth of our competition, our ability
to compete, investments in product development, the adequacy of
our current facilities, our litigation strategy, use of future
earnings, the features, benefits and performance of our current
and future products and services, plans to reduce operating
costs through continued expense reduction, anticipated effects
of restructuring and retirement of debt, and our belief as to
our ability to successfully emerge from the restructuring and
refocusing of our operations, are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. Factors that might cause future
results to differ materially from those projected in the
forward-looking statements include, but are not limited to,
difficulties of forecasting future results due to our limited
operating history, failure to meet sales and revenue forecasts,
evolving business strategy and the emerging nature of the market
for our products and services, finalization of pending class
action, derivative or other litigation, 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, 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 elsewhere in this
report, including but limited to in the section entitled
Additional Factors That May Affect Future Operating
Results.. 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.

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|                                      |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |      |     |   
|------------------------------------- | -------------------------------------------------------- | ---------------------------------- | ------ | --------- | --------- | ---- | ------- | ---------------------- | ------- | - | ------ | ------ | ------- | - | ------- | ---------- | ---------- | - | ---- | ---- | --- | -- | ------ | ------- | -------- | - | --- | ---- | --- | --
|                                      |                                                          |                                    |        |           |           |      |         |                       
|                                      |                                                          |                                    |        |           |           |      |         | Change Over Prior Year
|                                      |                                                          |                                    |        |           |           |      |         |                       
|                                      |                                                          |                                    |        |           |           |     
|                                      |                                                          | Historical Amounts                 |        | 2001      |           | 2002
|                                      |                                                          |                                    |        |           |           |     
|                                      |                                                          | 2000                               |        | 2001      |           | 2002 |         | $                      |         | % |        | $      |         | %
|                                      |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |  
|                                      |                                                          |                                   
|                                      |                                                          | (In thousands, except percentages)
|Period Ended December 31,             |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |     
|Net revenues                          |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |     
|Software license                      |                                                          | $                                  | 51,607 |           |           | $    | 30,960  |                        |         | $ | 35,176 |        |         | $ | (20,647 | )          |            |   | (40  | )%   |     | $  | 4,216  |         |          |   | 14  | %   
|                                      | Hosted messaging                                         |                                    |        | 58,553    |           |      |         | 43,821                 |         |   |        | 24,893 |         |   |         | (14,732    | )          |   |      | (25  | )%  |    |        | (18,928 | )        |   |     | (43  | )% 
|                                      | Professional services                                    |                                    |        | 14,527    |           |      |         | 12,573                 |         |   |        | 11,593 |         |   |         | (1,954     | )          |   |      | (13  | )%  |    |        | (980    | )        |   |     | (8   | )% 
|                                      | Maintenance and support                                  |                                    |        | 10,966    |           |      |         | 16,819                 |         |   |        | 15,471 |         |   |         | 5,853      |            |   |      | 53   | %   |    |        | (1,348  | )        |   |     | (8   | )% 
|                                      |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |     
|                                      |                                                          | Total net revenues                 |        |           | 135,653   |      |         |                        | 104,173 |   |        |        | 87,133  |   |         |            | (31,480    | ) |      |      | (23 | )% |        |         | (17,040  | ) |     |      | (16 | )%
|                                      |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |     
|Cost of net revenues Software license |                                                          |                                    | 2,731  |           |           |      | 1,533   |                        |         |   | 2,682  |        |         |   | (1,198  | )          |            |   | (44  | )%   |     |    | 1,149  |         |          |   | 75  | %   
|                                      | Hosted messaging                                         |                                    |        | 59,104    |           |      |         | 59,124                 |         |   |        | 29,303 |         |   |         | 20         |            |   |      | 0    | %   |    |        | (29,821 | )        |   |     | (50  | )% 
|                                      | Professional services                                    |                                    |        | 5,945     |           |      |         | 10,315                 |         |   |        | 10,020 |         |   |         | 4,370      |            |   |      | 74   | %   |    |        | (295    | )        |   |     | (3   | )% 
|                                      | Maintenance and support                                  |                                    |        | 8,060     |           |      |         | 10,081                 |         |   |        | 8,670  |         |   |         | 2,021      |            |   |      | 25   | %   |    |        | (1,411  | )        |   |     | (14  | )% 
|                                      | Amortization of purchased technology                     |                                    |        | 18,140    |           |      |         | 21,284                 |         |   |        | 18,522 |         |   |         | 3,144      |            |   |      | 17   | %   |    |        | (2,762  | )        |   |     | (13  | )% 
|                                      | Acquisition-related retention bonuses                    |                                    |        | 1,040     |           |      |         |                       |         |   |        |       |         |   |         | (1,040     | )          |   |      | (100 | )%  |    |        |        |          |   |     |     | %  
|                                      | Stock-based expenses                                     |                                    |        | 1,586     |           |      |         | 4,050                  |         |   |        | 1,225  |         |   |         | 2,464      |            |   |      | 155  | %   |    |        | (2,825  | )        |   |     | (70  | )% 
|                                      | Impairment of long-lived assets                          |                                    |        | 25,315    |           |      |         | 16,654                 |         |   |        |       |         |   |         | (8,661     | )          |   |      | (34  | )%  |    |        | (16,654 | )        |   |     | (100 | )% 
|                                      |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |     
|                                      |                                                          | Total cost of net revenues         |        |           | 121,921   |      |         |                        | 123,041 |   |        |        | 70,422  |   |         |            | 1,120      |   |      |      | 1   | %  |        |         | (52,619  | ) |     |      | (43 | )%
|                                      |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |     
|Gross profit (loss)                   |                                                          |                                    | 13,732 |           |           |      | (18,868 | )                      |         |   | 16,711 |        |         |   | (32,600 | )          |            |   | (237 | )%   |     |    | 35,579 |         |          |   | 189 | %   
|                                      |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |     
|Operating expenses                    |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |     
|                                      | Sales and marketing                                      |                                    |        | 66,125    |           |      |         | 53,356                 |         |   |        | 43,604 |         |   |         | (12,769    | )          |   |      | (19  | )%  |    |        | (9,752  | )        |   |     | (18  | )% 
|                                      | Research and development                                 |                                    |        | 31,022    |           |      |         | 30,744                 |         |   |        | 19,649 |         |   |         | (278       | )          |   |      | (1   | )%  |    |        | (11,095 | )        |   |     | (36  | )% 
|                                      | General and administrative                               |                                    |        | 30,444    |           |      |         | 42,260                 |         |   |        | 22,128 |         |   |         | 11,816     |            |   |      | 39   | %   |    |        | (20,132 | )        |   |     | (48  | )% 
|                                      | Amortization of goodwill and other intangible
    assets |                                    |        | 382,932   |           |      |         | 32,746                 |         |   |        | 24,773 |         |   |         | (350,186   | )          |   |      | (91  | )%  |    |        | (7,973  | )        |   |     | (24  | )% 
|                                      | Acquisition-related retention bonuses                    |                                    |        | 8,294     |           |      |         | 1,381                  |         |   |        | 11     |         |   |         | (6,913     | )          |   |      | (83  | )%  |    |        | (1,370  | )        |   |     | (99  | )% 
|                                      | Stock-based expenses                                     |                                    |        | 23,534    |           |      |         | 34,085                 |         |   |        | 8,772  |         |   |         | 10,551     |            |   |      | 45   | %   |    |        | (25,313 | )        |   |     | (74  | )% 
|                                      | Acquired in-process research and development             |                                    |        | 3,700     |           |      |         |                       |         |   |        |       |         |   |         | (3,700     | )          |   |      | (100 | )%  |    |        |        |          |   |     |     | %  
|                                      | Restructuring and other expenses                         |                                    |        | 3,248     |           |      |         | 18,267                 |         |   |        | 3,168  |         |   |         | 15,019     |            |   |      | 462  | %   |    |        | (15,099 | )        |   |     | (83  | )% 
|                                      | Impairment of long-lived assets                          |                                    |        | 1,282,150 |           |      |         | 9,991                  |         |   |        |       |         |   |         | (1,272,159 | )          |   |      | (99  | )%  |    |        | (9,991  | )        |   |     | (100 | )% 
|                                      |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |     
|                                      |                                                          | Total operating expenses           |        |           | 1,831,449 |      |         |                        | 222,830 |   |        |        | 122,105 |   |         |            | (1,608,619 | ) |      |      | (88 | )% |        |         | (100,725 | ) |     |      | (45 | )%
|                                      |                                                          |                                    |        |           |           |      |         |                        |         |   |        |        |         |   |         |            |            |   |      |      |     |    |        |         |          |   |     |     

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|                                                               |  |                                    |            |      |  |      |          |                        |  |   |          |   |  |   |           |   |  |  |      |    |  |   |          |   |  |  |      |   
|-------------------------------------------------------------- |  | ---------------------------------- | ---------- | ---- |  | ---- | -------- | ---------------------- |  | - | -------- | - |  | - | --------- | - |  |  | ---- | -- |  | - | -------- | - |  |  | ---- | --
|                                                               |  |                                    |            |      |  |      |          |                       
|                                                               |  |                                    |            |      |  |      |          | Change Over Prior Year
|                                                               |  |                                    |            |      |  |      |          |                       
|                                                               |  |                                    |            |      |  |     
|                                                               |  | Historical Amounts                 |            | 2001 |  | 2002
|                                                               |  |                                    |            |      |  |     
|                                                               |  | 2000                               |            | 2001 |  | 2002 |          | $                      |  | % |          | $ |  | %
|                                                               |  |                                    |            |      |  |      |          |                        |  |   |          |   |  |  
|                                                               |  |                                   
|                                                               |  | (In thousands, except percentages)
|Loss from operations                                           |  |                                    | (1,817,717 | )    |  |      | (241,698 | )                      |  |   | (105,394 | ) |  |   | 1,576,019 |   |  |  |     | %  |  |   | 136,304  |   |  |  | (56  | )%
|Interest and other income (expense), net                       |  |                                    | 12,970     |      |  |      | 5,840    |                        |  |   | (5,852   | ) |  |   | (7,130    | ) |  |  | (55  | )% |  |   | (11,692  | ) |  |  | (200 | )%
|Interest expense                                               |  |                                    | (15,948    | )    |  |      | (14,714  | )                      |  |   | (2,748   | ) |  |   | 1,234     |   |  |  | (8   | )% |  |   | 11,966   |   |  |  | (81  | )%
|Equity in net loss of joint venture                            |  |                                    | (1,019     | )    |  |      | (1,866   | )                      |  |   | (1,408   | ) |  |   | (847      | ) |  |  | 83   | %  |  |   | 458      |   |  |  | (25  | )%
|Minority interest in net income of consolidated
    subsidiary |  |                                    | (649       | )    |  |      |         |                        |  |   |         |   |  |   | 649       |   |  |  | (100 | )% |  |   |         |   |  |  |     | % 
|Loss on investments                                            |  |                                    | (23,589    | )    |  |      | (702     | )                      |  |   | (1,530   | ) |  |   | 22,887    |   |  |  | (97  | )% |  |   | (828     | ) |  |  | 118  | % 
|Gain on retirement of convertible subordinated
    notes, net  |  |                                    |           |      |  |      | 180,882  |                        |  |   |         |   |  |   | 180,882   |   |  |  |     | %  |  |   | (180,882 | ) |  |  | (100 | )%
|                                                               |  |                                    |            |      |  |      |          |                        |  |   |          |   |  |   |           |   |  |  |      |    |  |   |          |   |  |  |      |   
|Loss before income taxes                                       |  |                                    | (1,845,952 | )    |  |      | (72,258  | )                      |  |   | (116,932 | ) |  |   | 1,773,694 |   |  |  | (96  | )% |  |   | (44,674  | ) |  |  | 62   | % 
|Provision for income taxes                                     |  |                                    | (6,513     | )    |  |      | (7,206   | )                      |  |   | (979     | ) |  |   | (693      | ) |  |  | 11   | %  |  |   | 6,227    |   |  |  | (86  | )%
|                                                               |  |                                    |            |      |  |      |          |                        |  |   |          |   |  |   |           |   |  |  |      |    |  |   |          |   |  |  |      |   
|Net loss                                                       |  | $                                  | (1,852,465 | )    |  | $    | (79,464  | )                      |  | $ | (117,911 | ) |  |   | 1,773,001 |   |  |  | (96  | )% |  |   | (38,447  | ) |  |  | 48   | % 
|Accretion on mandatorily redeemable preferred
    stock        |  |                                    |           |      |  |      | (356     | )                      |  |   | (13,904  | ) |  |   | (356      | ) |  |  |     | %  |  |   | (13,548  | ) |  |  |     | % 
|                                                               |  |                                    |            |      |  |      |          |                        |  |   |          |   |  |   |           |   |  |  |      |    |  |   |          |   |  |  |      |   
|Net loss attributable to common shares                         |  | $                                  | (1,852,465 | )    |  | $    | (79,820  | )                      |  | $ | (131,815 | ) |  | $ | 1,772,645 |   |  |  | (96  | )% |  | $ | (51,995  | ) |  |  | 65   | % 
|                                                               |  |                                    |            |      |  |      |          |                        |  |   |          |   |  |   |           |   |  |  |      |    |  |   |          |   |  |  |      |   

Overview

We deliver digital communications software and
services that enable enterprises, government agencies, wireless
carriers, and service providers to rapidly deploy highly
scalable solutions for messaging and identity management. Built
upon an open, extensible software platform, these solutions help
organizations expand the range of digital communications
services they provide, while frequently reducing overall costs.
Our messaging solutions, that are available both as licensed
software and as hosted services, provide integrated access to a
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.

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

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costs associated with the elimination of
approximately 39 positions and $300,000 in facilities lease
termination costs.


Most recently, in January 2003, we announced a
restructuring initiative designed to further reduce our expense
level in an effort to achieve operating profitability assuming
limited revenue growth. The cost-reduction plan targets reduced
operating expenses, excluding special charges, amortization and
depreciation, of approximately $22 million annually.
Quarterly operating expenses are expected to be, excluding
special charges, amortization and depreciation, approximately
$21 million to $22 million by mid-year 2003. The plan
includes the consolidation of some office locations and a global
workforce reduction of approximately 175 positions, or
approximately 30% of the workforce. The headcount reduction is
partially offset by outsourcing approximately 75 positions to
lower cost service providers. We anticipate an aggregate charge
of approximately $7.5 million resulting from the cost
reduction plan, inclusive of cash and non-cash expenses. We
expect to incur the charge through the first half of 2003.

In addition to these formal restructuring
initiatives, we have sought aggressively to manage our cost
structure throughout 2001 and 2002, identifying incremental
savings where possible. We intend to continue to aggressively
manage our expenses in 2003, while maintaining strong service
levels to our customers.

We have incurred significant losses since our
inception, and as of December 31, 2002, 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 through
the end of 2003, however, we do not anticipate the need for
additional financing prior to December 31, 2003.

In view of the rapidly evolving nature of our
business, prior acquisitions, organizational restructuring and
limited operating history, we believe that period-to-period
comparisons of revenues and operating results, including gross
profit margin and operating expenses as a percentage of total
net revenues, are not meaningful and should not be relied upon
as indications of future performance. At December 31, 2002,
we had 577 employees, as compared to 562 employees at
December 31, 2001 and 1,041 employees at December 31,
2000. We do not believe that our historical trends for revenues,
expenses or personnel are indicative of future results.

Critical Accounting Policies

The following discussion and analysis of our
financial condition and results of operations is based on its
consolidated financial statements and results of operations,
which have been prepared in accordance with accounting
principles generally accepted in the United States. We believe
the following are the most critical accounting policies
underlying our presentation of our financial condition and
related operating results:



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

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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 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

We periodically evaluate the carrying value of
long-lived assets and identifiable intangible assets for
impairment when events and circumstances indicate that the
carrying amount of an asset may not be recoverable. An
impairment loss is recognized whenever the evaluation
demonstrates that the carrying amount of a long-lived asset is
not recoverable. In connection with the impairment analysis
performed in the fourth quarter of 2000, the estimates of fair
values were based upon the discounted estimated cash flows of
Critical Path for the succeeding three years using a discount
rate of 25% and estimated terminal value. The assumptions
supporting the estimated cash flows, including the discount rate
and an estimated terminal value, reflect managements best
estimates. The discount rate was primarily based upon the
weighted average cost of capital for comparable companies.
During 2001 and in connection with our strategic restructuring
effort, an additional assessment of impairment was performed on
certain of our remaining long-lived assets. The restructuring
plan identified and formulated a plan to exit certain products
and services that were determined to be non-core to Critical
Paths business strategy. We reviewed the intangible assets
related to these non-core products and services and, as a result
of the assessment, recorded an impairment charge to these assets
in the second quarter. Additionally during the fourth quarter of
2001, we performed an evaluation of long-lived assets within our
core business. As a result of this assessment we recorded a
further impairment charge. This charge resulted from an
impairment of assets associated with our core business,
primarily the hosted messaging services, as we determined that
we had excess capacity and equipment related to certain core
products and services. No impairment charge was recorded in 2002.

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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, which is described more fully in Note 16 of Notes to
Consolidated Financial Statements  Shareholders
Equity (Deficit).

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 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.

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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                  
|                                                                                     |                                                                                                                                                    |                                         
|                                                                                     |                                                                                                                                                    | 2000                                     |            | 2001     |   | 2002
|                                                                                     |                                                                                                                                                    |                                          |            |          |   |     
|                                                                                     |                                                                                                                                                    |                                         
|                                                                                     |                                                                                                                                                    | (In thousands, except per share amounts)
|Net loss attributable to common
    shares  as reported                             |                                                                                                                                                    | $                                        | (1,852,465 | )        |   | $    | (79,820 | )       |   | $ | (131,815 | )      
|Add:                                                                                 |                                                                                                                                                    |                                          |            |          |   |      |         |         |   |   |          |        
|                                                                                     | Unearned stock-based employee compensation
    expense included in reported net loss attributable to common
    shares, net of related tax effects |                                          |            | 25,283   |   |      |         | 38,165  |   |   |          | 9,997   |  
|Deduct                                                                               |                                                                                                                                                    |                                          |            |          |   |      |         |         |   |   |          |        
|                                                                                     | Total stock-based employee compensation expense
    determined under a fair value based method for all grants, net
    of related tax effects      |                                          |            | (332,420 | ) |      |         | (23,901 | ) |   |          | (68,658 | )
|                                                                                     |                                                                                                                                                    |                                          |            |          |   |      |         |         |   |   |          |        
|Net loss attributable to common
    shares  pro forma                               |                                                                                                                                                    |                                          | (2,159,602 | )        |   |      | (65,556 | )       |   |   | (190,476 | )      
|Basic and diluted net loss per share attributable
    to common shares  as reported |                                                                                                                                                    |                                          | (30.67     | )        |   |      | (1.08   | )       |   |   | (1.69    | )      
|Basic and diluted net loss per share attributable
    to common shares  pro forma   |                                                                                                                                                    |                                          | (35.76     | )        |   |      | (0.89   | )       |   |   | (2.45    | )      

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 2000, 2001 and 2002
and the relative composition of net revenues and the selected
cost of net revenues data as a percentage of net revenues during
2000, 2001 and 2002.

|                          |                         |                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |    |  
|------------------------- | ----------------------- | ------------------ | - | ------------------- |  | ---- | - | ------ |  | ---- | - | ------ |  |  |  | -- | - |  |  | -- | - |  |  | -- | -
|                          |                         |                    |   |                     |  |      |   |       
|                          |                         |                    |   | Percentage of Total
|                          |                         | Historical Amounts |   | Net Revenues       
|                          |                         |                    |   |                    
|                          |                         | 2000               |   | 2001                |  | 2002 |   | 2000   |  | 2001 |   | 2002  
|                          |                         |                    |   |                     |  |      |   |        |  |      |   |       
|                          |                         |                   
|                          |                         | (In thousands)    
|Period Ended December 31, |                         |                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |   
|Net revenues              |                         |                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |   
|                          | Software license        |                    | $ | 51,607              |  |      | $ | 30,960 |  |      | $ | 35,176 |  |  |  | 38 | % |  |  | 30 | % |  |  | 40 | %
|                          | Hosted messaging        |                    |   | 58,553              |  |      |   | 43,821 |  |      |   | 24,893 |  |  |  | 43 |   |  |  | 42 |   |  |  | 29 |  
|                          | Professional services   |                    |   | 14,527              |  |      |   | 12,573 |  |      |   | 11,593 |  |  |  | 11 |   |  |  | 12 |   |  |  | 13 |  
|                          | Maintenance and support |                    |   | 10,966              |  |      |   | 16,819 |  |      |   | 15,471 |  |  |  | 8  |   |  |  | 16 |   |  |  | 18 |  

|                              |                         |  |   |        |  |  |   |                       |  |  |   |        |  |  |  |     |   |  |  |     |   |  |  |     |  
|----------------------------- | ----------------------- |  | - | ------ |  |  | - | --------------------- |  |  | - | ------ |  |  |  | --- | - |  |  | --- | - |  |  | --- | -
|                              |                         |  |   |        |  |  |   |                      
|                              |                         |  |   |        |  |  |   | Percentage of Related
|                              |                         |  |   |        |  |  |   | Net Revenues         
|                              |                         |  |   |        |  |  |   |                      
|Selected cost of net revenues |                         |  |   |        |  |  |   |                       |  |  |   |        |  |  |  |     |   |  |  |     |   |  |  |    
|                              | Software license        |  | $ | 2,731  |  |  | $ | 1,533                 |  |  | $ | 2,682  |  |  |  | 5   | % |  |  | 5   | % |  |  | 8   | %
|                              | Hosted messaging        |  |   | 59,104 |  |  |   | 59,124                |  |  |   | 29,303 |  |  |  | 101 |   |  |  | 135 |   |  |  | 118 |  
|                              | Professional services   |  |   | 5,945  |  |  |   | 10,315                |  |  |   | 10,020 |  |  |  | 41  |   |  |  | 82  |   |  |  | 86  |  
|                              | Maintenance and support |  |   | 8,060  |  |  |   | 10,081                |  |  |   | 8,670  |  |  |  | 73  |   |  |  | 60  |   |  |  | 56  |  

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Net
Revenues

Software License.We
recognized $35.2 million in software license revenues
during 2002, as compared to $31.0 million in 2001 and
$51.6 million in 2000. Software license revenues in 2002
increased $4.2 million from 2001 due primarily to renewed
customer confidence in Critical Path and continued improvement
to 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 restatement of
certain previously released financial results for the third
quarter of 2000 and subsequently affected the termination and
resignation of much of the leadership in our sales organization
and significant turnover within our senior management group.
During the second half of 2001 and first half of 2002, we
restructured our business, reorganized our management team, and
endeavored to rebuild customer confidence in us. Software
license revenues in 2001 decreased $20.6 million from 2000
due primarily to this uncertainty exacerbated by unfavorable
macroeconomic conditions, which caused further delays in
information technology spending. Furthermore, the terrorist
attacks of September 11, 2001 significantly impacted world
economic markets and delayed some of our licensed software sales
with enterprise customers who operated in the affected areas or
whose operations were disrupted by these events. Additionally,
we exited or sold 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 in 2002, as compared to
approximately $2.5 million in 2001 and $4.5 million in
2000. Excluding related non-core products and services, software
license revenues were $35.2 million in 2002,
$28.5 million in 2001 and $47.1 million in 2000.

In August 2002, a dispute arose with Sun
Microsystems over the calculation of royalty revenues related to
the sale of certain iPlanet products and solutions containing
our technology. In December 2002, an independent audit was
completed and the results were presented to Sun Microsystems. We
will not recognize royalty revenues from Sun Microsystems until
we come to a mutual agreement on current and historic
contractual obligations, however, based on the findings of the
independent audit, we expect that any impact to revenue will be
insignificant. During the second, third and fourth quarters of
2002 we excluded all royalty revenues earned from Sun
Microsystems, Inc.

Hosted Messaging.We
recognized $24.9 million in hosted messaging revenues
during 2002, as compared to $43.8 million in 2001 and
$58.6 million in 2000. Hosted messaging revenues in 2002
decreased $18.9 million from 2001 due primarily to our 2001
restructuring initiatives in which we exited or sold certain
non-core hosted messaging products and services during the
second half of 2001. In addition, during 2002, we experienced a
net loss in customers and volume, which also contributed to the
decline in hosted messaging revenues in 2002. Hosted messaging
revenues in 2001 decreased $14.7 million from 2000 due
primarily to our 2001 restructuring initiatives as well. We
recognized no hosted messaging revenues related to non-core
services in 2002, as compared to approximately
$13.6 million in 2001 and $27.0 million in 2000.
Excluding related non-core products and services, hosted
messaging revenues were $24.9 million in 2002,
$30.2 million in 2001 and $31.6 million in 2000.

Professional Services.We recognized $11.6 million in
professional services revenues during 2002, as compared to
$12.6 million in 2001 and $14.5 million in 2000.
Professional services revenues in 2002 decreased
$1.0 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. Professional
services revenues in 2001 decreased $2.0 million from 2000
as a result of the restructuring initiatives as well as the
reduction in software license sales in 2001. We recognized no
professional services revenues related to non-core products and
services in 2002, as compared to approximately $1.7 million
in 2001 and $2.9 million in 2000. Excluding related
non-core products and services, professional services revenues
were $11.6 million in 2002, $10.9 million in 2001 and
$11.6 million in 2000.

Maintenance and Support.We recognized $15.5 million in
maintenance and support revenues during 2002, as compared to
$16.8 million in 2001 and $11.0 million in 2000.
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. Maintenance
and support revenues in 2001 increased $5.9 million from
2000 due primarily to our completion of several acquisitions

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during 2000 and additional sales of software
license products during 2000 and 2001. However, this increase
was partially offset by our elimination of certain non-core
products and services through the restructuring initiatives. We
recognized no maintenance and support revenues related to
non-core products and services in 2002, as compared to
approximately $3.8 million in 2001 and $1.1 million in
2000. Excluding related non-core products and services,
maintenance and support revenues were $15.5 million in
2002, $13.0 million in 2001 and $9.9 million in 2000.


Our international operations accounted for
approximately 54% of net revenues in 2002, 40% in 2001 and 38%
in 2000. The significant increase in international revenues as a
percentage of total revenues in 2002 resulted primarily from the
increase in license revenues in Europe and the decrease in our
domestic hosted messaging revenues.

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
$2.7 million in 2002, as compared to $1.5 million in
2001 and $2.7 million in 2000. Software license costs in
2002 increased by $1.2 million from 2001 due primarily to
the increase in software license revenues over the same period,
and to a lesser extent, an increase on third party costs.
Software license costs in 2001 decreased by $1.2 million
from 2000 due primarily to the reduction in software license
revenue over the same period.

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 $29.3 million in 2002, as
compared to $59.1 million in both 2000 and 2001. Hosted
messaging costs in 2002 decreased by $29.8 million, or 50%,
from 2001 due primarily to cost savings generated through our
2001 and 2002 restructuring initiatives, including the
termination of employees, the reduction in related personnel
costs, 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 2001 were flat against 2000. Depreciation expense
related to cost of net hosted messaging revenues, totaled
$15.3 million, $26.3 million and $23.9 million
during 2002, 2001 and 2000, 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 allocated indirect costs.
Professional services costs were $10.0 million in 2002, as
compared to $10.3 million in 2001 and $5.9 million in
2000. 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,
including the termination of employees and the reduction in
related overhead and personnel costs. Professional services
costs in 2001 increased by $4.4 million from 2000 due
primarily to additional personnel costs associated with our
acquisitions in 2000.

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 $8.7 million in 2002, as
compared to $10.1 million in 2001 and $8.1 million in
2000. 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,
including the termination of employees and the reduction in
related personnel costs. Maintenance and support costs in 2001
increased by $2.0 million from 2000 due primarily to
additional personnel costs associated with our acquisitions in
2000.

Operations, customer support and professional
services staffing totaled 182 employees at
December 31, 2002, 192 employees at December 31, 2001
and 340 employees as December 31, 2000. Headcount
decreased year over year as a result of our 2001 and 2002
strategic restructuring initiatives. The headcount is also
expected to decrease in 2003 by an estimated 25%.

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The following table presents selected operating
expenses of Critical Path during 2000, 2001 and 2002.

|                            |                            |                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |    |  
|--------------------------- | -------------------------- | ------------------ | - | ------------------- |  | ---- | - | ------ |  | ---- | - | ------ |  |  |  | -- | - |  |  | -- | - |  |  | -- | -
|                            |                            |                    |   |                     |  |      |   |       
|                            |                            |                    |   | Percentage of Total
|                            |                            | Historical Amounts |   | Net Revenues       
|                            |                            |                    |   |                    
|                            |                            | 2000               |   | 2001                |  | 2002 |   | 2000   |  | 2001 |   | 2002  
|                            |                            |                    |   |                     |  |      |   |        |  |      |   |       
|                            |                            |                    |   |                     |  |      |   |       
|                            |                            | (In thousands)     |   |                     |  |      |   |       
|Period Ended December 31,   |                            |                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |   
|Selected operating expenses |                            |                    |   |                     |  |      |   |        |  |      |   |        |  |  |  |    |   |  |  |    |   |  |  |   
|                            | Sales and marketing        |                    | $ | 66,125              |  |      | $ | 53,356 |  |      | $ | 43,604 |  |  |  | 49 | % |  |  | 51 | % |  |  | 50 | %
|                            | Research and development   |                    |   | 31,022              |  |      |   | 30,744 |  |      |   | 19,649 |  |  |  | 23 |   |  |  | 30 |   |  |  | 23 |  
|                            | General and administrative |                    |   | 30,444              |  |      |   | 42,260 |  |      |   | 22,128 |  |  |  | 22 |   |  |  | 41 |   |  |  | 25 |  

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 $43.6 million in 2002, as compared to
$53.4 million in 2001 and $66.1 million in 2000. 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 personnel
costs of approximately $5.5 million, and the reduction in
certain marketing program costs which accounted for
approximately $2.9 million of the decrease. Sales and
marketing expenses in 2001 decreased by $12.8 million from
2000 due primarily to the termination and resignation of
employees in our sales organization during the first quarter of
2001, the termination of certain strategic marketing
relationships related to non-core services and other cost
cutting measures in connection with the headcount reduction of
our 2001 restructuring initiatives. Sales and marketing staffing
totaled 144 employees at December 31, 2002, 131 employees
at December 31, 2001 and 305 employees at December 31,
2000. Headcount increased in 2002 as a result of the
reorganization of our sales force and decreased in 2001 as a
result of our 2001 strategic restructuring initiatives.
Consistent with recently announced restructuring initiatives
headcount in sales and marketing is expected to further decrease
approximately 25% during 2003.

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 $19.6 million in 2002, as compared to
$30.7 million in 2001 and $31.0 million in 2000.
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 personnel costs of approximately $5.3 million, the
cancellation of certain outside consulting arrangements, which
accounted for approximately $1.5 million, and the
consolidation of facilities, which accounted for approximately
$4.6 million of the decrease. Research and development
expenses in 2001 decreased by $300,000 from 2000 due primarily
to our 2001 restructuring initiatives, including the termination
of certain employees as well as certain contracts with outside
consultants, and the implementation of other cost cutting
measures. Research and development staffing totaled 163
employees at December 31, 2002, 148 employees at
December 31, 2001 and 252 employees at December 31,
2000. Consistent with recently announced restructuring
initiatives, headcount in research and development is expected
to decrease approximately 25% during 2003.

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 $22.1 million in 2002, as compared to
$42.3 million in 2001 and $30.4 million in 2000.
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 personnel costs of approximately $3.5 million, the
reduction in outside legal and accounting fees, which accounted
for approximately $7.7 million, and the consolidation of
facilities, which accounted for approximately $6.6 million
of the decrease. General and

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administrative expenses in 2001 increased by
$11.8 million from 2000 primarily as a result of increased
compensation and other personnel costs from the additional
headcount added through the acquisitions completed during 2000.
Additionally, we incurred higher fees for outside professional
services in 2001, in particular significantly higher legal and
accounting fees related to the SEC investigation and shareholder
litigation which included legal fees reimbursed with respect to
indemnification obligations to former officers and directors.
These increases in general and administrative expenses were
partially offset by the termination of several employees in
connection with our 2001 restructuring initiative and the
implementation of other cost cutting measures. General and
administrative staffing totaled 88 employees at
December 31, 2002, 91 employees at December 31, 2001
and 144 employees at December 31, 2000. Consistent with
recently announced restructuring initiatives, headcount in
general and administrative is expected to decrease approximately
25% during 2003.


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 other intangible assets, for assembled workforce,
customer base, and existing technology. During 2000 and 2001 we
recorded amortization of goodwill of $341.7 million and
$643,000, respectively. In July 2001, the Financial Accounting
Standards Board 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 and
the reclassification of certain existing recognized intangibles
as goodwill. In connection with the adoption of SFAS
No. 142, in January 2002, we have 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 $5.8 million and $4.7 million during
2000 and 2001, respectively, and was included in amortization of
intangible assets. There was no amortization expense recorded in
2002. 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 have
recorded intangible assets related to certain warrants issued to
strategic partners. In connection with the adoption of SFAS
No. 142, discussed above, we have reclassified certain
intangible assets and related amortization associated with
assembled workforce out of intangible assets and into goodwill.
Based on the types of identifiable intangibles assets acquired,
amortization expenses of $18.1 million, $21.3 million
and $18.5 million were allocated to the cost of net
revenues and amortization expenses of $382.9 million,
$32.7 million and $24.8 million were allocated to
operating expenses in 2000, 2001 and 2002, respectively.
Additionally, we recorded charges related to the impairment of
certain long-lived assets, including intangible assets.
Impairment charges of $25.3 million and $16.7 million
were allocated to the cost of net revenues and impairment
charges of $1.3 billion and $10.0 million were
allocated to operating expenses in 2000 and 2001, respectively.
No impairment charges were expensed in 2002. See also the
Critical Accounting Policies section of Managements
Discussion and Analysis and Note 8 of Notes to Consolidated
Financial Statements  Goodwill and Other Intangible
Assets.

Warrants.During
1999 and 2000, we issued warrants to purchase shares of our
preferred and common stock pursuant to certain strategic
agreements. The value of these warrants were fully amortized as
of December 31, 2002. See also Note 8 of Notes to
Consolidated Financial Statements  Goodwill and Other
Intangible Assets and Note 17  Impairment of
Long-Lived Assets. We believe that these warrants could have a
significant future impact on our results of operations.

In January 1999, we entered into an agreement
with ICQ, Inc., a subsidiary of AOL Time Warner, pursuant to
which we agreed to 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 sub-branded advertising for Critical Path in exchange
for a warrant 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

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attained and the final revised aggregate fair
value of all vested warrants was $93.8 million, which is
being amortized to advertising expense using the straight-line
method over four years. During the fourth quarter of 2000, we
recorded an impairment charge of $16.8 million bringing the
adjusted fair value to approximately $30.1 million, which
was amortized over the remaining benefit period.


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 sub-branded advertising for us 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. In October 1999, the first of the six milestones had
been attained and the final revised aggregate fair value of the
vested warrants associated with the first milestone approximated
$22.2 million, which is being amortized to advertising
expense using the straight-line method over three years. 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 the fourth quarter of 2000, we recorded an
impairment charge of $4.8 million bringing the adjusted
fair value to approximately $8.6 million, which was
amortized over the remaining benefit period.

In December 1999, we entered into an agreement
with Worldsport Network Ltd., which was the sole and exclusive
provider of Internet solutions for the General Association of
International Sports Federations or GAISF and a majority of the
international federations it recognizes. Under the terms of the
agreement, Worldsport offered our 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 us 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 cancelled. Worldsport ceased
operations and filed for bankruptcy during 2000 and none of the
milestones are considered probable. Accordingly, no deferred
compensation associated with these warrants has been recognized.

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 a maximum of 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. The fair value of
approximately $2.0 million was being amortized to general
and administrative expenses using the straight-line method over
10 years. 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 as
stock-based expense.

In January 2000, The docSpace Company entered
into an agreement with a major telecommunications company
(Telco) pursuant to which docSpace would provide
secure messaging services to 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 a maximum of 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 our relationship. We believe the vesting
provisions of the agreement will be modified to reflect the
requirements of the new relationship. As of December 31,
2002, 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.

Acquired In-Process Research And Development.In connection with the acquisitions of
ISOCOR and PeerLogic during 2000, we recognized
$3.7 million in expenses representing the value
attributable to acquired in-process research and development
that had not yet reached technological feasibility and had no
alternative future use. This amount was determined by estimating
the future net cash flow of the acquired in-process research and
development over its respective estimated useful life and
discounting the net cash flow back to its present value. At
December 31, 2002, actual results were consistent, in all
material respects, with our

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assumptions at the time of the acquisitions. All
acquired in-process research and development was expensed at the
date of acquisition. No amounts were recognized resulting from
acquired in-process research and development during 2001 and
2002.


Acquisition-Related Retention Bonuses.In connection with the acquisitions of
dotOne, Amplitude, Xeti, FaxNet, ISOCOR, and docSpace, we
established various retention bonus programs that in the
aggregate amounted to approximately $20.7 million in
incentives for certain former employees of these companies to
encourage their continued employment with Critical Path. Based
on the employees participating in these programs during 2000,
expenses of $1.0 million were allocated to cost of net
revenues and expenses of $8.3 million were allocated to
operating expenses. During 2001 and 2002, expenses of
$1.4 million and $11,000, respectively, were allocated to
operating expenses related to these retention bonus programs.
The significant year over year decrease in acquisition-related
retention bonus expenses resulted from the completion of all
bonus programs in 2001 and 2002. All bonus programs were fully
amortized and funded at December 31, 2002.

Stock-Based Expenses.Stock-based expenses totaled
$25.2 million, $38.2 million and $10.0 million in
2000, 2001 and 2002, respectively. These amounts were comprised
of stock-based charges related to stock options granted to
employees and consultants. Based on the functions of the
employees and consultants participating in the related option
grants, during 2000, 2001 and 2002, expenses of
$1.6 million, $4.1 million and $1.2 million,
respectively, were allocated to cost of net revenues and the
remaining expenses were allocated to operating expenses. See
also the Critical Accounting Policies Section and
Managements Discussion and Analysis and Note 16 of
Notes to Consolidated Financial Statements 
Shareholders Equity (Deficit). During 2001 and 2002, we
incurred stock-based charges of approximately $1.7 million
and $627,000, 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. During 2000,
we incurred stock-based charges of approximately
$5.7 million in connection with certain severance
agreements for terminated employees. Approximately
$3.4 million of this charge was included in employee
severance expense in connection with our plan to reduce
worldwide headcount and the remaining $2.3 million was
included in stock-based expenses.

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, 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 operating expense related to the fair value of these
warrants. We are currently finalizing the terms of the
settlement of the derivative litigation associated with the same
period.

Stock-based expenses increased during 2000 and
2001 primarily caused by the increase in the number of stock
option grants with exercise prices below fair market value
during 1999 and 2001 and by the issuance of warrants in 1999
throughout 2001. During 2002 and the second half of 2001, the
unearned compensation balances related to these grants were
substantially reduced as a result of the headcount reductions
during 2000, 2001 and 2002, causing a reduction in stock-based
expense in 2002. All unearned compensation balances related to
the 1998 and 1999 grants were fully amortized as of
December 31, 2002 and $59,000 remained, related to the
March 2001 grants and will be fully amortized by March 31,
2003.



| |                                                                 
| | ----------------------------------------------------------------
| | Strategic Restructuring and Employee Severance
    (in millions)

|                                                            |       |                |     |         |  |         |     |               |  |                |      |      |   |   |      |      |   |   |     |     | 
|----------------------------------------------------------- | ----- | -------------- | --- | ------- |  | ------- | --- | ------------- |  | -------------- | ---- | ---- | - | - | ---- | ---- | - | - | --- | --- | 
|                                                            |       | Liabilities at |     |         |  |         |     |               |  | Liabilities at
|                                                            |       | December 31,   |     | Total   |  | Noncash |     | Cash Receipts |  | December 31,  
|                                                            |       | 2001           |     | Charges |  | Charges |     | (Payments)    |  | 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 | 

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In July 2000, we announced a plan to reduce our
worldwide employee headcount by approximately 113 employees or
11%. This employee reduction plan was executed with the intent
to realize various synergies gained through the nine
acquisitions we completed in 1999 and the first half of 2000.
During 2000, we recognized a charge for severance-related costs
totaling $6.7 million, comprised of $3.3 million in
cash charges and $3.4 million in stock-based compensation
expense, which resulted from the acceleration of certain
employee stock options in connection with our employee reduction
plan. During 2000, we paid all amounts related to employee
severance.

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 appropriate levels of
customer service. We completed our 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
Critical Path, 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 26% and 21% of total revenues in the
years ended December 31, 2000 and 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 our 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 the consolidation of facilities
we reduced from 77 facilities at March 31, 2001 to 27
facilities at December 31, 2001. Charges related to the
facility consolidation consisted primarily of lease termination
costs, future lease payments and related fees, and aggregated
approximately $9.0 million during 2001. At
December 31, 2002, the balance of the accrual was
approximately $600,000 and is expected to be utilized by the end
of 2003.

In May 2002, the Board of Directors approved a
restructuring plan to further 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. During 2002, approximately $762,000 was charged against
this accrual, primarily cash payments of severance related
costs. The balance of the accrual at December 31, 2002, of
approximately $777,000 is expected to be utilized by the end of
2003.

In January 2003, we announced a restructuring
initiative designed to further reduce our expense level in an
effort to achieve operating profitability assuming no or
moderate revenue growth. The cost-reduction plan targets a
reduction in operating expenses, excluding special charges,
amortization and depreciation, of approximately $22 million
annually. Quarterly operating expenses are expected to be
excluding special charges, amortization and depreciation, of
approximately $21 million to $22 million by mid-year
2003. The plan includes the consolidation of some office
locations and a global workforce reduction of approximately
175 positions, or approximately 30% of our workforce. The
headcount reduction is partially offset by outsourcing
approximately 75 positions to lower cost service providers. We
anticipate an aggregate charge of approximately
$7.5 million resulting from the cost reduction plan,
inclusive of $6.5 million in cash and $1.0 million in
non-cash expenses. Included in this plan were approximately
$1.7 million in charges incurred in the fourth quarter of
2002, comprised of approximately $668,000 in severance and
related costs and $1.0 million in facilities lease
termination costs. We expect to incur the remainder of the
charge through the first half of 2003. At December 31,
2002, the balance of the accrual was approximately
$1.2 million and is expected to be utilized by the end of
2003.



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

Interest and other income consists primarily of
interest earnings on cash and cash equivalents as well as net
gains (losses) on foreign exchange transactions. We
completed private placements of equity securities in

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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. As a result,
interest income increased significantly during the latter half
of 1999 and into 2000, in comparison with early 1999, due to
higher cash balances available for investing. During 2001, we
used $53.1 million to retire a substantial portion of our
convertible subordinated notes, as well as a significant amount
of cash to fund our operating activities during both 2001 and
2002. As a result of this reduction in cash, interest income
significantly decreased in 2001 and 2002 from 2000. During 2000,
we recognized a net loss from foreign currency transactions
associated with our international operations in the amount of
$280,000, a net gain of $947,000 in 2001 and a net loss of
$817,000 in 2002. Based on the current international markets, we
expect that fluctuations in foreign currencies could have a
significant impact to our operating results in 2003.


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 income or expense. At December 31, 2002,
the estimated fair value of the liquidation preference was
$12.6 million, resulting in a net charge to other expense
during 2002 of $7.4 million due to the increase in
estimated fair value of the liquidation preference from
$5.2 million at December 31, 2001.



| |                     
| | --------------------
| | 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
$34.4 million, $43.0 million and $27.2 million
during 2000, 2001 and 2002, respectively. Included in these
amounts was depreciation expense related to cost of net hosted
messaging revenues, which totaled $23.9 million,
$26.3 million and $15.3 million during 2000, 2001 and
2002, 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.



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

Interest expense consists primarily of interest
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, $12.1 million and $2.2 million in
interest expense on the Convertible Subordinated Notes, and
approximately $1.6 million, $1.5 million and $275,000
related to amortization of debt issuance costs in 2000, 2001 and
2002, respectively.



| |                                                
| | -----------------------------------------------
| | Equity in Net Loss of Critical Path
    Pacific

In June 2000, we established a joint venture,
Critical Path Pacific, Inc. with Mitsui and Co., Ltd., NTT
Communications Corporation and NEC Corporation to deliver
advanced Internet messaging solutions to businesses in Asia. We
invested $7.5 million and held a 40% ownership interest in
the joint venture. This investment was being accounted for using
the equity method. During 2000, 2001 and 2002, we recorded
equity in net loss of joint venture of approximately
$1.0 million, $1.9 million and $1.4 million,
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. The excess
of the purchase price of $5.6 million over the fair value
of the acquired net assets, primarily working capital and fixed
assets, of $4.6 million was recorded as goodwill. In
accordance with SFAS No. 142, this goodwill asset of
approximately $1.0 million will not be amortized; however,
we will test this asset for impairment on an annual basis, or
more frequently if events or circumstances indicate that the
asset might be impaired. We began including the financial
results of Critical Path Pacific in our own consolidated results
subsequent to the acquisition date. As a result, the second
quarter of 2002 represented the last quarter in which we used
the equity method to account for our ownership interest in
Critical Path Pacific.

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| |                                                               
| | --------------------------------------------------------------
| | Minority Interest in Net Income of
    Consolidated Subsidiary

In January 2000 and in connection with our
acquisition of Isocor Corporation, we acquired a 72.87% interest
in CP Italia. During 2000 and 2001 we consolidated their
operating results and recorded minority interest in net income
of CP Italia, which amounted to $649,000 in 2000 and was
insignificant in 2001. In March 2001, in connection with our
agreement to purchase the remaining minority interest, we
acquired the outstanding 27.13% interest in CP Italia for
approximately $4.2 million.



| |                    
| | -------------------
| | Loss on Investments

During 2000, 2001 and 2002, we determined that
certain of our investments were other than temporarily impaired
and recorded write downs of $23.6 million, $702,000 and
$1.5 million, respectively. During 2000, these adjustments
reduced the carrying value by $2.6 million in investments
in marketable securities and $21.0 million in investments
in non-marketable securities. During 2001 and 2002, investments
in non-marketable securities were written-down by $702,000 and
$1.5 million, respectively. 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 during 2000, 2001 and 2002 as certain of
our European operations generated income taxable in certain
European jurisdictions.



| |                               
| | ------------------------------
| | 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, 2001 and 2002, there was approximately
$600,000 and $560,000 in interest payable, respectively. 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 an extraordinary
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 Transaction. As of
December 31, 2001 and 2002, the total balance outstanding
was $38.4 million. These Notes are carried at cost and had
an approximate fair value at December 31, 2001 and 2002 of
$21.5 million and $32.4 million, respectively.



| |                
| | ---------------
| | 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. At December 31, 2002, we had no borrowings and
$3.0 million in letters of credit under the credit
facility. The credit facility is secured by certain of our
assets and borrowings bear variable interest, Prime rate plus
1.00%, and is subject to certain covenants. Interest is paid
each month with principle due at maturity. Commitment fees
related to the credit facility include an initial commitment fee
of 0.50%, or $75,000, which was paid upon close, an early
termination fee of 0.50% due and payable should we elect to
cancel the facility within the first six months from closing,
and an additional fee based on unused credit of 0.45% payable at
the end of each quarterly period in arrears. The

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credit facility was scheduled to mature on
September 30, 2003, however it was recently amended on
March 25, 2003, to extend the maturity date to
March 31, 2004 and revise certain covenants. At
December 31, 2002, we were in compliance with the covenants
required under the amended credit facility. In connection with
the extension we paid an additional commitment fee of $37,500
and extended the initial six-month period subject to an early
termination fee through September 30, 2003. The interest
rate on the credit facility was 4.7% during 2002.


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
Convertible Preferred Stock. See also Financing Transaction
below or Note 15 of Notes to Consolidated Financial
Statements  Financing Transaction.

During 2001 and 2002, the accretion on redeemable
convertible preferred shares totaled $356,000 and
$13.9 million, respectively. The accretion during 2001 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.

Financing
Transaction

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
Transaction. 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
2.5 million 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
principle 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, as defined, divided by $1.05, 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

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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 of Series D Preferred
Stock, which at December 31, 2002 was $4.20, 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. At
December 31, 2001, the estimated fair value of the
liquidation preference was $5.2 million 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 and until November 8, 2006 for an
exercise price of $1.05, 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.

Related Party Transactions

Vectis Group, LLC.In March 2001, we entered into certain
agreements with Vectis Group, LLC (Vectis Group) to
engage Vectis Group to act as an advisor to us with respect to
various strategic alternatives we were exploring and to assist
with other management related services. As part of the
agreement, Vectis Group agreed to provide us consulting services
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 our 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, we 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 closed in December 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 of Notes to Consolidated
Financial Statements  Financing Transaction. 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 in April 2001 and was
later appointed Vice Chairman and Chief Executive Officer.
Effective September 30, 2001, we terminated our 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 our employees.
Although the agreements were terminated, certain obligations
under the agreement survived, including the transaction fee paid
in connection with our Series D Preferred Stock financing
transaction and related indemnification obligations. The total
potential remaining fees payable aggregate between zero and
$135,000.

Loans to Shareholders and Officers.During 1998, we issued a full recourse
note to a shareholder and former Chief Executive Officer,
Douglas Hickey, with a principal amount of $1.06 million.
Mr. Hickeys full recourse note accrued interest at
the rate of 4.51% per annum and was secured by shares of our
common stock owned by Mr. Hickey. In February 2001,
Mr. Hickey terminated his employment with us. In connection
with the termination, the repayment of the $1.06 million
note receivable and accrued interest was extended to May 9,
2002. As of December 31, 2000 and 2001, accrued interest
totaled $109,000 and $158,000, respectively. Mr. Hickey
repaid this note in full with interest in March 2002.

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During 2000, we issued a note to former Chief
Financial Officer, Lawrence Reinhold, with a principal amount of
$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
approximately $270,000 of principal and interest was forgiven
and charged to operating expenses, consistent with the terms of
the note. 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
us. In connection with the termination, all outstanding
principal and interest of $1.5 million was forgiven by us
and charged to operating expense.

In connection with his employment agreement, in
October 2001, we made a loan and held a note receivable from
Pierre Van Beneden, President, totalling $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.
Mr. Van Benedens employment terminated shortly
thereafter.

During 2001 and in connection with his employment
agreement, we loaned and held a note receivable from David
Hayden, Executive Chairman and a Director of the Board, 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 Critical Path, 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 us, some
of the terms of the loan were altered as described in this
section below under Termination Agreements.

In December 2001, the Board approved a fully
secured loan to William McGlashan, Jr., our 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
has yet been funded.

In connection with the reduction of the loan
commitment, in May 2002 Mr. McGlashan was granted an option to
purchase 1,000,000 shares of 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 our
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 we now hold 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 portion of the purchase price
representing the purchase price of the vested
shares. As of December 31, 2003, no interest had accrued,
however we expect interest will begin accruing in May 2003.

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
has been recognized as an asset, in Other assets, and as a
liability, in Capital lease and other obligations. These
balances will be reclassified to shareholders equity as
the right of repurchase lapses.

Termination 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 to repay
the $1.95 million loan with us until no later than
June 30, 2005, an

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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 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 will 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
$572,000 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, 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 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 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 executed a mutual release of all
claims.

Consulting Agreements.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 member of the Board of
Critical Path. 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 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.

In August 2002, we 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 Critical Path, is a partner of
R.B. Webber and Company. Mr. Webber shall also provide
consulting services under the agreement.

Acquisitions

The following is a summary of the ten
acquisitions we completed during 1999 and 2000. There were no
acquisitions completed during 2001. In June 2002, we acquired
the remaining 60% ownership interest in Critical Path Pacific.
All acquisitions were accounted for using the purchase method of
accounting. Results of operations of the acquired businesses are
included in our 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 and the
excess of the purchase price over the fair value of separately
identified net assets acquired is included in goodwill in the
accompanying consolidated balance sheets. The fair value of
separately identified intangible assets was determined based
upon independent valuations using various valuation
methodologies. See also Note 2 of Notes to Consolidated
Financial Statements  Acquisitions.

1999 Acquisitions.On May 26, 1999, we acquired substantially all the
operating assets of the Connect Service business of Fabrik
Communications, for a total purchase price of approximately
$20.1 million. On July 21, 1999, we acquired dotOne
Corporation, a corporate email messaging service provider
for a total purchase price of approximately $57.0 million.
On August 31, 1999, we acquired Amplitude Software

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Corporation , a
provider of business-to-business Internet calendaring and
resource scheduling solutions for a total purchase price of
approximately $214.4 million. On November 24, 1999, we
acquired Xeti, Inc., a developer of standards-based
public key infrastructure solutions for a total purchase price
of approximately $23.8 million. On December 6, 1999,
we acquired FaxNet Corporation, a outsource supplier of
carrier-class enhanced fax and integrated messaging solutions
for a total purchase price of approximately $187.6 million.


2000 Acquisitions.On January 19, 2000, we acquired
ISOCOR Corporation, a supplier of Internet messaging,
directory and meta-directory software solutions for a total
purchase price of approximately $277.4 million. On
March 8, 2000, we acquired The docSpace Company, a
provider of web-based services for secure file delivery, storage
and collaboration for a total purchase price of approximately
$258.0 million. On March 30, 2000, we acquired
RemarQ Communities, Inc., a provider of Internet
collaboration services for corporations, web portals and
Internet service providers for a total purchase price of
approximately $267.6 million. On June 26, 2000, we
acquired Netmosphere, Inc., a provider of e-Business
solutions for project collaboration and communications for a
total purchase price of approximately $41.3 million. On
September 26, 2000, we acquired PeerLogic, Inc., a
provider of directory and enterprise application integration
software for a total purchase price of approximately
$445.1 million.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities
were $43.1 million, $69.2 million and
$216.5 million at December 31, 2002, 2001 and 2000,
respectively. 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.
As of December 31, 2002 and 2001, these marketable
securities totaled approximately $9.6 million and
$9.7 million, respectively. During 2000, there were no
investments with maturities greater than 90 days.

Cash and cash equivalents decreased by
$25.9 million during 2002 and $156.5 million during
2001 after having increased by $140.6 million in 2000. We
used cash to fund operating activities of $24.8 million
during 2002, $91.2 million during 2001 and
$80.5 million in 2000, 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
2002 and 2001 were net cash outlays totaling $2.3 million
and $8.2 million, respectively, related to our 2002 and
2001 strategic restructuring activities. In 2000, payments of
acquisition-related retention bonuses totaled $11.6 million
and contributed to the net use of cash in operating activities.
A more detailed discussion of our 2000, 2001 and 2002 operating
results can be found in the Results of Operations section of
this document.

A number of non-cash items have been charged to
expense and increased our net loss in 2002. These items include
depreciation and amortization of property and equipment and
intangible assets, amortization of unearned stock-based
compensation and other stock-based compensation charges and
provisions for doubtful accounts. To the extent these non-cash
items increase or decrease in amount and increase or decrease
our future operating results, there will be no corresponding
impact on our cash flows.

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

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

During 2002, 2001 and 2000, we used cash in
investing activities of $1.8 million, $34.9 million and
$90.4 million to purchase property and equipment, primarily
for the acquisition of additional network

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infrastructure equipment for our data centers,
for certain strategic investments in private entities and
short-term investments in high-grade, low risk instruments.
Investments in property and equipment totaled $6.8 million,
$11.2 million and $54.5 million during 2002, 2001 and
2000. Additionally, 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 used. In 2001, we acquired the
outstanding 27.13% interest in our Italian subsidiary,
CP Italia, for approximately $4.2 million, and paid an
investment banking fee associated with our ISOCOR acquisition.
During 2000, we completed our acquisitions of ISOCOR, docSpace,
RemarQ, Netmosphere, and PeerLogic, and as a result, expended
capital of $15.6 million, net of cash acquired. In
addition, we made several strategic investments in private
entities totaling approximately $28 million and an initial
capital contribution of $7.5 million to fund our initial
interest in Critical Path Pacific, Inc. These uses of cash were
offset by the repayment of a previous advance made to a private
company pursuant to a promissory note and certain of the
employee notes.


During 2002 and 2001 we used cash in financing
activities of $781,000 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 (detailed below), the
repayment of notes receivable from officers and shareholders and
from the exercise of stock options.

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. Additionally, we entered into a $15.0 million
one-year non-formula line of credit with Silicon Valley Bank in
September 2002. The primary use of the credit facility is for
working capital and general corporate operations. At
December 31, 2002, we had no borrowings and
$3.0 million in letters of credit under the credit facility.

During 2001, we used cash in financing activities
of $59.6 million to retire a significant portion of our
convertible debt and to payoff capital lease obligations. 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.

During 2001, we retired $261.4 million of
face value of convertible debt, 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. We used cash of $53.1 million, as well as a
significant portion of the proceeds raised from the issuance of
preferred stock, in order to retire this debt. See also Note 15
of Notes to Consolidated Financial Statements 
Financing Transaction. As of December 31, 2000, 2001 and
2002 the total balance outstanding was $300.0 million,
$38.4 million and $38.4 million, respectively.

During 2001, we closed a financing transaction
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 and its affiliates of warrants to
purchase 2.5 million shares of common stock. The cash
proceeds to us, net of transaction costs, totaled
$26.8 million.

We received net cash proceeds from financing
activities during 2000 of $311.5 million due to the sale of
$300.0 million in 5 3/4% Convertible Subordinated
Notes, as well as from the exercise of employee stock options
and the purchase of stock under our employee stock purchase
plan. These cash proceeds were partially offset by a payment of
$6.0 million to retire a note payable assumed in the
PeerLogic acquisition and payments of $6.8 million to
retire principal on capital lease obligations.

We receive cash from the exercise of stock
options and the sale of stock under our Employee Stock Purchase
Plan. While we expect to continue to receive these proceeds in
future periods, the timing and amount of such proceeds is
difficult to predict and is contingent on a number of factors
including the price of our common stock, the number of employees
participating in the stock option plans and our Employee Stock
Purchase Plan and general market conditions.

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Our primary sources of capital have come from
both debt and equity financings that we have completed over the
past three years. Revenues generated from the sale of our
products and services may not increase to a level that exceeds
our operating expenses or could fluctuate significantly as a
result of changes in customer demand or acceptance of future
products. We expect our operating expenses to decrease in 2003,
however if we are not successful in achieving this reduction our
operating expenses will constitute a material use of our cash.
Accordingly, our cash flow from operations may continue to be
negatively impacted. However, we believe that our cash, cash
equivalents, marketable securities and available line of credit
will be sufficient to maintain current and planned operations
for at least the next twelve months.

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

The Contractual Obligations and Commitments Table
below sets forth our significant obligations and commitments as
of December 31, 2002.

|                              |                                                           |                                    |   |        |        |      |   |       |        |      |   |            |        |  |   |        |        |  |   |       |       |  |   |        |        | 
|----------------------------- | --------------------------------------------------------- | ---------------------------------- | - | ------ | ------ | ---- | - | ----- | ------ | ---- | - | ---------- | ------ |  | - | ------ | ------ |  | - | ----- | ----- |  | - | ------ | ------ | 
|                              |                                                           |                                   
|                              |                                                           | Fiscal Year                       
|                              |                                                           |                                   
|                              |                                                           |                                    |   | 2007  
|                              |                                                           | Total                              |   | 2003   |        | 2004 |   | 2005  |        | 2006 |   | and beyond
|                              |                                                           |                                    |   |        |        |      |   |       |        |      |   |           
|                              |                                                           |                                   
|                              |                                                           | (In thousands)                    
|Contractual Cash Obligations: |                                                           |                                    |   |        |        |      |   |       |        |      |   |            |        |  |   |        |        |  |   |       |       |  |   |       
|                              | Convertible subordinated notes, including
    interest(1) |                                    | $ | 43,692 |        |      | $ | 2,206 |        |      | $ | 2,206      |        |  | $ | 39,280 |        |  | $ |      |       |  | $ |       |       
|                              | Operating lease obligations                               |                                    |   | 36,729 |        |      |   | 5,452 |        |      |   | 4,920      |        |  |   | 4,529  |        |  |   | 3,777 |       |  |   | 18,051 |       
|                              | Capital lease obligations                                 |                                    |   | 2,898  |        |      |   | 2,541 |        |      |   | 357        |        |  |   |       |        |  |   |      |       |  |   |       |       
|                              | Other purchase obligations(2)                             |                                    |   | 13,986 |        |      |   | 7,946 |        |      |   | 5,577      |        |  |   | 230    |        |  |   | 118   |       |  |   | 115    |       
|                              |                                                           |                                    |   |        |        |      |   |       |        |      |   |            |        |  |   |        |        |  |   |       |       |  |   |       
|                              |                                                           | Total Contractual Cash Obligations |   | $      | 97,305 |      |   | $     | 18,145 |      |   | $          | 13,060 |  |   | $      | 44,039 |  |   | $     | 3,895 |  |   | $      | 18,166 | 
|                              |                                                           |                                    |   |        |        |      |   |       |        |      |   |            |        |  |   |        |        |  |   |       |       |  |   |       



---



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

Recent Accounting Pronouncements

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

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In November 2002, the FASB issued FIN
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN No. 45 requires that a
liability be recorded at fair value in the guarantors
balance sheet upon issuance of a guarantee. In addition,
FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes
in the entitys product warranty liabilities. The initial
recognition and initial measurement provisions of FIN
No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year-end. We have adopted the
disclosure requirements, contained in Note 13 of Notes to
Consolidated Financial Statements  Commitments and
Contingencies, and are currently assessing the impact of the
recognition and initial measurement provisions of
FIN No. 45 will have on our financial position and
results of operations.

In July 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). This Statement requires that a
liability for costs associated with an exit or disposal activity
be recognized and measured initially at fair value only when the
liability is incurred. The provisions of this Statement are
effective for exit or disposal activities that are initiated
after December 31, 2002. We adopted SFAS No. 146
in the first quarter of 2003 and will recognize approximately
$5.9 million of restructuring costs during the year ending
December 31, 2003 as the related liabilities are incurred.

In April 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of SFAS No. 13, and
Technical Corrections. The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 are effective
for fiscal years beginning after May 15, 2002. Other
provisions of SFAS No. 145 are effective for financial
statements issued on or after May 15, 2002 and rescinds
both SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and the amendment to
SFAS No. 4, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. Through this
rescission, SFAS No. 145 eliminates the requirement
that gains and losses from the extinguishment of debt be
aggregated and, if material, classified as an extraordinary
item, net of the related income tax effect. We early adopted the
rules on accounting and reporting gains and losses from
extinguishment of debt in the second quarter of fiscal 2002.
Adoption resulted in the reclassification of certain gains on
extinguishment of debt recorded in fiscal 2001.

In October 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement supersedes
SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. This
Statement applies to all long-lived assets (including
discontinued operations) and consequently amends APB Opinion
No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. This Statement develops one accounting model for
long-lived assets that are to be disposed of by sale. This
Statement requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or
fair value less cost to sell. Additionally, this Statement
expands the scope of discontinued operations to include all
components of an entity with operations that can be
distinguished from the rest of the entity and will be eliminated
from the ongoing operations of the entity in a disposal
transaction. This Statement is effective for financial
statements issued for fiscal years beginning after
December 15, 2001. We adopted SFAS No. 144 on
January 1, 2002, and the adoption of this Statement did not
have a material impact on our financial position and results of
operations.

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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
OPERATING RESULTS

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

We cannot accurately forecast our revenues as a
result of our limited operating history, evolving business
strategy and the emerging nature of the Internet messaging
infrastructure market. Forecasting is further complicated by
rapid changes in our business due to integration of acquisitions
we completed in 1999 and 2000, our recent strategic and
operational restructuring, as well as significant fluctuations
in license revenues as a percentage of total revenues from an
insignificant percentage in 1999, to 38% in 2000, 30% in 2001
and 40% in 2002. Our revenues in some past quarters fell and
could continue to fall short of expectations if we experience
delays or cancellations of even a small number of orders. We
often offer volume-based pricing, which may affect operating
margins. A number of factors are likely to cause fluctuations in
operating results, including, but not limited to:



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

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

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

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

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

Our ability to increase revenues will depend on
our ability to continue to successfully recruit, train and
retain experienced and effective sales and marketing personnel
and to achieve results once employed with us. Competition for
experienced and effective personnel in certain markets is
intense and we may not be able to hire and retain personnel with
relevant experience. The complexity and implementation of our
messaging and directory infrastructure products and services
require highly trained sales and marketing personnel to educate
prospective customers regarding the use and benefits of our
services. Current and prospective customers, in turn, must be
able to educate their end-users. Any delays or difficulties
encountered in our staffing and training efforts would impair
our ability to attract new customers and enhance our
relationships with existing customers, and ultimately, grow
revenues. This would also adversely impact the timing and extent
of our revenues from quarter to quarter and overall or could
jeopardize sales altogether. Because we have experienced
turnover in our sales force and have fewer resources than many
of our competitors, our sales and marketing organizations may
not be able to compete successfully against the sales and
marketing organizations of our competitors. Moreover, our
competitors frequently have larger and more established sales
forces calling upon potential enterprise customers with more
frequency. In addition, certain of our competitors have longer
and closer relationships with the senior management of
enterprise customers who decide whose technologies and solutions
to deploy. If we do not successfully operate and grow our sales
and marketing activities, our business and results of operations
could suffer and the price of our common stock could continue to
decline.

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

As of December 31, 2002, we had an
accumulated deficit, including other comprehensive income, of
approximately $2.2 billion. We have not achieved
profitability in any period and expect to continue to incur net
losses in accordance with generally accepted accounting
principles for the foreseeable future. However, we will continue
to spend resources on maintaining and strengthening our
business, and this may, in the near term, have a negative effect
on our operating results and our financial condition.

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

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

Throughout 2001 and 2002, we announced a series
of changes in our management that included the departure of many
senior executives and also made changes in our board of
directors. A majority of the board of directors and senior
executives of the Company joined us in 2001 and 2002. We have
made additional changes in recent months to our senior
management team due to a variety of factors. Because of these
changes and recent recruitment, our management team has not
worked together as a group for a significant length of time and
may not be able to work together effectively to successfully
execute on revenue goals, implement our strategies and manage
our operations. If our management team is unable to accomplish
our business objectives, our ability to grow our business and
successfully meet operational challenges could be severely

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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 harm our
business and affect our ability to successfully implement our
business objectives.


We depend on strategic relationships and the
loss of any key strategic relationships could harm our business
and negatively affect our revenues.

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

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

We expect that sales of our products and services
to a limited number of customers will continue to account for a
high percentage of our revenue for the foreseeable future. Our
future success depends on our ability to retain our current
customers, and to attract new customers, in our target markets.
The loss of one or several major customers, whether through
termination of agreements, acquisitions or bankruptcy, could
harm our business. Our agreements with our customers typically
have terms of one to three years often with automatic one-year
renewals and can be terminated without cause upon certain notice
periods that vary among our agreements and range from a period
of thirty to 120 days notice. In addition, a number of our
customers, particularly for our hosted services business and in
the technology industry, have also suffered from falling
revenue, job losses, restructuring and decreased technology
spending in the recent economic downturn. Especially in the
telecommunications industry, which represents a sizeable portion
of our customer base, the relative financial performance of our
customers will continue to impact our sales cycles and ability
to attract new business. If our customers terminate their
agreements for any reason before the end of the contract term,
the loss of the customer could have an adverse impact on our
current and future revenues. Also, if we are unable to enter
into agreements with new customers and develop business with our
existing customers, our business will not grow and we will not
generate additional revenues.

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

Because we have a variety of messaging and
directory infrastructure products and services, we encounter
different competitors at each level of our products and
services. Our primary competitors for service providers seeking
insourced or outsourced product-based solutions are Sun
Microsystems iPlanet and OpenWave Systems, Inc.,
Mirapoint, Inc., Oracle Corporation, Microsoft Corporation and
IBM Corporations Lotus Division. For secure delivery
services, our competitors include Tumbleweed Communications
Corp. for product-based solutions and SlamDunk Networks for
service-based solutions, as well as Atabok Inc. and Zixit
Corporation. In the enterprise/eBusiness directory category, we
compete primarily with iPlanet, Microsoft Corporation and Novell
Corporation, and our competitors in the meta-directory market
are iPlanet, Microsoft, Novell and Siemens Corporation. Our
competitors for corporate customers seeking outsourced hosted
messaging solutions are email service providers, such as
CommTouch, Easylink Services Corporation (formerly Mail.com),
USA.Net and application service providers who offer hosted
exchange services.

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



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

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

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

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

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Our sales cycle is lengthy, has lengthened in
recent quarters, and our results could be harmed by delays or
cancellations in orders.

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

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

In December 2001, we issued 4,000,000 shares of
Series D Cumulative Convertible Redeemable Preferred Stock,
and additional warrants, in a private placement to certain
investors. The shares of Series D Preferred Stock have an
aggregate liquidation preference of $81.4 million. The
shares of Series D Preferred Stock was convertible as of
December 31, 2002 into common stock (including all accreted
amounts) at an aggregate conversion price of $59.5 million
and were convertible into 56.8 million shares of common
stock. To the extent the Series D Preferred Stock is
converted into common stock, a very significant number of
additional shares of common stock may be sold into the market,
which could decrease the price of our common stock.

In the event of a liquidation, dissolution or
winding up of Critical Path, the holders of Series D
Preferred Stock would be entitled to receive a liquidation value
as of December 31, 2002 of between $59.5 million and
$81.4 million depending on the per share value in
connection with the event. In the event that we were to enter
into a merger or sale in which the total value of the
transaction would be less than the then current liquidation
value of each preferred share, a buyer would unlikely be willing
to assume the liquidation preferences and other obligations
represented by the Series D Preferred Stock. Consequently,
we currently anticipate that any transaction resulting in the
sale of all of substantially all of the shares of Critical Path
would result in substantially all of the proceeds of such
transaction being distributed to the holders of our
Series D Preferred Stock.

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

We believe that existing capital resources will
enable us to maintain current and planned operations through at
least December 31, 2003. However, additional capital may be
required to continue operations and achieve profitability. In
addition, we may be required to raise additional funds due to
unforeseen circumstances and market conditions. If our capital
requirements vary materially from those currently planned, we
may require additional financing even sooner than anticipated.
Such financing may not be available in sufficient amounts or on
terms acceptable to us and may be dilutive to existing
shareholders. Additionally, we face a number of challenges in
operating our business, including but not limited to the
resources to maintain worldwide operations, continued
sluggishness in technology spending, and significant contingent
liabilities associated with litigation. In the event that
resolution of these or other operational matters involve
issuance of stock or other derivative instruments, our existing
shareholders may experience significant dilution.

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

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

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

Failure to resolve pending securities claims
and other material lawsuits could significantly harm our
business.

Although the Company reached and the court
approved settlement agreements in connection with the securities
class action pending in the U.S. District Court for the Northern
District of California, a number of plaintiffs associated with
the acquisition of Peer Logic, Inc. opted out of such
settlement. The case against the Company with respect to these
plaintiffs continues in the Southern District of New York. In
addition, the Company is a defendant in a number of securities
class action lawsuits filed in the U.S. District Court for the
Southern District of New York, alleging that prospectuses under
which securities were sold contained false and misleading
statements with respect to discounts and commissions received by
underwriters. Should these lawsuits linger for a long period of
time, whether resolved in the Companys favor or not, or
further lawsuits be filed against us there can be no assurance
that fees and expenses, and any ultimate resolution associated
with such litigation, will be within the coverage limits of our
insurance and/or our ability to pay such amounts. Likewise,
there can be no assurance that the Company will be able to
conclude or settle such litigation on terms that coincide with
the coverage limits of our insurance and/or ability to pay upon
any final determination. A failure to definitively resolve
material litigation in which the Company is involved or in which
it may become involved in the future, regardless of the merits
of the respective cases, could also cast doubt as to the
prospects of the Company in the eyes of our customers, potential
customers and investors, and cause the Companys stock
price to further decline.

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

In 2001, the SEC investigated the Company and
certain of its former officers and directors related to
non-specified accounting matters, financial reports, other
public disclosures and trading activity in our stock. In
February 2002, the SEC concluded the investigation as to the
Company. Although the SEC did not impose any financial or
criminal penalties against the Company, we consented, without
admitting or denying liability, to a cease and desist order and
an administrative order for violation of certain non-fraud
provisions of the federal securities laws. In addition, since
then the SEC and the Department of Justice charged five former
employees of the Company with various violations of the
securities laws. We believe that the investigation continues
with respect to a number of other former executives and
employees of the Company and expect that such investigation may
result in further charges against former employees although we
do not know the status

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of such investigation. Despite the conclusion of
the investigation of the Company, lingering concerns about the
actions leading up to the restatement of financials for the
third quarter of 2000 have nevertheless cast doubt on the future
of the Company in the eyes of customers and investors. In
addition, a number of recent arrests, allegations and
investigations in connection with accounting improprieties,
insider trading and fraud at other public companies have created
investor uncertainty and scrutiny in general as to the stability
and veracity of public companies financial statements.
Such lingering doubts stemming from the Companys past
accounting restatements and such general market uncertainty
could harm our business and cause the price of our common stock
to continue to fluctuate and/or decline further.


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

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

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

The Nasdaq Stock Market has quantitative
maintenance criteria for the continued listing of common stock
on the Nasdaq National Market. The current requirements
affecting us include (i) having net tangible assets of at
least $4 million and (ii) maintaining a minimum closing bid
price per share of $1. As of November 13, 2002 we were not
in compliance with Nasdaq National Market minimum bid listing
requirements and had not been in compliance since
September 19, 2002. As of December 20, 2002, if our
common stock price remains below $1.00 and we were unable to
take actions that resulted in per share closing bid price
exceeding and remaining above $1.00 for a period of ten trading
days, and became subject to a delisting action of our common
stock by the Nasdaq National Market. Upon receipt of the
delisting notice we requested a hearing before the Nasdaq
Listing Qualifications Panel, which was granted and held on
January 30, 2003. At the hearing, the Company presented its
plan to regain long term compliance with the minimum closing bid
listing requirement through effecting a reverse stock split of
the Companys common stock. After the meeting, the Nasdaq
National Market announced proposed rules changes that extended
the grace period for regaining compliance with the minimum bid
listing requirement and as result the Company requested, and was
granted, an extension on the delisting proceeding for a period
of 60 additional days pending review and approval by the SEC of
the rules change.

Also effective November 1, 2002, we need to
comply with the Nasdaq National Markets revised
quantitative maintenance criteria including a new minimum
requirement of $10.0 million in stockholders equity.
The Nasdaq National Markets Audit Committee Rules require
that our audit committee be comprised of at least three
independent members. Although we believe that we currently
comply with this requirement and other Nasdaq National
Marketplace Rules, recent amendments to such rules may involve
changes to listing requirements and the membership of our Board
committees, and will require review and potential changes in our
policies, procedures and committee memberships to remain in
compliance. As a result, the Company is currently evaluating its
compliance with rule changes to ensure future compliance with
proposed, and amended rules.

Nevertheless, there can be no assurance that we
will be able to comply with the quantitative or quantitative
maintenance criteria or any of the Nasdaq National Markets
listing requirements or other rules, or other markets listing
requirements to the extent our stock is listed elsewhere, in the
future. If we fail to maintain continued listing on the Nasdaq
National Market and must move to a market with less liquidity,
our financial condition could be harmed and our stock price
would likely further decline. If we are delisted, it

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could have a material adverse effect on the
market price of, and the liquidity of the trading market for,
our common stock.


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

The trading price of our common stock has been
and may continue to experience volatility, wide fluctuations and
declines. For example, during the fourth quarter of 2002, the
closing sale prices of our common stock on the Nasdaq National
Market ranged from $0.41 on October 21, 2002 to $0.90 on
December 2, 2002. The closing price of our stock on
December 31, 2002 was $0.51 per share, and on
March 14, 2003 it was $0.83 per share. Our stock price may
further decline or fluctuate in response to any number of
factors and events, such as announcements related to
technological innovations, intense regulatory scrutiny and new
corporate and securities and other legislation, strategic and
sales relationships, new product and service offerings by us or
our competitors, litigation outcomes, changes in senior
management, changes in financial estimates and recommendations
of securities analysts, the operating and stock price
performance of other companies that investors may deem
comparable, news reports relating to trends in our markets and
the market for our stock, media interest in accounting scandals
and corporate governance questions, overall market conditions
and domestic and international economic factors unrelated to our
performance. In addition, the stock market in general,
particularly with respect to technology stocks, has experienced
extreme volatility and a significant cumulative decline in
recent quarters. This volatility and decline has affected many
companies, including our company, irrespective of the specific
operating performance of such companies. These broad market
influences and fluctuations may adversely affect the price of
our stock, and our ability to remain listed on the Nasdaq
National Market, regardless of our operating performance or
other factors.

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

Our liability insurance for actions taken by
officers and directors during the period from March 1999 to
March 2001, the period during which events related to securities
class action lawsuits against us and certain of former executive
officers are alleged to have occurred, provided only limited
liability protection. While these policies covered the
settlement amount paid in connection with the settlement of the
primary securities class action, there can be no assurance that
the policies will continue to cover other pending matters and
related expenses from that period or future periods. If these
policies do not adequately cover our expenses related to those
lawsuits and the investigation, our business and financial
condition could be seriously harmed. Our current director and
officer liability insurance, which was put in place in March
2002, and continues through March 2003, contains similar
provisions, and in the event circumstances arise requiring
coverage by such policies there can be no assurance that they
will be adequate for the liabilities and expenses potentially
incurred. To the extent liabilities, expenses, or settlements
thereof, exceed the limitations of coverage, our business and
financial condition could be materially harmed. We are currently
finalizing the terms and conditions of director and officer
liability insurance for the period from March 2003 to March 2004.

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

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

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

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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 who have been granted
stock-based incentive compensation. In recent quarters we have
also initiated reductions in our work force and job eliminations
to balance the size of our employee base with anticipated
revenue levels. Reductions in our workforce could make it
difficult to motivate and retain remaining employees or attract
needed new employees, and provide distractions affecting our
ability to deliver products and solutions in a timely fashion
and provide a high level of customer service and support.


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

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

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

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

Economic growth has slowed significantly, and
some analysts believe the United States economy is experiencing
a recession. In addition, the terrorists attacks in the United
States and turmoil in the Middle East have increased the
uncertainty in the United States economy and may further add to
the decline in the United States business environment. The war
on terrorism, along with the effects of the terrorist attack and
other similar events, or war in general, 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 because of the war in the Middle East and
elsewhere, we may experience decreases in the demand for our
products and services, which may harm our operating results.

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

Acquisitions involve risks related to the
integration and management of acquired technology, operations
and personnel. In addition, in connection with our strategic
restructuring, the Company elected to divest or discontinue many
of the acquired businesses. Both the integration and divestiture
of acquired businesses have been and will continue to be
complex, time consuming and expensive processes, which may
disrupt and distract our management. With respect to
integration, we must operate as a combined organization utilizing

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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
expectations, we eliminated certain acquired product or service
offerings through termination, sale or other disposition. Such
decisions to eliminate or limit our offering of an acquired
product or service involved and could continue to include the
expenditure of capital, the realization of losses, further
reduction in workforce, facility consolidation, and/or the
elimination of revenues along with the associated costs, any of
which could harm our financial condition and operating results.

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

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

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

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

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

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

Finally, the Company faces increased regulatory
scrutiny and potential criminal liability for its executives
associated with various accounting and corporate governance
rules promulgated under the Sarbanes-Oxley Act of 2002. The
Company is currently reviewing all of its accounting policies
and practices, legal disclosure and corporate governance
policies under the new legislation, including those related to
its relationships with its independent accountants, enhanced
financial disclosures, internal controls, board and board
committee practices, corporate responsibility and loan
practices, and intends to fully comply with such laws.
Nevertheless, such increased scrutiny and penalties involve
risks to both the Company and its executive officers and
directors in monitoring and insuring compliance. A failure to
properly navigate the legal disclosure environment and implement
appropriate policies and procedures, if needed could harm the
Companys business and prospects.

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

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

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

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

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

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

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

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

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

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

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.              

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

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

We assume a certain level of credit risk with our
customers in order to do business. Conditions affecting any of
our customers could cause them to become unable or unwilling to
pay us in a timely manner, or at all, for products or services
we have already provided them. For example, if the current
economic conditions continue to decline or if new or
unanticipated government regulations are enacted which affect
our customers, they may be unable to pay their bills. In the
past, we have experienced significant collection delays from
certain customers, and we cannot predict whether we will
continue to experience similar or more severe delays in the
future. In particular, some of our customers are suffering from
the general weakness in the economy and among technology
companies in particular. Although we have established reserves
to cover losses due to delays in or inability to pay, there can
be no assurance that such reserves will be sufficient to cover
our losses. If losses due to delays or inability to pay are
greater than our reserves, it could harm our business, operating
results and financial condition.

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

We derived 54% of our revenues from international
sales in 2002 and 40% of our revenues from international sales
in 2001. We intend to continue to operate in international
markets and to spend significant financial and managerial
resources to do so. In particular, we have purchased the
remaining interests of our joint venture partners for our
operations in Japan. We plan to expend revenues and resources to
grow our operations in the Asian market. If revenues from
international operations do not exceed the expense of
establishing and maintaining these operations, our business,
financial condition and operating results will suffer. We have
limited experience in international operations and may not be
able to compete or operate effectively in international markets.
We face certain risks inherent in conducting business
internationally, including:



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

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

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

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

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

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



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




Item 7A. Quantitative and
Qualitative Disclosures About Market Risk

As of December 31, 2002, our investments in
marketable securities consisted of available-for-sale
securities, excluding those classified as cash equivalents, of
$9.6 million. These investments are primarily comprised of
low risk government securities, agency and corporate bonds. See
also Note 6 of Notes to Consolidated Financial Statements 
Investments.

We also hold equity investments in certain public
and privately held companies, these securities are subject to
equity price risk. We have not attempted to reduce or eliminate
its market exposure on these equity securities. At
December 31, 2002, we carried long-term investments
totaling $357,000, comprised of marketable securities. Our
non-marketable securities have been eliminated through
write-downs and the acquisition of the remaining ownership
interest in Critical Path Pacific. See also Note 2 of Notes to
Consolidated Financial Statements  Acquisitions. For each
10% decline in market value of its available-for-sale equity
securities from December 31, 2002, our marketable
securities would be insignificantly impacted.

Our long-term obligations consist of our
$38.4 million five-year, 5 3/4% Convertible
Subordinated Notes due April 2005, and certain fixed rate
capital leases. Accordingly, an immediate 10% change in interest
rates would not affect our long-term obligations or our results
of operations.

A significant portion of our international
operations has a functional currency other than the United
States dollar. Accordingly, we are exposed to foreign currency
exchange rate risk inherent in our sales

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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, Italian Lire and Irish Punt. We
realized a net loss on foreign exchange equal to $280,000 during
2000, a net gain of $947,000 in 2001 and a net loss of $725,000
in 2002. 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 Accountants, 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 70 of this report are incorporated into this Item 8.




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

None.




PART III




Item 10. Directors and Executive
Officers of the Registrant

Directors and Executive Officers

The executive officers, directors and key
employees of Critical Path and their ages as of March 15,
2003 are as follows:

|                               |  |     |    |          |  |                                                                                  
|------------------------------ |  | --- | -- | -------- |  | ---------------------------------------------------------------------------------
|Name                           |  | Age |    | Position
|                               |  |     |    |         
|William E. McGlashan, Jr.      |  |     | 39 |          |  | Chairman of the Board and Chief Executive Officer                                
|Robert Allen (Al) Shipp        |  |     | 46 |          |  | President                                                                        
|Paul Bartlett                  |  |     | 42 |          |  | Executive Vice President and Chief Financial
    Officer                         
|Bernard Harguindeguy           |  |     | 45 |          |  | Executive Vice President and Chief Marketing
    Officer                         
|Patrick Tracy Currie           |  |     | 41 |          |  | Executive Vice President, Operations and General
    Manager of Hosted Operations
|Michael J. Zukerman            |  |     | 43 |          |  | Senior Vice President, General Counsel and
    Secretary                         
|Menelaos (Michael) Serbinis    |  |     | 29 |          |  | Chief Technology Officer                                                         
|Barry Twohig                   |  |     | 36 |          |  | Senior Vice President, Engineering                                               
|The Honorable William S. Cohen |  |     | 62 |          |  | Director                                                                         
|Raul Fernandez(1)(2)           |  |     | 36 |          |  | Director                                                                         
|William E. Ford(1)(2)          |  |     | 41 |          |  | Director                                                                         
|Wm. Christopher Gorog          |  |     | 49 |          |  | Director                                                                         
|Jeffrey Webber(2)              |  |     | 50 |          |  | Director                                                                         



---



|    |                                                                    
|--- | -------------------------------------------------------------------
|(1) | Member of the Compensation Committee of the Board
    of Directors.
|   
|(2) | Member of the Audit Committee of the Board of
    Directors.       

William E. McGlashan, Jr.has served as a director and Chief
Executive Officer since December of 2001 and as Chairman of the
Board since June 2002. Mr. McGlashan joined the Company in
April 2001 as our Interim President and Chief Operating Officer.
He was appointed Interim Chief Executive Officer in August 2001.
Prior to joining the Company, Mr. McGlashan served as the
chief executive officer and founder of the Vectis Group LLC, an
investment company, from 2000 to 2001. Prior to his tenure at
Vectis, he was a venture

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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.


Robert Allen (Al) Shipphas served as President since October
2002. Prior to joining Critical Path, Mr. Shipp served as
senior vice president of worldwide field operations at Inktomi
Corp. from October 2001 to September 2002. Prior to that he
worked for BEA Systems from December 1999 to October 2001, most
recently as president of the eCommerce Server Division. Prior to
that, he was at IBM for 17 years, most recently at vice
president of sales, western region from April 1998 to December
1999, and as vice president, industry solutions sales from
October 1997 to April 1998.

Paul Bartletthas
served as our Executive Vice President, Chief Financial Officer
since February 2003. In April 2002, he 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. From October 1996 to March 2000,
Mr. Bartlett was president and a director of Hall Kinion
and Associates.

Bernard Harguindeguyhas served as of Executive Vice
President and Chief Marketing Officer since December 2001.
Before joining Critical Path, from June 2000 to January 2002,
Mr. Harguindeguy was an independent consultant serving
various technology companies. Prior to that, from December 1996
to September 1999, he served as chief executive officer of
Worldtalk Communications Corporation.

Patrick Tracy Curriehas served as of Executive Vice
President, Operations and General Manager, Hosted Operations
since November 2002 and prior to that serving as a consultant
and Acting General Manager, Hosted Operations from July 2002.
Prior to that 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
September 1999 to June 2001, he was vice president of business
development for Driveway Corporation. Prior to that, Mr.
Zukerman was general counsel and senior vice president of
business development at Sega.com, Inc., from September 1996 to
September 1999. Prior to that, from 1989 to 1996,
Mr. Zukerman worked at Netopia, Inc. (formerly Farallon
Communications), where he last served as vice president and
general counsel. Prior to that, Mr. Zukerman was an
attorney with Brobeck, Phleger & Harrison LLP.

Menelaos (Michael) Serbinishas served as our Senior Vice
President and Chief Technology Officer since July 2002, prior to
that serving as Vice President and 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 the Company from the acquisition of ISOCOR Corporation
that month where he held Director of Engineering and other
engineering management positions, since February 1995. Prior to
that, Mr. Twohig was in various roles at Retix Corporation
from August 1988 to January 1995.

The Honorable William S. Cohenhas served as a director of the
Company since July 2002. Since January 2001, Secretary Cohen has
been the chairman and chief executive officer of The Cohen
Group, a consulting

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company. From January 1997 to December 2000
Secretary Cohen served as the United States Secretary of
Defense. From 1979 to January 1997, Secretary Cohen served as
the U.S. Senator for the State of Maine. From 1973 to 1979,
Secretary Cohen served as the U.S. Representative from
Maines Second Congressional District. Secretary Cohen also
serves as a director on the boards of Velocity Express
Corporation, the Nasdaq Stock Market, Inc., Global Crossing
Ltd., IDT Corporation, and Head NV.


Raul J. Fernandezhas served as a director of the
Company since December 2001, prior to that from June 2002 to
January 2003. Since January 2003, Mr. Fernandez has held
the position of Special Advisor to General Atlantic Partners.
Prior to that from June 2001 to January 2003 Mr. Fernandez
was the chief executive officer of Dimension Data North America.
He had been appointed to the board of directors of Dimension
Data Holdings Group in September 2001 following the Groups
acquisition of Proxicom Corporation which directorship
terminated in July 2002. Prior to that, Mr. Fernandez was the
founder and chief executive officer of Proxicom serving since
his founding of the Company in 1991. Mr. Fernandez is also
a member of the Board of Directors of Liz Claiborne, Inc.

William E. Fordhas
served as a director of the Company since December 2001.
Mr. Ford is a general partner at General Atlantic Partners
LLC, a worldwide private equity firm, where he has worked since
1991. From 1987 to 1991, Mr. Ford worked at Morgan Stanley
& Co. as an investment banker, where he was a member of the
merger and acquisition and corporate finance departments.

Wm. Christopher Goroghas served as director of the Company
since March 2003. He has been the chairman and chief executive
officer of Roxio, Inc. since September 2001 and served as the
chief executive officer, president and as a director since
August 2000. From February 1999 to September 2000, Mr. Gorog
served as a consultant in the entertainment and media industry,
including serving as advisor to J.H. Whitney, an asset
management company, in HOB Entertainment, Inc.s
acquisition of Universal Concerts. From November 1995 to
February 1999, Mr. Gorog served as president of new
business development at Universal Studios, an entertainment
company. From January 1995 to November 1995, Mr. Gorog
served as executive vice president of group operations at
Universal Studios.

Jeffrey Webberhas
served as a director of the Company since July of 2001. He is
the founder and partner in the R.B.Webber & Company, a
technology management consulting firm where he was worked since
1991.

Additional information required by this item is
incorporated by reference to the information set forth in the
section entitled Information About the Board of Directors
and Committees of the Board in the Proxy Statement in
connection with the solicitation of proxies for our 2003 Annual
Meeting of Shareholders (Proxy Statement) to be
filed with the Securities and Exchange Commission within
120 days of the end of our fiscal year ended
December 31, 2002. This information is contained in the
Section entitled Information about the Board of Directors
and Committees of the Board  Section 16(a) Beneficial
Ownership Reporting Compliance in the Proxy Statement and
is incorporated by reference.




Item 11. Executive
Compensation

The information required by this item is
incorporated by reference to the information set forth in the
sections entitled Compensation of Executive Officers
and Election of Directors contained in the Proxy
Statement for our 2002 Annual Meeting of Shareholders.






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

The information required by Item 403 of
Regulation S-K is incorporated by reference to the
information set forth in the section entitled Common Stock
Ownership of Certain Beneficial Owners and Management
contained in the Proxy Statement for our 2003 Annual Meeting of
Shareholders.




Item 13. Certain Relationships
and Related Party Transactions

The information required by this item is
incorporated by reference to the information set forth in the
section entitled Transactions with Related Parties
contained in the Proxy Statement for our 2003 Annual Meeting of
Shareholders.

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Item 14. Controls and
Procedures

Evaluation of Disclosure Controls and
Procedures

Within 90 days prior to the date of this
report, we carried out an evaluation, under the supervision of
and with the participation of our principal executive officer
and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures.
Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure
controls and procedures are effective in alerting them in a
timely manner to material information required to included in
our periodic and annual reports to the U.S. Securities and
Exchange Commission.

Changes in Internal Controls

There were no significant changes in our internal
controls or, to our knowledge, in other factors that could
significantly affect those controls subsequent to the date of
their evaluation, and there were no significant deficiencies or
material weaknesses in such controls requiring corrective
actions.

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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 Accountants                             |  |      | 70  | 
|Consolidated Balance Sheets                                   |  |      | 71  | 
|Consolidated Statements of Operations                         |  |      | 72  | 
|Consolidated Statements of Shareholders
    Equity (Deficit) |  |      | 73  | 
|Consolidated Statements of Cash Flows                         |  |      | 74  | 
|Notes to Consolidated Financial Statements                    |  |      | 75  | 
|Schedule II  Valuation and
    Qualifying Accounts           |  |      | 110 | 

(a)(2) Financial Statement Schedule

Schedule II  Valuation and Qualifying
Accounts for the years ended December 31, 2000, 2001 and
2002 appears on page 110 of this report and should be read in
conjunction with the consolidated financial statements and
related notes thereto and report of independent accountants
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

None

(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(ii)  |  |  | Amended and Restated Bylaws. (Incorporated by
    reference to Exhibit 3(ii)(b) to the Registrants
    Registration Statement on Form S-1 (File
    No. 333-71499)).                                                                                                                                                                                                                            
| | 4.1    |  |  | Form of Common Stock Certificate. (Incorporated
    by reference to Exhibit 4.1 to the Registrants
    Registration Statement on Form S-1 (File
    No. 333-71499)).                                                                                                                                                                                                                            
| | 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).

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| |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ---- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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).                                                                                                                                             
| | 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)).                                                                                                                                                                                                
| | 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)).                                                                                                                                                                  

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| |       |  |  |                                                                                                                                                                                                                                                                                      
| | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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).                                    
| | 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).                                     

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| |       |  |  |                                                                                                                                                                                                                                                                       
| | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                                          
| | 10.28 |  |  | Nonstatutory Stock Option Agreement dated as of
    January 15, 2003 by and between Registrant and Paul
    Bartlett.                                                                                                                                                 
| | 10.29 |  |  | Employment Agreement dated as of April 8,
    2002 by and between Registrant and Paul Bartlett.                                                                                                                                                                       
| | 10.30 |  |  | Nonstatutory Stock Option Agreement dated as of
    October 10, 2002 by and between Registrant and Robert Allen
    Shipp.                                                                                                                                            
| | 10.31 |  |  | Employment Agreement dated as of October 9,
    2002 by and between Registrant and Robert Allen Shipp.                                                                                                                                                                
| | 10.32 |  |  | Employment Agreement dated as of November 4,
    2002 by and between Registrant and Patrick Tracy Currie.                                                                                                                                                             
| | 10.33 |  |  | Nonstatutory Stock Option Agreement dated as of
    November 6, 2002 by and between Registrant and Patrick
    Tracy Currie.                                                                                                                                          
| | 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.                                                                                                                                                  
| | 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.                                                                                                                                                 

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| |       |  |  |                                                                                                                                                                                                             
| | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
| | 21.1  |  |  | List of Subsidiaries                                                                                                                                                                                        
| | 23.1  |  |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants.                                                                                                                                         
| | 24.1  |  |  | Power of Attorney (see the signature page of this
    report).                                                                                                                                              
| | 99.1  |  |  | Certification of Chief Executive Officer*                                                                                                                                                                   
| | 99.2  |  |  | Certification of Chief Financial Officer*                                                                                                                                                                   

_______________




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The material contained in Exhibits 99.1 and 99.2
    is not deemed filed with the U.S. Securities and
    Exchange Commission and is not incorporated by reference into
    any filing of Critical Path, Inc. under the Securities Act of
    1933, as amended, or the Securities Exchange Act of 1934, as
    amended, whether made before or after the date hereof and
    irrespective of any general incorporation language contained in
    such filing.

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Report of Independent Accountants

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,
2001 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2002 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 8 of Notes to Consolidated
Financial Statements  Goodwill and Other Intangible
Assets, effective January 1, 2002, the Company changed its
method of accounting for goodwill in accordance with Statement
of Financial Accounting Standard No. 142, Goodwill and
Other Intangible Assets.

PRICEWATERHOUSECOOPERS LLP

SAN JOSE, CA

FEBRUARY 5, 2003,


except for Note 10,


which is as of


March 25, 2003


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CRITICAL PATH, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share
amounts)


|                                                                                           |                                                     |                                                                                                  |        |            |         |  |        |            |         |  
|------------------------------------------------------------------------------------------ | --------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------ | ---------- | ------- |  | ------ | ---------- | ------- | -
|                                                                                           |                                                     |                                                                                                 
|                                                                                           |                                                     | December 31,                                                                                    
|                                                                                           |                                                     |                                                                                                 
|                                                                                           |                                                     | 2001                                                                                             |        | 2002      
|                                                                                           |                                                     |                                                                                                  |        |           
|ASSETS                                                                                    
|Current assets                                                                             |                                                     |                                                                                                  |        |            |         |  |        |           
|                                                                                           | Cash and cash equivalents                           |                                                                                                  | $      | 59,463     |         |  | $      | 33,498     |        
|                                                                                           | Short-term marketable securities                    |                                                                                                  |        | 9,702      |         |  |        | 5,583      |        
|                                                                                           | Accounts receivable, net                            |                                                                                                  |        | 26,692     |         |  |        | 22,818     |        
|                                                                                           | Other current assets                                |                                                                                                  |        | 5,367      |         |  |        | 4,030      |        
|                                                                                           |                                                     |                                                                                                  |        |            |         |  |        |           
|                                                                                           |                                                     | Total current assets                                                                             |        |            | 101,224 |  |        |            | 65,929  |  
|Long-term marketable securities                                                            |                                                     |                                                                                                  |       |            |         |  | 3,990  |           
|Equity investments                                                                         |                                                     |                                                                                                  | 7,215  |            |         |  | 357    |           
|Property and equipment, net                                                                |                                                     |                                                                                                  | 36,285 |            |         |  | 18,142 |           
|Goodwill                                                                                   |                                                     |                                                                                                  | 1,983  |            |         |  | 6,613  |           
|Other intangible assets, net                                                               |                                                     |                                                                                                  | 46,658 |            |         |  |       |           
|Restricted cash                                                                            |                                                     |                                                                                                  | 2,674  |            |         |  | 2,729  |           
|Other assets                                                                               |                                                     |                                                                                                  | 3,913  |            |         |  | 6,246  |           
|                                                                                           |                                                     |                                                                                                  |        |            |         |  |        |           
|                                                                                           |                                                     | Total assets                                                                                     |        | $          | 199,952 |  |        | $          | 104,006 |  
|                                                                                           |                                                     |                                                                                                  |        |            |         |  |        |           
|LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
    STOCK AND SHAREHOLDERS EQUITY (DEFICIT)
|Current liabilities                                                                        |                                                     |                                                                                                  |        |            |         |  |        |           
|                                                                                           | Accounts payable                                    |                                                                                                  | $      | 25,955     |         |  | $      | 28,093     |        
|                                                                                           | Accrued liabilities                                 |                                                                                                  |        | 6,232      |         |  |        | 3,764      |        
|                                                                                           | Deferred revenue                                    |                                                                                                  |        | 10,297     |         |  |        | 10,788     |        
|                                                                                           | Capital lease and other obligations, current        |                                                                                                  |        | 3,431      |         |  |        | 3,323      |        
|                                                                                           |                                                     |                                                                                                  |        |            |         |  |        |           
|                                                                                           |                                                     | Total current liabilities                                                                        |        |            | 45,915  |  |        |            | 45,968  |  
|Convertible subordinated notes payable                                                     |                                                     |                                                                                                  | 38,360 |            |         |  | 38,360 |           
|Capital lease and other obligations, long-term                                             |                                                     |                                                                                                  | 1,149  |            |         |  | 1,332  |           
|                                                                                           |                                                     |                                                                                                  |        |            |         |  |        |           
|                                                                                           |                                                     | Total liabilities                                                                                |        |            | 85,424  |  |        |            | 85,660  |  
|                                                                                           |                                                     |                                                                                                  |        |            |         |  |        |           
|Commitments and contingencies (Note 13)                                                    |                                                     |                                                                                                  |        |            |         |  |        |           
|Mandatorily redeemable preferred stock (Note 15)                                           |                                                     |                                                                                                  |        |            |         |  |        |           
|                                                                                           | Shares authorized: 5,000                            |                                                                                                  |        |            |         |  |        |            |        
|                                                                                           | Shares issued and outstanding: 4,000                |                                                                                                  |        |            |         |  |        |            |        
|                                                                                           | Liquidation value at December 31, 2002:
    $59,548 |                                                                                                  |        | 5,556      |         |  |        | 26,900     |        
|Shareholders equity (deficit)                                                             |                                                     |                                                                                                  |        |            |         |  |        |           
|                                                                                           | Common Stock and paid-in-capital, $0.001 par value  |                                                                                                  |        |            |         |  |        |            |        
|                                                                                           | Shares authorized: 150,000                          |                                                                                                  |        |            |         |  |        |            |        
|                                                                                           | Shares issued and outstanding: 76,581 and 80,130    |                                                                                                  |        | 2,176,187  |         |  |        | 2,165,917  |        
|                                                                                           | Common stock warrants                               |                                                                                                  |        | 5,250      |         |  |        | 5,947      |        
|                                                                                           | Notes receivable from shareholders                  |                                                                                                  |        | (1,222     | )       |  |        |           |        
|                                                                                           | Unearned compensation                               |                                                                                                  |        | (7,050     | )       |  |        | (59        | )      
|                                                                                           | Accumulated deficit                                 |                                                                                                  |        | (2,061,405 | )       |  |        | (2,179,316 | )      
|                                                                                           | Accumulated other comprehensive loss                |                                                                                                  |        | (2,788     | )       |  |        | (1,043     | )      
|                                                                                           |                                                     |                                                                                                  |        |            |         |  |        |           
|                                                                                           |                                                     | Total shareholders equity (deficit)                                                             |        |            | 108,972 |  |        |            | (8,554  | )
|                                                                                           |                                                     |                                                                                                  |        |            |         |  |        |           
|                                                                                           |                                                     | Total liabilities, mandatorily redeemable
    preferred stock and shareholders equity (deficit) |        | $          | 199,952 |  |        | $          | 104,006 |  
|                                                                                           |                                                     |                                                                                                  |        |            |         |  |        |           

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

71



---



##### Table of Contents



CRITICAL PATH, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |        |         | 
|------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------- | ---------- | --------- | --------- | ---- | -------- | ------ | ------- | - | -------- | ------ | ------- | 
|                                                                          |                                                          |                           
|                                                                          |                                                          | Year Ended December 31,   
|                                                                          |                                                          |                           
|                                                                          |                                                          | 2000                       |            | 2001      |           | 2002
|                                                                          |                                                          |                            |            |           |           |     
|Net revenues                                                              |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|                                                                          | Software license                                         |                            | $          | 51,607    |           |      | $        | 30,960 |         |   | $        | 35,176 |        
|                                                                          | Hosted messaging                                         |                            |            | 58,553    |           |      |          | 43,821 |         |   |          | 24,893 |        
|                                                                          | Professional services                                    |                            |            | 14,527    |           |      |          | 12,573 |         |   |          | 11,593 |        
|                                                                          | Maintenance and support                                  |                            |            | 10,966    |           |      |          | 16,819 |         |   |          | 15,471 |        
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|                                                                          |                                                          | Total net revenues         |            |           | 135,653   |      |          |        | 104,173 |   |          |        | 87,133  | 
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|Cost of net revenues                                                      |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|                                                                          | Software license                                         |                            |            | 2,731     |           |      |          | 1,533  |         |   |          | 2,682  |        
|                                                                          | Hosted messaging                                         |                            |            | 59,104    |           |      |          | 59,124 |         |   |          | 29,303 |        
|                                                                          | Professional services                                    |                            |            | 5,945     |           |      |          | 10,315 |         |   |          | 10,020 |        
|                                                                          | Maintenance and support                                  |                            |            | 8,060     |           |      |          | 10,081 |         |   |          | 8,670  |        
|                                                                          | Amortization of purchased technology                     |                            |            | 18,140    |           |      |          | 21,284 |         |   |          | 18,522 |        
|                                                                          | Acquisition-related retention bonuses                    |                            |            | 1,040     |           |      |          |       |         |   |          |       |        
|                                                                          | Stock-based expense  Hosted messaging                   |                            |            | 1,586     |           |      |          | 1,520  |         |   |          | 590    |        
|                                                                          | Stock-based expense  Professional
    services          |                            |            |          |           |      |          | 1,347  |         |   |          | 222    |        
|                                                                          | Stock-based expense  Maintenance and
    support        |                            |            |          |           |      |          | 1,183  |         |   |          | 413    |        
|                                                                          | Impairment of long-lived assets                          |                            |            | 25,315    |           |      |          | 16,654 |         |   |          |       |        
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|                                                                          |                                                          | Total cost of net revenues |            |           | 121,921   |      |          |        | 123,041 |   |          |        | 70,422  | 
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|Gross profit (loss)                                                       |                                                          |                            | 13,732     |           |           |      | (18,868  | )      |         |   | 16,711   |       
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|Operating expenses                                                        |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|                                                                          | Sales and marketing                                      |                            |            | 66,125    |           |      |          | 53,356 |         |   |          | 43,604 |        
|                                                                          | Research and development                                 |                            |            | 31,022    |           |      |          | 30,744 |         |   |          | 19,649 |        
|                                                                          | General and administrative                               |                            |            | 30,444    |           |      |          | 42,260 |         |   |          | 22,128 |        
|                                                                          | Amortization of goodwill and other intangible
    assets |                            |            | 382,932   |           |      |          | 32,746 |         |   |          | 24,773 |        
|                                                                          | Acquisition-related retention bonuses                    |                            |            | 8,294     |           |      |          | 1,381  |         |   |          | 11     |        
|                                                                          | Stock-based expense  Sales and marketing                |                            |            | 3,884     |           |      |          | 5,174  |         |   |          | 3,877  |        
|                                                                          | Stock-based expense  Research and
    development       |                            |            | 3,449     |           |      |          | 3,691  |         |   |          | 1,214  |        
|                                                                          | Stock-based expense  General and
    administrative     |                            |            | 12,754    |           |      |          | 25,220 |         |   |          | 3,681  |        
|                                                                          | Stock-based expense  Restructuring                      |                            |            | 3,447     |           |      |          |       |         |   |          |       |        
|                                                                          | Acquired in-process research and development             |                            |            | 3,700     |           |      |          |       |         |   |          |       |        
|                                                                          | Restructuring and other expenses                         |                            |            | 3,248     |           |      |          | 18,267 |         |   |          | 3,168  |        
|                                                                          | Impairment of long-lived assets                          |                            |            | 1,282,150 |           |      |          | 9,991  |         |   |          |       |        
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|                                                                          |                                                          | Total operating expenses   |            |           | 1,831,449 |      |          |        | 222,830 |   |          |        | 122,105 | 
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|Loss from operations                                                      |                                                          |                            | (1,817,717 | )         |           |      | (241,698 | )      |         |   | (105,394 | )     
|Interest and other income (expense), net                                  |                                                          |                            | 12,970     |           |           |      | 5,840    |        |         |   | (5,852   | )     
|Interest expense                                                          |                                                          |                            | (15,948    | )         |           |      | (14,714  | )      |         |   | (2,748   | )     
|Equity in net loss of joint venture                                       |                                                          |                            | (1,019     | )         |           |      | (1,866   | )      |         |   | (1,408   | )     
|Minority interest in net income of consolidated
    subsidiary            |                                                          |                            | (649       | )         |           |      |         |        |         |   |         |       
|Loss on investments                                                       |                                                          |                            | (23,589    | )         |           |      | (702     | )      |         |   | (1,530   | )     
|Gain on retirement of subordinated notes, net                             |                                                          |                            |           |           |           |      | 180,882  |        |         |   |         |       
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|Loss before income taxes                                                  |                                                          |                            | (1,845,952 | )         |           |      | (72,258  | )      |         |   | (116,932 | )     
|Provision for income taxes                                                |                                                          |                            | (6,513     | )         |           |      | (7,206   | )      |         |   | (979     | )     
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|Net loss                                                                  |                                                          |                            | (1,852,465 | )         |           |      | (79,464  | )      |         |   | (117,911 | )     
|Accretion on mandatorily redeemable preferred
    stock                   |                                                          |                            |           |           |           |      | (356     | )      |         |   | (13,904  | )     
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|Net loss attributable to common shares                                    |                                                          | $                          | (1,852,465 | )         |           | $    | (79,820  | )      |         | $ | (131,815 | )     
|                                                                          |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|Net loss per share attributable to common
    shares  basic and diluted: |                                                          |                            |            |           |           |      |          |        |         |   |          |       
|                                                                          | Net loss per share attributable to common shares         |                            | $          | (30.67    | )         |      | $        | (1.08  | )       |   | $        | (1.69  | )      
|                                                                          | Weighted average shares  basic and
    diluted          |                            |            | 60,399    |           |      |          | 73,981 |         |   |          | 77,782 |        

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

72



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##### Table of Contents



CRITICAL PATH, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY (DEFICIT)

|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |            |            |        |  
|--------------------------------------------- | ---------------------------------------------------------------- | ----------------------- | ------------------------------------ | ---------- | ---------- | ------- | - | ---------- | ---------- | ------- | - | ---------- | ---------- | ------ | -
|                                              |                                                                  |                        
|                                              |                                                                  | Year Ended December 31,
|                                              |                                                                  |                        
|                                              |                                                                  | 2000                    |                                      | 2001       |            | 2002   
|                                              |                                                                  |                         |                                      |            |            |        
|                                              |                                                                  |                        
|                                              |                                                                  | (In thousands)         
|Common Stock                                  |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              | Balance, beginning of year                                       |                         | $                                    | 864,699    |            |         | $ | 2,130,329  |            |         | $ | 2,181,437  |           
|                                              | Issuance of Common Stock                                         |                         |                                      | 1,204,022  |            |         |   | 431        |            |         |   | 511        |           
|                                              | Conversion feature on mandatorily redeemable
    preferred stock |                         |                                      |           |            |         |   | 41,600     |            |         |   | (125       | )         
|                                              | Dividend accretion on mandatorily redeemable
    preferred stock |                         |                                      |           |            |         |   | (121       | )          |         |   | (4,427     | )         
|                                              | Exercise of stock options and warrants                           |                         |                                      | 32,246     |            |         |   | 2,139      |            |         |   | 1,268      |           
|                                              | Issuance of warrants to purchase common stock                    |                         |                                      |           |            |         |   | 5,250      |            |         |   | 697        |           
|                                              | Unearned compensation related to stock options                   |                         |                                      | 29,608     |            |         |   | 3,632      |            |         |   | 1,980      |           
|                                              | Accretion on mandatorily redeemable preferred
    stock          |                         |                                      |           |            |         |   | (235       | )          |         |   | (9,477     | )         
|                                              | Purchase of Common Stock                                         |                         |                                      | (246       | )          |         |   | (67        | )          |         |   |           |           
|                                              | Purchase of remaining minority interest                          |                         |                                      |           |            |         |   | (1,521     | )          |         |   |           |           
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              |                                                                  | Balance, end of year    |                                      |            | 2,130,329  |         |   |            | 2,181,437  |         |   |            | 2,171,864  |       
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|Notes receivable from shareholders            |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              | Balance, beginning of year                                       |                         |                                      | (1,154     | )          |         |   | (1,205     | )          |         |   | (1,222     | )         
|                                              | Interest on shareholder notes                                    |                         |                                      | (51        | )          |         |   | (50        | )          |         |   | (8         | )         
|                                              | Repayment of shareholder notes                                   |                         |                                      |           |            |         |   | 33         |            |         |   | 1,230      |           
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              |                                                                  | Balance, end of year    |                                      |            | (1,205     | )       |   |            | (1,222     | )       |   |            |           |       
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|Unearned compensation                         |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              | Balance, beginning of year                                       |                         |                                      | (19,658    | )          |         |   | (34,005    | )          |         |   | (7,050     | )         
|                                              | Unearned compensation related to stock options                   |                         |                                      | (39,630    | )          |         |   | (11,210    | )          |         |   |           |           
|                                              | Amortization of unearned compensation                            |                         |                                      | 25,283     |            |         |   | 38,165     |            |         |   | 6,991      |           
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              |                                                                  | Balance, end of year    |                                      |            | (34,005    | )       |   |            | (7,050     | )       |   |            | (59        | )     
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|Accumulated deficit                           |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              | Balance, beginning of year                                       |                         |                                      | (129,476   | )          |         |   | (1,981,941 | )          |         |   | (2,061,405 | )         
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              | Net loss                                                         |                         |                                      | (1,852,465 | )          |         |   | (79,464    | )          |         |   | (117,911   | )         
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              |                                                                  | Balance, end of year    |                                      |            | (1,981,941 | )       |   |            | (2,061,405 | )       |   |            | (2,179,316 | )     
|Accumulated other comprehensive income (loss) |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              | Balance, beginning of year                                       |                         |                                      | 7,829      |            |         |   | (74        | )          |         |   | (2,788     | )         
|                                              | Unrealized investment losses                                     |                         |                                      | (7,926     | )          |         |   | (790       | )          |         |   | (671       | )         
|                                              | Foreign currency translation adjustments                         |                         |                                      | 23         |            |         |   | (1,924     | )          |         |   | 2,416      |           
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              |                                                                  | Balance, end of year    |                                      |            | (74        | )       |   |            | (2,788     | )       |   |            | (1,043     | )     
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           
|                                              |                                                                  |                         | Total shareholders equity (deficit) |            | $          | 113,104 |   |            | $          | 108,972 |   |            | $          | (8,554 | )
|                                              |                                                                  |                         |                                      |            |            |         |   |            |            |         |   |           

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

73



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##### Table of Contents



CRITICAL PATH, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                          |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |          |         |      |  
|--------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------- | ---------- | ------- | ------- | -------- | -------- | ------- | ------- | ------- | -------- | ------- | ---- | -
|                                                          |                                                                     |                                      
|                                                          |                                                                     | Year Ended December 31,              
|                                                          |                                                                     |                                      
|                                                          |                                                                     | 2000                                  |                                                         | 2001       |         | 2002   
|                                                          |                                                                     |                                       |                                                         |            |         |        
|                                                          |                                                                     |                                      
|                                                          |                                                                     | (In thousands)                       
|Operating                                                 |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|                                                          | Net loss                                                            |                                       | $                                                       | (1,852,465 | )       |         | $        | (79,464  | )       |         | $       | (117,911 | )      
|                                                          | Provision for doubtful accounts                                     |                                       |                                                         | 5,492      |         |         |          | 5,242    |         |         |         | 673      |        
|                                                          | Depreciation and amortization                                       |                                       |                                                         | 35,980     |         |         |          | 44,897   |         |         |         | 27,499   |        
|                                                          | Amortization of goodwill and other intangible
    assets            |                                       |                                                         | 401,072    |         |         |          | 54,029   |         |         |         | 43,295   |        
|                                                          | Stock-based costs and expenses                                      |                                       |                                                         | 25,120     |         |         |          | 38,135   |         |         |         | 9,997    |        
|                                                          | Acquired in-process research and development                        |                                       |                                                         | 3,700      |         |         |          |         |         |         |         |         |        
|                                                          | Impairment of long-lived assets                                     |                                       |                                                         | 1,307,465  |         |         |          | 26,645   |         |         |         |         |        
|                                                          | Minority interest in net income of consolidated
    subsidiary      |                                       |                                                         | 649        |         |         |          |         |         |         |         |         |        
|                                                          | Equity in net loss of joint venture                                 |                                       |                                                         | 1,019      |         |         |          | 1,866    |         |         |         | 1,408    |        
|                                                          | Change in fair-value of preferred stock instrument                  |                                       |                                                         |           |         |         |          |         |         |         |         | 7,440    |        
|                                                          | Loss on investments                                                 |                                       |                                                         | 23,589     |         |         |          | 702      |         |         |         | 1,530    |        
|                                                          | Gain on retirement of convertible debt                              |                                       |                                                         |           |         |         |          | (180,882 | )       |         |         |         |        
|                                                          | Provision for restructured operations                               |                                       |                                                         |           |         |         |          | 7,905    |         |         |         | 461      |        
|                                                          | Accounts receivable                                                 |                                       |                                                         | (16,724    | )       |         |          | 6,229    |         |         |         | 3,408    |        
|                                                          | Other assets                                                        |                                       |                                                         | (4,603     | )       |         |          | 3,555    |         |         |         | (132     | )      
|                                                          | Accounts payable                                                    |                                       |                                                         | (8,699     | )       |         |          | (10,957  | )       |         |         | (696     | )      
|                                                          | Accrued liabilities                                                 |                                       |                                                         | (1,380     | )       |         |          | (3,793   | )       |         |         | (2,528   | )      
|                                                          | Deferred revenue                                                    |                                       |                                                         | (711       | )       |         |          | (5,340   | )       |         |         | 491      |        
|                                                          |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|                                                          |                                                                     | Net cash used in operating activities |                                                         |            | (80,496 | )       |          |          | (91,231 | )       |         |          | (25,065 | )   
|                                                          |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|Investing                                                 |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|                                                          | Notes receivable from officers                                      |                                       |                                                         | (1,966     | )       |         |          | (1,699   | )       |         |         | 345      |        
|                                                          | Property and equipment purchases                                    |                                       |                                                         | (54,461    | )       |         |          | (11,189  | )       |         |         | (6,770   | )      
|                                                          | Available-for-sale marketable securities, net                       |                                       |                                                         |           |         |         |          | (9,702   | )       |         |         | 172      |        
|                                                          | Investments in unconsolidated entities, net                         |                                       |                                                         | (28,492    | )       |         |          | (4,212   | )       |         |         |         |        
|                                                          | Payments for acquisitions, net of cash acquired                     |                                       |                                                         | (15,618    | )       |         |          | (5,686   | )       |         |         | 4,511    |        
|                                                          | Promissory note receivable                                          |                                       |                                                         | 10,000     |         |         |          |         |         |         |         |         |        
|                                                          | Restricted cash                                                     |                                       |                                                         | 110        |         |         |          | (2,459   | )       |         |         | (55      | )      
|                                                          |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|                                                          |                                                                     | Net cash used in investing activities |                                                         |            | (90,427 | )       |          |          | (34,947 | )       |         |          | (1,797  | )   
|                                                          |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|Financing                                                 |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|                                                          | Proceeds from issuance of Preferred Stock, net                      |                                       |                                                         |           |         |         |          | 26,786   |         |         |         |         |        
|                                                          | Proceeds from issuance of Common Stock, net                         |                                       |                                                         | 35,368     |         |         |          | 2,570    |         |         |         | 1,779    |        
|                                                          | Proceeds from convertible debt offering, net                        |                                       |                                                         | 289,181    |         |         |          |         |         |         |         |         |        
|                                                          | Retirement of convertible debt                                      |                                       |                                                         |           |         |         |          | (48,734  | )       |         |         |         |        
|                                                          | Repayment of note payable                                           |                                       |                                                         | (6,000     | )       |         |          |         |         |         |         |         |        
|                                                          | Proceeds from payments of shareholder notes
    receivable          |                                       |                                                         |           |         |         |          | 33       |         |         |         | 1,230    |        
|                                                          | Purchase of common stock                                            |                                       |                                                         | (246       | )       |         |          | (67      | )       |         |         |         |        
|                                                          | Principal payments on capital lease obligations                     |                                       |                                                         | (6,816     | )       |         |          | (10,912  | )       |         |         | (3,790   | )      
|                                                          |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|                                                          |                                                                     |                                       | Net cash provided by (used in) financing
    activities |            |         | 311,487 |          |          |         | (30,324 | )       |          |         | (781 | )
|                                                          |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|Net change in cash and cash equivalents                   |                                                                     |                                       | 140,564                                                 |            |         |         | (156,502 | )        |         |         | (27,643 | )       
|Effect of exchange rates on cash and cash
    equivalents |                                                                     |                                       | 46                                                      |            |         |         | (577     | )        |         |         | 1,678   |         
|Cash and cash equivalents at beginning of year            |                                                                     |                                       | 75,932                                                  |            |         |         | 216,542  |          |         |         | 59,463  |         
|                                                          |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|Cash and cash equivalents at end of year                  |                                                                     | $                                     | 216,542                                                 |            |         | $       | 59,463   |          |         | $       | 33,498  |         
|                                                          |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|Supplemental cash flow disclosure:                        |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|                                                          | Cash paid for interest                                              |                                       | $                                                       | 11,598     |         |         | $        | 17,633   |         |         | $       | 2,316    |        
|                                                          | Cash paid for income taxes                                          |                                       | $                                                       | 335        |         |         | $        | 6,914    |         |         | $       | 2,578    |        
|Non-cash investing and financing activities:              |                                                                     |                                       |                                                         |            |         |         |          |          |         |         |         |         
|                                                          | Property and equipment leases                                       |                                       | $                                                       |           |         |         | $        | 1,413    |         |         | $       |         |        
|                                                          | Retirement of notes payable through issuance of
    Preferred Stock |                                       | $                                                       |           |         |         | $        | 64,630   |         |         | $       |         |        
|                                                          | Common Stock and options issued for acquisitions                    |                                       | $                                                       | 1,229,728  |         |         | $        |         |         |         | $       |         |        

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
highly scalable solutions for messaging and identity management.
Built upon an open, extensible software platform, these
solutions help organizations expand the range of digital
communications services they provide, while reducing overall
costs. Critical Paths messaging solutions 
which are available both as licensed software or hosted
services  provide integrated access to a broad range
of communication and collaboration applications from wireless
devices, Web browsers, desktop clients, and voice systems. This
provides 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, Critical Paths solutions 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. In 2001, the Company
completed a financing transaction that resulted in net cash
proceeds of approximately $27 million and the retirement of
approximately $65 million of face value of its 5 3/4%
Convertible Subordinated Notes. Also, during 2001, the Company
retired an additional $197 million of face value of its
5 3/4% Convertible Subordinated Notes.

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

Basis of Presentation

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

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.

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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. 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 assets and liabilities acquired are included in
goodwill in the accompanying consolidated balance sheets. The
fair value of separately identified intangible assets was
determined based upon independent valuations 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, 2002,
the Company held short and long-term marketable securities in
low risk government securities, agency and corporate bonds and
classifies these investments as available-for-sale.
Available-for-sale securities are carried at fair market value,
with the 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 periodically evaluates 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 2001 or net revenues in 2000, 2001
and 2002.

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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 Subordinated 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 Transaction.

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, if applicable, 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 2000, 2001 and 2002,
approximately $2.1 million, $1.5 million and $278,000
of cost, respectively, related to internal use software was
capitalized, and amortization of $283,000, $1.0 million and
$1.3 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
$267,000 recorded in both 2001 and 2002, respectively. There
were no amounts capitalized during 2001 and 2002 and there was
no amortization expense during 2000.

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

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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 two reporting units
for the purposes of this analysis: license software and services
and hosted services.


As of January 1, 2002, the Company adopted
SFAS No. 142 and accordingly reclassified
$3.6 million of intangible assets related to assembled
workforce to goodwill. As a result approximately
$5.6 million of goodwill will no longer be amortized. 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 units to the carrying value, including goodwill of
    each of those units. For each reporting unit where the carrying
    value, including goodwill, exceeds the units fair value,
    the Company moves on to step 2. If a 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 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
    our 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 our management to be
commensurate with the risk inherent in the Companys
current business model. See also Note 7 
Property and Equipment, Note 8  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 on services have been
delivered and collection of all fees is considered probable.

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License Revenues

Software license.The Company derives software license
revenues from perpetual and term licenses for our messaging,
collaboration 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
requires 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 we allocate
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 a multiple element arrangement includes
services that are deemed essential to the functionality of a
delivered element, 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. 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 our 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 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 for fees from post-contract customer
support agreements associated with product licenses. Such
services typically include rights to future update and upgrade
product releases and dial-up phone services. Fees are deferred
and recognized ratably over the term of the support contract,
generally one year.

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Advertising Expense

Advertising and promotion costs are generally
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
$1,300,000, $648,000 and $353,000 during 2000, 2001 and 2002,
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, as 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 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.

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.

The compensation cost associated with the
Companys stock-based compensation plans, determined using
the Black-Scholes option pricing model, resulted in a material
difference from the reported net loss during the three years
ended 2002. Had compensation cost been recognized based on the
fair value at the date

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of grant for options granted, during 2000, 2001,
and 2002, the pro forma amounts of the Companys net loss
and net loss per share would have been as follows:


|                                                                                                                                              |                                                                                                                        |                                          |            |        |  |      |         |        |  |   |          |       | 
|--------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ---------- | ------ |  | ---- | ------- | ------ |  | - | -------- | ----- | 
|                                                                                                                                              |                                                                                                                        |                                         
|                                                                                                                                              |                                                                                                                        | Year Ended December 31,                 
|                                                                                                                                              |                                                                                                                        |                                         
|                                                                                                                                              |                                                                                                                        | 2000                                     |            | 2001   |  | 2002
|                                                                                                                                              |                                                                                                                        |                                          |            |        |  |     
|                                                                                                                                              |                                                                                                                        |                                         
|                                                                                                                                              |                                                                                                                        | (In thousands, except per share amounts)
|Net loss attributable to common shares  as
    reported                                                                                      |                                                                                                                        | $                                        | (1,852,465 | )      |  | $    | (79,820 | )      |  | $ | (131,815 | )    
|Add:                                                                                                                                          |                                                                                                                        |                                          |            |        |  |      |         |        |  |   |          |      
|                                                                                                                                              | Unearned stock-based employee compensation
    expense included in reported net loss attributable to common
    shares |                                          |            | 25,283 |  |      |         | 38,165 |  |   |          | 9,997 | 
|Deduct                                                                                                                                        |                                                                                                                        |                                          |            |        |  |      |         |        |  |   |          |      
|Total stock-based employee compensation expense
    determined under a fair value based method for all grants, net
    of related tax effects |                                                                                                                        |                                          | (332,420   | )      |  |      | (23,901 | )      |  |   | (68,658  | )    
|                                                                                                                                              |                                                                                                                        |                                          |            |        |  |      |         |        |  |   |          |      
|Net loss attributable to common
    shares  pro forma                                                                                        |                                                                                                                        |                                          | (2,158,602 | )      |  |      | (65,556 | )      |  |   | (190,476 | )    
|Basic and diluted net loss per share attributable
    to common shares  as reported                                                          |                                                                                                                        |                                          | (30.67     | )      |  |      | (1.08   | )      |  |   | (1.69    | )    
|Basic and diluted net loss per share attributable
    to common shares  pro forma                                                            |                                                                                                                        |                                          | (35.76     | )      |  |      | (0.89   | )      |  |   | (2.45    | )    

The Company calculated the fair value of each
option grant on the date of grant during 2000, 2001 and 2002
using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following assumptions:

|                          |  |                         |       |      |  |      |       |   |  |  |       |  
|------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  | 2000                    |       | 2001 |  | 2002
|                          |  |                         |       |      |  |     
|Risk-free interest rate   |  |                         | 6.0   | %    |  |      | 4.0   | % |  |  | 2.6   | %
|Expected lives (in years) |  |                         | 4.0   |      |  |      | 4.0   |   |  |  | 4.0   |  
|Dividend yield            |  |                         | 0.0   | %    |  |      | 0.0   | % |  |  | 0.0   | %
|Expected volatility       |  |                         | 128.0 | %    |  |      | 250.0 | % |  |  | 111.0 | %

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
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

Basic net loss per share is computed by dividing
the net loss available to common shareholders 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 is computed by dividing the net loss available to
common shareholders 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, 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 and the
5 3/4% Convertible Subordinated Notes. See also Note
19  Net Loss Per Share.

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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 2000, 2001 and 2002 were as follows (in thousands):

|                             |                                          |                                         |        |             |        |       |        |        |        |   |        |        |        |  
|---------------------------- | ---------------------------------------- | --------------------------------------- | ------ | ----------- | ------ | ----- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                             |                                          | Unrealized                              |        |             |        |      
|                             |                                          | gain (loss) on                          |        | Cumulative  |        |      
|                             |                                          | available-for-sale                      |        | translation |        |      
|                             |                                          | investments                             |        | adjustment  |        | Total
|                             |                                          |                                         |        |             |        |      
|Balance at December 31, 1999 |                                          | $                                       | 7,926  |             |        | $     | (97    | )      |        | $ | 7,829  |       
|                             | Unrealized investment losses             |                                         |        | (7,926      | )      |       |        |       |        |   |        | (7,926 | )     
|                             | Foreign currency translation adjustments |                                         |        |            |        |       |        | 23     |        |   |        | 23     |       
|                             |                                          |                                         |        |             |        |       |        |        |        |   |        |       
|                             |                                          | Total other comprehensive income (loss) |        |             | (7,926 | )     |        |        | 23     |   |        |        | (7,903 | )
|Balance at December 31, 2000 |                                          | $                                       |       |             |        | $     | (74    | )      |        | $ | (74    | )     
|                             |                                          |                                         |        |             |        |       |        |        |        |   |        |       
|                             | Unrealized investment losses             |                                         |        | (790        | )      |       |        |       |        |   |        | (790   | )     
|                             | Foreign currency translation adjustments |                                         |        |            |        |       |        | (1,924 | )      |   |        | (1,924 | )     
|                             |                                          |                                         |        |             |        |       |        |        |        |   |        |       
|                             |                                          | Total other comprehensive income (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 other comprehensive income (loss) |        |             | (671   | )     |        |        | 2,416  |   |        |        | 1,745  |  
|Balance at December 31, 2002 |                                          | $                                       | (1,461 | )           |        | $     | 418    |        |        | $ | (1,043 | )     
|                             |                                          |                                         |        |             |        |       |        |        |        |   |        |       

There were no tax effects allocated to any
components of other comprehensive income during 2000, 2001 or
2002. See also Note 11  Income Taxes.

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 shareholders equity (deficit).
Gains and losses on foreign currency transactions are included
in non-operating income and expense. The Company recognized a
net loss from foreign currency transactions associated with its
international operations in the amount of $280,000 in 2000, a
net gain of $947,000 in 2001 and a net loss of $817,000 in 2002.

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 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

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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 when the Company believes
it is reasonably possible that it will consolidate or disclose
information about variable interest entities after FIN
No. 46 becomes effective. At this time, the Company does
not believe it is reasonably possible that the Company will
consolidate or disclose information about variable interest
entities. However, the Company will continue to assess the
impact of FIN No. 46 on its consolidated financial
statements.


In November 2002, the FASB issued FIN
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN No. 45 requires that a
liability be recorded at fair value in the guarantors
balance sheet upon issuance of a guarantee. In addition,
FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes
in the entitys product warranty liabilities. The initial
recognition and initial measurement provisions of FIN
No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year-end. The Company has adopted
the disclosure requirements, contained in
Note 13  Commitments and Contingencies, and is
currently assessing the impact of the recognition and initial
measurement provisions of FIN No. 45 will have on its
financial position and results of operations.

In July 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). This Statement requires that a
liability for costs associated with an exit or disposal activity
be recognized and measured initially at fair value only when the
liability is incurred. The provisions of this Statement are
effective for exit or disposal activities that are initiated
after December 31, 2002. The Company adopted
SFAS No. 146 in the first quarter of 2003 and will
recognize approximately $5.9 million of restructuring costs
during the year ending December 31, 2003 as the related
liabilities are incurred.

In April 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of SFAS No. 13, and
Technical Corrections. The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 are effective
for fiscal years beginning after May 15, 2002. Other
provisions of SFAS No. 145 are effective for financial
statements issued on or after May 15, 2002 and rescinds
both SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and the amendment to
SFAS No. 4, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. Through this
rescission, SFAS No. 145 eliminates the requirement
that gains and losses from the extinguishment of debt be
aggregated and, if material, classified as an extraordinary
item, net of the related income tax effect. The Company early
adopted the rules on accounting and reporting gains and losses
from extinguishment of debt in the second quarter of fiscal
2002. Adoption resulted in the reclassification of certain gains
on extinguishment of debt recorded in fiscal 2001.

In October 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement supersedes
SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. This
Statement applies to all long-lived assets (including
discontinued operations) and consequently amends APB Opinion
No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. This Statement develops one accounting model for
long-lived assets that are to be disposed of by sale. This
Statement requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or
fair value less cost to sell. Additionally, this Statement
expands the scope of discontinued operations to include all
components of an entity with operations that can be
distinguished from the rest of the entity and will be eliminated
from the ongoing operations of the

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entity in a disposal transaction. This Statement
is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company adopted SFAS
No. 144 on January 1, 2002, and the adoption of this
Statement did not have a material impact on its financial
position and results of operations.


Note 2  Acquisitions

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.

During 1999 and 2000, the Company completed ten
acquisitions. There were no acquisitions completed during 2001.
These acquisitions have been accounted for using the purchase
method of accounting and were as follows:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operating assets of the Connect Service business
    of Fabrik Communications, including the ongoing business
    operations and customer relationships;
|
| |  | dotOne Corporation, a corporate email messaging
    service provider;                                                                                   
|
| |  | Amplitude Software Corporation, a provider of
    business-to-business Internet calendaring and resource
    scheduling solutions;                      
|
| |  | Xeti, Inc., a developer of standards-based public
    key infrastructure solutions;                                                                     
|
| |  | FaxNet Corporation, a outsource supplier of
    carrier-class enhanced fax and integrated messaging solutions;                                          
|
| |  | ISOCOR Corporation, a supplier of Internet
    messaging, directory and meta-directory software solutions;                                              
|
| |  | The docSpace Company, a provider of web-based
    services for secure file delivery, storage and collaboration;                                         
|
| |  | RemarQ Communities, Inc., a provider of Internet
    collaboration services for corporations, web portals and
    Internet service providers;           
|
| |  | Netmosphere, Inc., a provider of e-Business
    solutions for project collaboration and communications;                                                 
|
| |  | PeerLogic, Inc., a provider of directory and
    enterprise application integration software.                                                           

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|                              |  |                  |         |        |  |           |         |      |  |        |         |        |  |          |          |        |  |             |         |           |  |   |         |  |  |   |         |   |  |   |         |  |  |  |         |   |  |   |         |  
|----------------------------- |  | ---------------- | ------- | ------ |  | --------- | ------- | ---- |  | ------ | ------- | ------ |  | -------- | -------- | ------ |  | ----------- | ------- | --------- |  | - | ------- |  |  | - | ------- | - |  | - | ------- |  |  |  | ------- | - |  | - | ------- | -
|                              |  |                 
|                              |  | Acquired Company
|                              |  |                 
|                              |  | Fabrik           |         | dotOne |  | Amplitude |         | Xeti |  | FaxNet |         | ISOCOR |  | docSpace |          | RemarQ |  | Netmosphere |         | PeerLogic
|                              |  |                  |         |        |  |           |         |      |  |        |         |        |  |          |          |        |  |             |         |          
|                              |  |                 
|                              |  | (In thousands)  
|Acquisition date              |  |                  | 5/26/99 |        |  |           | 7/12/99 |      |  |        | 8/31/99 |        |  |          | 11/24/99 |        |  |             | 12/6/99 |           |  |   | 1/19/00 |  |  |   | 3/8/00  |   |  |   | 3/30/00 |  |  |  | 6/26/00 |   |  |   | 9/26/00 |  
|Shares issued                 |  |                  | 109     |        |  |           | 641     |      |  |        | 4,107   |        |  |          | 274      |        |  |             | 2,845   |           |  |   | 5,030   |  |  |   | 3,806   |   |  |   | 3,868   |  |  |  | 1,008   |   |  |   | 6,120   |  
|Purchase price:               |  |                  |         |        |  |           |         |      |  |        |         |        |  |          |          |        |  |             |         |           |  |   |         |  |  |   |         |   |  |   |         |  |  |  |         |   |  |   |         |  
|Value of shares issued        |  |                  | $ 8,000 |        |  |           | $35,000 |      |  | $      | 141,300 |        |  |          | $18,500  |        |  | $           | 152,400 |           |  | $ | 226,700 |  |  | $ | 218,000 |   |  | $ | 259,300 |  |  |  | $33,000 |   |  | $ | 374,700 |  
|Value of options assumed      |  |                  |        |        |  |           | 3,200   |      |  |        | 22,000  |        |  |          | 3,100    |        |  |             | 7,300   |           |  |   | 37,200  |  |  |   |        |   |  |   | 7,700   |  |  |  | 6,700   |   |  |   | 63,400  |  
|Cash                          |  |                  | 12,000  |        |  |           | 17,500  |      |  |        | 45,000  |        |  |          | 2,000    |        |  |             | 20,000  |           |  |   |        |  |  |   | 30,000  |   |  |   |        |  |  |  |        |   |  |   | 3,000   |  
|Transaction costs             |  |                  | 100     |        |  |           | 1,300   |      |  |        | 6,100   |        |  |          | 200      |        |  |             | 7,900   |           |  |   | 13,500  |  |  |   | 10,000  |   |  |   | 600     |  |  |  | 1,600   |   |  |   | 4,000   |  
|                              |  |                  |         |        |  |           |         |      |  |        |         |        |  |          |          |        |  |             |         |           |  |   |         |  |  |   |         |   |  |   |         |  |  |  |         |   |  |   |         |  
|Total purchase price          |  |                  | $20,100 |        |  |           | $57,000 |      |  | $      | 214,400 |        |  |          | $23,800  |        |  | $           | 187,600 |           |  | $ | 277,400 |  |  | $ | 258,000 |   |  | $ | 267,600 |  |  |  | $41,300 |   |  | $ | 445,100 |  
|                              |  |                  |         |        |  |           |         |      |  |        |         |        |  |          |          |        |  |             |         |           |  |   |         |  |  |   |         |   |  |   |         |  |  |  |         |   |  |   |         |  
|Purchase price allocation:    |  |                  |         |        |  |           |         |      |  |        |         |        |  |          |          |        |  |             |         |           |  |   |         |  |  |   |         |   |  |   |         |  |  |  |         |   |  |   |         |  
|Property and equipment        |  |                  | $  500  |        |  |           | $      |      |  | $      |        |        |  |          | $       |        |  | $           |        |           |  | $ |        |  |  | $ |        |   |  | $ |        |  |  |  | $      |   |  | $ |        |  
|Customer base                 |  |                  | 2,100   |        |  |           | 4,600   |      |  |        | 600     |        |  |          |         |        |  |             | 5,500   |           |  |   | 9,800   |  |  |   |        |   |  |   | 5,900   |  |  |  | 9,000   |   |  |   | 5,500   |  
|Assembled workforce           |  |                  | 400     |        |  |           | 1,500   |      |  |        | 3,800   |        |  |          | 360      |        |  |             | 900     |           |  |   | 3,400   |  |  |   | 500     |   |  |   | 3,300   |  |  |  | 1,400   |   |  |   | 7,400   |  
|In-process technology         |  |                  |        |        |  |           |        |      |  |        |        |        |  |          |         |        |  |             |        |           |  |   | 200     |  |  |   |        |   |  |   |        |  |  |  |        |   |  |   | 3,500   |  
|Existing technology           |  |                  |        |        |  |           | 600     |      |  |        | 4,100   |        |  |          | 540      |        |  |             | 6,100   |           |  |   | 18,300  |  |  |   | 21,500  |   |  |   | 4,500   |  |  |  | 3,600   |   |  |   | 30,300  |  
|Unvested/assumed options      |  |                  |        |        |  |           |        |      |  |        |        |        |  |          |         |        |  |             |        |           |  |   |        |  |  |   |        |   |  |   |        |  |  |  |        |   |  |   | 28,300  |  
|Tangible assets/(liabilities) |  |                  |        |        |  |           | (1,700  | )    |  |        | 4,400   |        |  |          | 200      |        |  |             | (10,100 | )         |  |   | 18,700  |  |  |   | (7,100  | ) |  |   | 7,800   |  |  |  | (1,000  | ) |  |   | (18,650 | )
|Goodwill                      |  |                  | 17,100  |        |  |           | 52,000  |      |  |        | 201,500 |        |  |          | 22,700   |        |  |             | 185,200 |           |  |   | 227,000 |  |  |   | 243,100 |   |  |   | 246,100 |  |  |  | 28,300  |   |  |   | 388,750 |  
|                              |  |                  |         |        |  |           |         |      |  |        |         |        |  |          |          |        |  |             |         |           |  |   |         |  |  |   |         |   |  |   |         |  |  |  |         |   |  |   |         |  
|Total purchase price          |  |                  | $20,100 |        |  |           | $57,000 |      |  | $      | 214,400 |        |  |          | $23,800  |        |  | $           | 187,600 |           |  | $ | 277,400 |  |  | $ | 258,000 |   |  | $ | 267,600 |  |  |  | $41,300 |   |  | $ | 445,100 |  
|                              |  |                  |         |        |  |           |         |      |  |        |         |        |  |          |          |        |  |             |         |           |  |   |         |  |  |   |         |   |  |   |         |  |  |  |         |   |  |   |         |  

Acquired In-Process Research and
Development

In connection with the acquisitions of ISOCOR and
PeerLogic during 2000, the Company recognized $3.7 million
representing the value attributable to acquired in-process
research and development that had not yet reached technological
feasibility and had no alternative future use. These values were
determined by estimating the future net cash flows of the
acquired in-process research and development over their
respective estimated useful lives and discounting the net cash
flows back to their present value. At December 31, 2002,
actual results were consistent, in all material respects, with
our assumptions at the time of the acquisitions. All acquired
in-process research and development was expensed at the date of
acquisition. No amounts were recognized from acquired in-process
research and development during 2001 and 2002.

Pro Forma Results (Unaudited)

The following unaudited pro forma summary
presents the Companys consolidated results of operations
for 2000 as if the acquisitions completed in 2000 had been
consummated at January 1, 2000. The pro forma consolidated
results of operations include certain pro forma adjustments,
including the amortization of intangible assets and the
accretion of the acquisition-related retention bonuses.

|                    |                   |                       |            |        |  
|------------------- | ----------------- | --------------------- | ---------- | ------ | -
|                    |                   | Year Ended           
|                    |                   | December 31,         
|                    |                   | 2000                 
|                    |                   |                      
|                    |                   | (In thousands, except
|                    |                   | per share amounts)   
|Net revenues        |                   | $                     | 154,382    |       
|Net loss            |                   | $                     | (1,532,958 | )     
|Net loss per share: |                   |                       |            |       
|                    | Basic and diluted |                       | $          | (20.91 | )

The pro forma results are not necessarily
indicative of those that would have actually occurred had the
acquisitions taken place at the beginning of the periods
presented.

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

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employment with the Company. Payments of bonuses
to designated employees occurs on the six-month, twelve-month or
eighteen-month anniversary date of the 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 and 2002.


As of December 31, 2000, the aggregate,
adjusted eligible bonus amount was $4.9 million and the
ratable charge to compensation expense for the year then ended
was $9.3 million. Based on the functions of the employees
scheduled to receive acquisition bonuses in 2000,
$1.0 million of the compensation charge was allocated to
cost of net revenues and the remaining $8.3 million was
allocated to operating expenses. Additionally, during 2000,
approximately $790,000 was recognized as employee severance
expense, resulting from acceleration of the required one year
vesting period in the third quarter of 2000. See also Note
4  Strategic Restructuring and Employee Severance.
During 2000, $11.6 million was paid in acquisition-related
retention bonuses and $2.5 million was accrued as of the
year then ended.

As of December 31, 2001, the aggregate,
adjusted eligible bonus amount was $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. In March 2001, the Company
announced an employee retention bonus program designed to
provide incentives for current employees of Critical Path to
continue their employment with the Company. The Company did not
incur or pay any cost related to this program, as none of the
financial metrics were achieved. During 2002, the charges to
compensation related to acquisition bonuses were insignificant.
Additionally, as of December 31, 2002 no acquisition
bonuses remained.

Note 4  Strategic
Restructuring and Employee Severance

|                                                            |       |                |     |         |  |         |     |            |  |                |      |      |   |   |      |      |   |   |     |     | 
|----------------------------------------------------------- | ----- | -------------- | --- | ------- |  | ------- | --- | ---------- |  | -------------- | ---- | ---- | - | - | ---- | ---- | - | - | --- | --- | 
|                                                            |       | Liabilities at |     |         |  |         |     | Cash       |  | Liabilities at
|                                                            |       | December 31,   |     | Total   |  | Noncash |     | Receipts   |  | December 31,  
|                                                            |       | 2001           |     | Charges |  | Charges |     | (Payments) |  | 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 | 

In July 2000, the Company announced a plan to
reduce its worldwide employee headcount by approximately 113
employees or 11%. This employee reduction plan was executed with
the intent to realize various synergies gained through the nine
acquisitions the Company completed in 1999 and the first half of
2000. During 2000, the Company recognized a charge for
severance-related costs totaling $6.7 million, comprised of
$3.3 million in cash charges and $3.4 million in
stock-based compensation expense, which resulted from the
acceleration of certain employee stock options in connection
with the Companys employee reduction plan. During 2000,
the Company paid all amounts related to employee severance.

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 has 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 26% and 21% of total revenues in the years ended
December 31, 2000 and 2001.

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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 the consolidation of facilities
it reduced from 77 at March 31, 2001 to 27 at
December 31, 2001. Lease terminations 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. At
December 31, 2002, the balance of the accrual was
approximately $600,000 and is expected to be utilized by the end
of 2003.

In May 2002, the Board of Directors approved a
restructuring plan to further reduce the Companys expense
levels consistent with the current business climate. In
connection with the plan, a restructuring charge of
$1.5 million was recognized in the second quarter of 2002.
This charge was comprised of approximately $1.2 million in
severance and related costs associated with the elimination of
approximately 39 positions and $300,000 in facilities lease
termination costs. During 2002, approximately $762,000 was
charged against this accrual, primarily cash payments of
severance related costs. The balance of the accrual at
December 31, 2002, of approximately $777,000 is expected to
be utilized by the end of 2003.

In January 2003, The Company announced a
restructuring initiative designed to further reduce its expense
level in an effort to achieve operating profitability assuming
no or moderate revenue growth. The cost-reduction plan targets a
reduction in operating expenses, excluding special charges,
amortization and depreciation, of approximately $22 million
annually. Quarterly operating expenses are expected to be,
excluding special charges, amortization and depreciation, of
approximately $21 million to $22 million by mid-year
2003. The plan includes the consolidation of some office
locations and a global workforce reduction of approximately 175
positions, or approximately 30% of the workforce. The headcount
reduction is partially offset by outsourcing approximately 75
positions to lower cost service providers. The Company
anticipates an aggregate charge of approximately
$7.5 million resulting from the cost reduction plan,
inclusive of $6.5 million in cash and $1.0 million in
non-cash expenses. Included in this plan were approximately
$1.7 million in charges incurred in the fourth quarter of
2002, comprised of approximately $668,000 in severance and
related costs and $1.0 million in facilities lease
termination costs. The Company expects to incur the remainder of
the charge through the first half of 2003. At December 31,
2002, the balance of the accrual was approximately
$1.2 million and is expected to be utilized by the end of
2003.

Note 5  Accounts
Receivable

|                                |                          |                |        |        |  |   |        |        | 
|------------------------------- | ------------------------ | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                                |                          |               
|                                |                          | December 31,  
|                                |                          |               
|                                |                          | 2001           |        | 2002  
|                                |                          |                |        |       
|                                |                          |               
|                                |                          | (In thousands)
|Accounts receivable             |                          | $              | 27,874 |        |  | $ | 24,404 |       
|Allowance for doubtful accounts |                          |                | (1,182 | )      |  |   | (1,586 | )     
|                                |                          |                |        |        |  |   |        |       
|                                | Accounts receivable, net |                | $      | 26,692 |  |   | $      | 22,818 | 
|                                |                          |                |        |        |  |   |        |       

The provision for doubtful accounts was
$5.5 million, $5.2 million and $673,000 in 2000, 2001
and 2002, respectively.

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Note 6  Investments

|                       |                                                    |       |        |             |  |           |      |            |   |   |        |        |   |   |       |       | 
|---------------------- | -------------------------------------------------- | ----- | ------ | ----------- |  | --------- | ---- | ---------- | - | - | ------ | ------ | - | - | ----- | ----- | 
|                       |                                                    |       |        | Net         |  | Period    |      |           
|December 31, 2001      |                                                    | Cost  |        | Unrealized  |  | Income    |      | Estimated 
|(In thousands)         |                                                    | Basis |        | Gain (Loss) |  | (Expense) |      | Fair Value
|                       |                                                    |       |        |             |  |           |      |           
|Short-term investments |                                                    |       |        |             |  |           |      |            |   |   |        |        |   |   |       |      
|                       | Marketable securities                              |       | $      | 9,702       |  |           | $    |           |   |   | $      |       |   |   | $     | 9,702 | 
|                       |                                                    |       |        |             |  |           |      |            |   |   |        |        |   |   |       |      
|Long-term investments  |                                                    |       |        |             |  |           |      |            |   |   |        |        |   |   |       |      
|                       | Marketable equity investments                      |       | $      | 1,883       |  |           | $    | (790       | ) |   | $      |       |   |   | $     | 1,093 | 
|                       | Non-marketable equity investments                  |       |        | 2,202       |  |           |      |           |   |   |        | (702   | ) |   |       | 1,500 | 
|                       | Investment in Critical Path Pacific, equity method |       |        | 7,508       |  |           |      |           |   |   |        | (2,886 | ) |   |       | 4,622 | 
|                       |                                                    |       |        |             |  |           |      |            |   |   |        |        |   |   |       |      
|                       |                                                    | $     | 11,593 |             |  | $         | (790 | )          |   | $ | (3,588 | )      |   | $ | 7,215 |      
|                       |                                                    |       |        |             |  |           |      |            |   |   |        |        |   |   |       |      

|                       |                               |   |       |       |  |   |      |      |   |   |    |    |  |   |       |       | 
|---------------------- | ----------------------------- | - | ----- | ----- |  | - | ---- | ---- | - | - | -- | -- |  | - | ----- | ----- | 
|December 31, 2002      |                               |   |       |       |  |   |      |     
|(In thousands)         |                               |   |       |       |  |   |      |     
|                       |                               |   |       |       |  |   |      |     
|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 consist of both
short-term and long-term investments. Short-term investments are
primarily comprised of low risk government securities and
corporate bonds. Long-term investments are 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 2000, 2001 and 2002, the Company
determined that the impairment of certain of these investments
were deemed to be other-than-temporary and recorded write downs
of $23.6 million, $702,000 and $1.5 million. The
impairment charge recorded in 2000, consisted of
$2.6 million in investments in marketable securities and
$21.0 million in investments in non-marketable securities.
During 2001 and 2002 the Company recorded write-downs related to
other-than-temporary impairments of certain non-marketable
securities. As of December 31, 2002, the estimated fair
value of non-marketable equity investments amounted to zero.

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 2000, 2001 and 2002, the Company
recorded equity in net loss of joint venture of approximately
$1.0 million, $1.9 million and $1.4 million,
respectively. On June 6, 2002, the Company acquired the
remaining 60% ownership interest. See also Note 2 
Acquisitions.

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Note 7  Property and
Equipment

|                                                |  |                |         |      |  |   |         |  
|----------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                                |  |               
|                                                |  | December 31,  
|                                                |  |               
|                                                |  | 2001           |         | 2002
|                                                |  |                |         |     
|                                                |  |               
|                                                |  | (In thousands)
|Computer equipment and software                 |  | $              | 109,543 |      |  | $ | 104,474 |  
|Furniture and fixtures                          |  |                | 9,822   |      |  |   | 9,456   |  
|Leasehold improvements                          |  |                | 2,180   |      |  |   | 2,035   |  
|                                                |  |                |         |      |  |   |         |  
|                                                |  |                | 121,545 |      |  |   | 115,965 |  
|Less: Accumulated depreciation and amortization |  |                | (85,260 | )    |  |   | (97,823 | )
|                                                |  |                |         |      |  |   |         |  
|                                                |  | $              | 36,285  |      |  | $ | 18,142  |  
|                                                |  |                |         |      |  |   |         |  

At December 31, 2000, 2001 and 2002,
property and equipment included $21.5 million,
$2.9 million and $5.1 million of assets under capital
leases, respectively, and accumulated amortization totaled
$13.6 million, $1.4 million and $3.1 million at
December 31, 2000 , 2001 and 2002, respectively. All assets
under capital lease relate to computer equipment and software.

Depreciation and amortization expense totaled
$34.4 million, $43.0 million and $27.2 million
during 2000, 2001 and 2002, respectively.

Note 8  Goodwill and Other
Intangible Assets

At December 31, 2002, 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. At December 31, 2001, the Company carried net
intangible assets of $48.6 million. Of this amount,
$46.7 million is related to acquired intangible assets and
the remaining $1.9 million was associated with goodwill.
During the second quarter of 2002, goodwill increased by
approximately $1.0 million associated with the
Companys 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. On September 30, 2002, the Company performed
its annual impairment review, at which time the goodwill was not
impaired. 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.

Goodwill is detailed as follows (in thousands):

|              |  |              |       |                  |  |            |       |             |  |              |       |  |  |   |     |  |  |   |       | 
|------------- |  | ------------ | ----- | ---------------- |  | ---------- | ----- | ----------- |  | ------------ | ----- |  |  | - | --- |  |  | - | ----- | 
|              |  | December 31, |       |                  |  | January 1, |       |             |  | December 31,
|              |  | 2001         |       | Reclassification |  | 2002       |       | Acquisition |  | 2002        
|              |  |              |       |                  |  |            |       |             |  |             
|United States |  | $            |      |                  |  | $          | 2,386 |             |  | $            | 2,386 |  |  | $ |    |  |  | $ | 2,386 | 
|Europe        |  |              | 1,983 |                  |  |            | 1,262 |             |  |              | 3,245 |  |  |   |    |  |  |   | 3,245 | 
|Other         |  |              |      |                  |  |            |      |             |  |              |      |  |  |   | 982 |  |  |   | 982   | 
|              |  |              |       |                  |  |            |       |             |  |              |       |  |  |   |     |  |  |   |       | 
|              |  | $            | 1,983 |                  |  | $          | 3,648 |             |  | $            | 5,631 |  |  | $ | 982 |  |  | $ | 6,613 | 
|              |  |              |       |                  |  |            |       |             |  |              |       |  |  |   |     |  |  |   |       | 

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##### Table of Contents



Other intangible assets are detailed as follows
(in thousands):

|                                   |  |        |         |              |  |       |         |   |  |   |        | 
|---------------------------------- |  | ------ | ------- | ------------ |  | ----- | ------- | - |  | - | ------ | 
|                                   |  |        |         |              |  | Net  
|                                   |  | Gross  |         | Accumulated  |  | Book 
|December 31, 2001                  |  | Amount |         | Amortization |  | Value
|                                   |  |        |         |              |  |      
|Existing technology                |  | $      | 39,748  |              |  | $     | (21,226 | ) |  | $ | 18,522 | 
|Strategic relationships  warrants |  |        | 38,660  |              |  |       | (19,330 | ) |  |   | 19,330 | 
|Customer base                      |  |        | 12,493  |              |  |       | (7,698  | ) |  |   | 4,795  | 
|Assembled workforce                |  |        | 8,930   |              |  |       | (5,282  | ) |  |   | 3,648  | 
|Patents                            |  |        | 726     |              |  |       | (363    | ) |  |   | 363    | 
|                                   |  |        |         |              |  |       |         |   |  |   |        | 
|                                   |  | $      | 100,558 |              |  | $     | (53,900 | ) |  | $ | 46,658 | 
|                                   |  |        |         |              |  |       |         |   |  |   |        | 

|                                   |  |        |        |              |  |       |         |   |  |   |   | 
|---------------------------------- |  | ------ | ------ | ------------ |  | ----- | ------- | - |  | - | - | 
|                                   |  |        |        |              |  | Net  
|                                   |  | Gross  |        | Accumulated  |  | Book 
|December 31, 2002                  |  | Amount |        | Amortization |  | Value
|                                   |  |        |        |              |  |      
|Existing technology                |  | $      | 39,748 |              |  | $     | (39,748 | ) |  | $ |  | 
|Strategic relationships  warrants |  |        | 38,660 |              |  |       | (38,660 | ) |  |   |  | 
|Customer base                      |  |        | 12,493 |              |  |       | (12,493 | ) |  |   |  | 
|Patents                            |  |        | 726    |              |  |       | (726    | ) |  |   |  | 
|                                   |  |        |        |              |  |       |         |   |  |   |   | 
|                                   |  | $      | 91,627 |              |  | $     | (91,627 | ) |  | $ |  | 
|                                   |  |        |        |              |  |       |         |   |  |   |   | 

Amortization expense was $401.1 million,
$54.1 million and $43.3 million in 2000, 2001 and
2002. Included in amortization expense was amortization of
goodwill totaling $341.7 million, $643,000 and zero in
2000, 2001 and 2002, respectively, with the remaining
amortization expense related to other intangible assets. Based
on the types of other identifiable intangibles acquired, during
2000, 2001 and 2002 amortization expense of $18.1 million,
$21.3 million and $18.5 million was allocated to cost
of net revenues, respectively, and amortization expense of
$382.9 million, $32.7 million and $24.8 million
was allocated to operating expenses, respectively. During 2000,
the Company also recognized $3.7 million of acquired
in-process research and development costs in the period the
transaction was consummated. See also Note 2 
Acquisitions. Additionally, a $1.3 billion impairment
charge to reduce the carrying value of goodwill and other
intangible assets was recognized in 2000. The remaining
identifiable intangible assets primarily relate to existing
technology for some of the Companys licensed products,
which were acquired in 2000, and certain amounts related to
assembled work forces, 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,
|                                                                  |  |                        
|                                                                  |  | 2000                    |            | 2001 |  | 2002
|                                                                  |  |                         |            |      |  |     
|Net loss                                                          |  |                         |            |      |  |      |         |   |  |   |          |  
|Reported net loss attributable to common shares                   |  | $                       | (1,852,465 | )    |  | $    | (79,820 | ) |  | $ | (131,815 | )
|Amortization of goodwill                                          |  |                         | 5,762      |      |  |      | 4,688   |   |  |   |         |  
|                                                                  |  |                         |            |      |  |      |         |   |  |   |          |  
|Net loss attributable to common shares, as
    adjusted           |  | $                       | (1,846,703 | )    |  | $    | (75,132 | ) |  | $ | (131,815 | )
|                                                                  |  |                         |            |      |  |      |         |   |  |   |          |  
|Net loss per share  basic and
    diluted                        |  |                         |            |      |  |      |         |   |  |   |          |  
|Reported net loss per share attributable to
    common shares     |  | $                       | (30.67     | )    |  | $    | (1.08   | ) |  | $ | (1.69    | )
|Amortization of goodwill per share                                |  |                         | 0.09       |      |  |      | 0.06    |   |  |   |         |  
|                                                                  |  |                         |            |      |  |      |         |   |  |   |          |  
|Net loss per share attributable to common shares,
    as adjusted |  | $                       | (30.58     | )    |  | $    | (1.02   | ) |  | $ | (1.69    | )
|                                                                  |  |                         |            |      |  |      |         |   |  |   |          |  

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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 $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. During
2000, the Company recorded an impairment charge of $16.8 million
bringing the adjusted fair value to approximately
$30.1 million to be amortized over the remaining benefit
period. See also Note 17  Impairment of Long-Lived
Assets.



| |                                 
| | --------------------------------
| | 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 is considered probable are remeasured at each
subsequent reporting date, beginning at December 31, 1999,
until each sub-branded Qwest mailbox registration threshold is
achieved and the related warrant shares vest, at which time the
fair value attributable to that tranche of the warrant is fixed.
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.

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 is being 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
2000 and 2001, $7.4 million and $4.6 million,
respectively, was charged to stock-based operating expense
related to the vested warrants. During 2002, amortization of
intangible assets totaled $4.6 million, related to these
warrants. The value of these warrants was fully amortized at
December 31, 2002. During 2000, the Company recorded an
impairment charge of $4.8 million. See also Note
16  Impairment of Long-Lived Assets. The fair value
at December 31, 2000 and 2001, was approximately
$8.6 million and $4.6 million, respectively, and was fully
amortized as of the end of 2002.

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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 cancelled. 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.

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, 2002, 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,
will cause additional substantial changes in the ultimate amount
of the related stock-based charges.

Note 9  Related Party
Transactions

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

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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 Transaction. 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.
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.


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. As of December 31, 2000 and
2001, accrued interest totaled $109,000 and $158,000,
respectively. 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, totalling
$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

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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 portion of the purchase price representing the purchase
price of the vested shares. As of December 31,
2002, no interest had accrued, however the Company expects
interest will begin accruing in May 2003.

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
has been recognized as an asset, in Other assets, and as a
liability, in Capital lease and other obligations. These
balances will be reclassified to shareholders equity as
the right of repurchase lapses, one third in May 2003, and
one thirty sixth monthly thereafter.

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

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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.


Consulting Agreements

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 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.

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.



| |                      
| | ---------------------
| | Revenues and Expenses

The following is a summary of revenues and
receivables associated with related parties:

|        |  |                    |       |                 |  |      |       |      |  |      |     |      |  |   |     |  |  |   |       |  |  |   |    | 
|------- |  | ------------------ | ----- | --------------- |  | ---- | ----- | ---- |  | ---- | --- | ---- |  | - | --- |  |  | - | ----- |  |  | - | -- | 
|        |  |                    |       |                
|        |  | Revenues           |       | Receivables    
|        |  |                    |       |                
|        |  |                    |       |                
|        |  | For the Year Ended |       |                
|        |  | December 31,       |       | At December 31,
|        |  |                    |       |                
|        |  | 2000               |       | 2001            |  | 2002 |       | 2000 |  | 2001 |     | 2002
|        |  |                    |       |                 |  |      |       |      |  |      |     |     
|        |  |                   
|        |  | (In thousands)    
|E*TRADE |  | $                  | 395   |                 |  | $    | 1,724 |      |  | $    | 9   |      |  | $ | 42  |  |  | $ | 1,591 |  |  | $ |   | 
|US West |  |                    | 5,806 |                 |  |      | 2,647 |      |  |      |    |      |  |   | 460 |  |  |   | 21    |  |  |   |   | 
|ICQ     |  |                    | 240   |                 |  |      | 237   |      |  |      | 480 |      |  |   | 105 |  |  |   | 60    |  |  |   | 40 | 
|        |  |                    |       |                 |  |      |       |      |  |      |     |      |  |   |     |  |  |   |       |  |  |   |    | 
|        |  | $                  | 6,441 |                 |  | $    | 4,608 |      |  | $    | 489 |      |  | $ | 607 |  |  | $ | 1,672 |  |  | $ | 40 | 
|        |  |                    |       |                 |  |      |       |      |  |      |     |      |  |   |     |  |  |   |       |  |  |   |    | 



| |         
| | --------
| | Expenses

During 2000, the Company leased an aircraft, for
use by certain officers of the Company, from D Squared LLC, in
which Douglas Hickey and David Thatcher, the Companys
former Chief Executive Officer and former President,
respectively, had a direct investment. The aggregate amount
billed to the Company for the use of the aircraft or other
aircraft arranged through D Squared LLC aggregated approximately
$337,000. There were no billed amounts in 2001 and 2002.

Note 10  Credit
Facility

In September 2002, the Company entered into a
$15.0 million one-year line of credit (credit
facility) with Silicon Valley Bank, to be utilized for
working capital and general corporate operations. At
December 31, 2002, the Company had no borrowings and
$3.0 million in letters of credit under the credit
facility. The credit facility is secured by certain assets of
the Company and borrowings bear variable interest, Prime rate
plus 1.00% and is subject to certain covenants. Interest is paid
each month with principle due at maturity. Commitment fees
related to the credit facility include an initial commitment fee
of 0.50%, or $75,000, which

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was paid upon close, a fee of 0.50% due and
payable should the Company elect to cancel the facility within
the first six months from closing, and an additional fee based
on unused credit of 0.45% payable at the end of each quarterly
period in arrears. The credit facility was scheduled to mature
on September 30, 2003, however it was recently amended on
March 25, 2003, to extend the maturity date to
March 31, 2004 and revised certain covenants. At
December 31, 2002, the Company was in compliance with the
covenants required under the amended credit facility. In
connection with the extension we paid an additional commitment
fee of $37,500 and extended the initial six-month period subject
to an early termination fee through September 30, 2003. The
interest rate on the credit facility was 4.7% during 2002.


Note 11  Convertible
Subordinated Notes

During 2000, the Company issued
$300.0 million of five-year, 5 3/4% Convertible
Subordinated Notes (Notes) due April 2005, to
qualified institutional buyers in reliance on Rule 144A
under the Securities Act of 1933. Holders may convert the 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 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 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 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 Notes are
non-callable for three years. In the event of a Change in
Control, as defined in Notes Offering Circular, the
Notes holders have the option of requiring the Company 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.

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 Notes. During 2000, 2001 and 2002, the Company
recorded interest expense related to the amortization of the
debt issuance costs of $1.6 million, $1.5 million and
$275,000, respectively.

Interest is payable on April 1 and
October 1 of each year. As of December 31, 2000, 2001
and 2002, there was approximately $4.3 million, $600,000
and $556,000 in interest payable, respectively. During 2000,
2001 and 2002, the Company recorded interest expense related to
the Notes of $13.0 million, $12.1 million and
$2.2 million, respectively. The 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 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 Notes, inclusive of approximately
$4.4 million in accrued interest. See also Note
15  Financing Transaction. As of December 31,
2000, 2001 and 2002 the total balance outstanding was
$300.0 million, $38.4 million and $38.4 million,
respectively. These Notes are carried at cost and had an
approximate fair value at December 31, 2002 of
$32.4 million.

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, 2002, the Company had
approximately $303 million of federal and $145 million
of state net operating loss carryforwards available to offset
future taxable income. Federal and state net operating loss

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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 has 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.

At December 31, 2002, 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.

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

|         |       |      |            |            |   |      |         |         |   |   |          |          |  
|-------- | ----- | ---- | ---------- | ---------- | - | ---- | ------- | ------- | - | - | -------- | -------- | -
|         |       | 2000 |            | 2001       |   | 2002
|         |       |      |            |            |   |     
|Domestic |       | $    | (1,858,276 | )          |   | $    | (67,000 | )       |   | $ | (114,578 | )       
|Foreign  |       |      | 12,324     |            |   |      | (5,258  | )       |   |   | (2,354   | )       
|         |       |      |            |            |   |      |         |         |   |   |          |         
|         | Total |      | $          | (1,845,952 | ) |      | $       | (72,258 | ) |   | $        | (116,932 | )
|         |       |      |            |            |   |      |         |         |   |   |          |         

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

|         |  |              |       |      |  |      |       |  |  |   |       |  
|-------- |  | ------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | -
|         |  |             
|         |  | December 31,
|         |  |             
|         |  | 2000         |       | 2001 |  | 2002
|         |  |              |       |      |  |     
|Current: |  |              |       |      |  |      |       |  |  |   |       |  
|Federal  |  | $            |      |      |  | $    | 1,600 |  |  | $ | (800  | )
|Foreign  |  |              | 6,513 |      |  |      | 5,606 |  |  |   | 1,779 |  
|         |  |              |       |      |  |      |       |  |  |   |       |  
|         |  |              | 6,513 |      |  |      | 7,206 |  |  |   | 979   |  
|         |  |              |       |      |  |      |       |  |  |   |       |  

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

|                          |                                  |              |         |         |   |      |          |        |   |   |          |         |  
|------------------------- | -------------------------------- | ------------ | ------- | ------- | - | ---- | -------- | ------ | - | - | -------- | ------- | -
|                          |                                  |             
|                          |                                  | December 31,
|                          |                                  |             
|                          |                                  | 2000         |         | 2001    |   | 2002
|                          |                                  |              |         |         |   |     
|Deferred tax assets       |                                  |              |         |         |   |      |          |        |   |   |          |        
|                          | Net operating loss carryforwards |              | $       | 96,254  |   |      | $        | 87,381 |   |   | $        | 111,288 |  
|                          | Tax credits                      |              |         | 6,442   |   |      |          | 13,321 |   |   |          | 15,918  |  
|                          | Fixed assets                     |              |         | 1,085   |   |      |          | 7,043  |   |   |          | 7,043   |  
|                          | Accrued liabilities              |              |         | 15,490  |   |      |          | 4,828  |   |   |          | 1,762   |  
|                          |                                  |              |         |         |   |      |          |        |   |   |          |        
|Total deferred tax assets |                                  | $            | 121,271 |         |   | $    | 112,573  |        |   | $ | 136,011  |        
|Deferred tax liability    |                                  |              |         |         |   |      |          |        |   |   |          |        
|                          | Intangible assets                |              | $       | (26,917 | ) |      | $        | (8,758 | ) |   | $        | (3,492  | )
|                          |                                  |              |         |         |   |      |          |        |   |   |          |        
|                          |                                  | $            | (26,917 | )       |   | $    | (8,758   | )      |   | $ | (3,492   | )      
|                          |                                  |              |         |         |   |      |          |        |   |   |          |        
|Gross deferred tax assets |                                  | $            | 94,354  |         |   | $    | 103,815  |        |   | $ | 132,518  |        
|                          |                                  |              |         |         |   |      |          |        |   |   |          |        
|Valuation allowance       |                                  | $            | (94,354 | )       |   | $    | (103,815 | )      |   | $ | (132,518 | )      
|                          |                                  |              |         |         |   |      |          |        |   |   |          |        
|Net deferred tax assets   |                                  | $            |        |         |   | $    |         |        |   | $ |         |        
|                          |                                  |              |         |         |   |      |          |        |   |   |          |        

The net increases in the valuation allowance for
2000, 2001 and 2002 were $69.0 million, $9.5 million
and $28.7 million, respectively.

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

|                                 |  |              |     |      |  |      |     |    |  |  |     |   
|-------------------------------- |  | ------------ | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2000         |     | 2001 |  | 2002
|                                 |  |              |     |      |  |     
|Tax at federal statutory rate    |  |              | (34 | )%   |  |      | (34 | )% |  |  | (34 | )%
|State, net of federal benefit    |  |              | (1  | )%   |  |      | (2  | )% |  |  | (3  | )%
|Stock-based expenses             |  |              | 0   | %    |  |      | 17  | %  |  |  | 0   | % 
|Goodwill amortization            |  |              | 7   | %    |  |      | 0   | %  |  |  | 0   | % 
|Intangible asset write off       |  |              | 24  | %    |  |      | 0   | %  |  |  | 0   | % 
|Research and development credits |  |              | 0   | %    |  |      | (2  | )% |  |  | (1  | )%
|Change in valuation allowance    |  |              | 4   | %    |  |      | 16  | %  |  |  | 26  | % 
|Foreign taxes                    |  |              | 0   | %    |  |      | 5   | %  |  |  | 5   | % 
|Warrant amortization             |  |              | 0   | %    |  |      | 9   | %  |  |  | 5   | % 
|Other                            |  |              | 0   | %    |  |      | 1   | %  |  |  | 4   | % 
|                                 |  |              |     |      |  |      |     |    |  |  |     |   
|Provision for taxes              |  |              | 0   | %    |  |      | 9   | %  |  |  | 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 2000, 2001
and 2002, totaled $5.8 million, $5.4 million and
$4.8 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            |                                                |                |       |           |   |   |        |       
|                                   | 2003                                           |                | $     | 2,541     |   |   | $      | 5,452  | 
|                                   | 2004                                           |                |       | 357       |   |   |        | 4,920  | 
|                                   | 2005                                           |                |       |          |   |   |        | 4,529  | 
|                                   | 2006                                           |                |       |          |   |   |        | 3,777  | 
|                                   | 2007 and beyond                                |                |       |          |   |   |        | 18,051 | 
|                                   |                                                |                |       |           |   |   |        |       
|Total minimum lease payments       |                                                | $              | 2,898 |           |   | $ | 36,729 |       
|                                   |                                                |                |       |          
|Less: Amount representing interest |                                                |                | (158  | )         |   |   |        |       
|                                   |                                                |                |       |           |   |   |        |       
|                                   | Present value of capital lease obligations     |                | $     | 2,740     |   |   |        |        | 
|                                   | Less: Current portion                          |                |       | (2,398    | ) |   |        |        | 
|                                   |                                                |                |       |           |   |   |        |       
|                                   | Long-term portion of capital lease obligations |                | $     | 342       |   |   |        |        | 
|                                   |                                                |                |       |           |   |   |        |       

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

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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 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 and a capital lease
obligation of $1.9 million at December 31, 2002.


Other Contractual Obligations

The Company entered into various contractual
obligations which total $14.0 million, at December 31,
2002, primarily related the future purchase of equipment,
software and maintenance of hardware and software products being
utilized within engineering and hosted operations, management of
data center operations and network infrastructure storage for
our hosted operations. These obligations are expected to be
completed over the next 5 years, including
$7.9 million in 2003.

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

Securities Action in Northern District of
California.On April 30, 2002,
MBCP PeerLogic LLC and other named plaintiffs filed suit in the
U.S. District Court for the Southern District of New York
against the Company and certain of its former officers. The
plaintiff shareholders had opted out of a shareholder litigation
settlement that was approved by the U.S. District Court for the
Northern District of California. The complaint alleged breach of
contract, unjust enrichment, common law fraud and violations of
federal securities laws and seeks compensatory and punitive
damages in an unnamed amount but in excess of $200 million.
The case has been transferred to the U.S. District Court for the
Northern District of California. Litigation in this matter is
ongoing.

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

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

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Companys common stock, engaged in insider
trading in violation of California law or published false
financial information in violation of California law. The
Company is currently working with plaintiffs counsel to
finalize execution of the terms of the settlement of this matter.


Securities Class Action in Southern
District of New York.Beginning on
July 18, 2001, a number of securities class action
complaints were filed against the Company, and certain of its
former officers and directors and underwriters connected with
its initial public offering of common stock in the U.S. District
Court for the Southern District of New York (In re Initial
Public Offering Sec. Litig.). The purported class action
complaints were filed by individuals who allege that they
purchased common stock at the initial public offering of common
stock between March 26, 1999 and December 6, 2000. The
complaints allege generally that the Prospectus under which such
securities were sold contained false and misleading statements
with respect to discounts and commissions received by the
underwriters. The over 1,000 complaints have been consolidated
into a single action. The complaints seek an unspecified amount
in damages on behalf of persons who purchased the Companys
stock during the specified period. Similar complaints have been
filed against 55 underwriters and more than 300 other companies
and other individuals. Pretrial motions and discovery was stayed
pending a ruling on a motion to dismiss the claims by
defendants. On February 19, 2003, the court issued an
opinion refusing to dismiss claims against the defendants in the
case, except in certain limited circumstances which did not
apply to Critical Path or its then officers and directors.

Lease Dispute.In
July 2000, PeerLogic, Inc. signed a lease for office space in
San Francisco, California. In December 2000, Critical Path
acquired PeerLogic as a wholly-owned subsidiary. After review,
the Company determined that local zoning laws likely prohibited
a business such as the Company or PeerLogic from occupying the
leased premises, and promptly sought a zoning determination from
the San Francisco Zoning Administrator to resolve the matter.
The Zoning Administrator determined that the Companys
proposed use of the leased premises was not permitted, but the
landlord appealed this determination and prevailed before the
San Francisco Board of Appeals. The Company requested a
rehearing on the matter, which the Board of Appeals denied.

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

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

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

Indemnifications

The Company provides general indemnification
provisions in its license agreements. In these agreements, the
Company generally states that it will defend or settle, at its
own expense, any claim against the customer by a third party
asserting a patent, copyright, trademark, trade secret or
proprietary right violation related to

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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.


Note 14  Minority Interest in
Subsidiary

In January 2000 and in connection with the
Companys acquisition of Isocor Corporation, it acquired a
72.87% interest in CP Italia. During 2000 and 2001 the Company
consolidated the operating results of CP Italia and recorded
minority interest in net income, which amounted to $649,000 in
2000 and was insignificant in 2001. In March 2001, in connection
with an agreement to purchase the remaining minority interest,
the Company acquired the outstanding 27.13% interest in CP
Italia for approximately $4.2 million.

Note 15  Financing
Transaction

In December 2001, the Company completed a
financing transaction with a group of investors and their
affiliated entities (Investors). 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 to the Company of approximately $30 million, and
the simultaneous retirement of approximately $65 million in
face value of outstanding 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 2.5 million of the Companys
Common Stock in connection with this offering.

The Series D Preferred Stock ranks senior to
all preferred and common stock of the Company in priority of
dividends, rights of redemption and payment upon liquidation.
The fair value ascribed to the Series D Preferred Stock was
based on actual cash paid by independent investors and the
approximate fair value of the Notes retired in connection with
the offering. The principle terms of the Series D 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, as defined,
divided by $1.05, 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 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
stockholders, and also provides for the Series D Preferred
stockholders to participate on a pro rata basis with the common
stockholders, 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) the Company 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 equal to,
or at least, four times the Accreted Value of Series D
Preferred Stock, which at December 31, 2001 was $4.20, or
(ii) the Company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. At
December 31, 2001, the estimated fair value

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of the liquidation preference was
$5.2 million 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. At
December 31, 2002, the estimated fair value of the
liquidation preference was $12.6 million, resulting in a
net charge to other expense during 2002 of $7.4 million due
to the reduction in estimated fair value of the liquidation
preference.


The warrants are exercisable at any time after
November 8, 2002 and until November 8, 2006, at an
exercise price of $1.05, and convert into one share of the
Companys Common 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. Consistent with the
provisions set forth in APB Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants, 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.

The carrying value of the Series D Preferred
Stock at December 31 was determined as follows:

|                                                                                                     |                               |                |        |         |   |   |        |         |  
|---------------------------------------------------------------------------------------------------- | ----------------------------- | -------------- | ------ | ------- | - | - | ------ | ------- | -
|                                                                                                     |                               | 2001           |        | 2002   
|                                                                                                     |                               |                |        |        
|                                                                                                     |                               |               
|                                                                                                     |                               | (In thousands)
|Series D Preferred Stock                                                                             |                               | $              | 55,000 |         |   | $ | 55,000 |        
|Less: Issuance costs                                                                                 |                               |                | (2,950 | )       |   |   | (3,075 | )      
|                                                                                                     |                               |                |        |         |   |   |        |        
|Series D Preferred Stock, net of issuance
    costs                                                  |                               |                | 52,050 |         |   |   | 51,925 |        
|Less amounts allocated to:                                                                           |                               |                |        |         |   |   |        |        
|                                                                                                     | Common stock warrants         |                |        | (5,250  | ) |   |        | (5,250  | )
|                                                                                                     | Beneficial conversion feature |                |        | (41,600 | ) |   |        | (41,475 | )
|Add liquidation preference                                                                           |                               |                |       |         |   |   | 7,440  |        
|Add amortization and accretion                                                                       |                               |                | 356    |         |   |   | 14,260 |        
|                                                                                                     |                               |                |        |         |   |   |        |        
|Carrying value of Series D Preferred Stock
    and embedded change-in-control feature at December 31 |                               | $              | 5,556  |         |   | $ | 26,900 |        
|                                                                                                     |                               |                |        |         |   |   |        |        

The accretion on redeemable convertible preferred
shares totaled $356,000 and $13.9 million during 2001 and
2002, 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.

Note 16  Shareholders
Equity (Deficit)

Changes in shares of Common Stock outstanding
were:

|                                                   |                                        |                                 |        |        |        |      |        |       |        |  |        |       |        | 
|-------------------------------------------------- | -------------------------------------- | ------------------------------- | ------ | ------ | ------ | ---- | ------ | ----- | ------ |  | ------ | ----- | ------ | 
|                                                   |                                        |                                
|                                                   |                                        | Year Ended December 31         
|                                                   |                                        |                                
|                                                   |                                        | 2000                            |        | 2001   |        | 2002
|                                                   |                                        |                                 |        |        |        |     
|                                                   |                                        |                                
|                                                   |                                        | (In thousands)                 
|Common Stock Shares outstanding, beginning of year |                                        |                                 | 46,937 |        |        |      | 74,135 |       |        |  | 76,581 |      
|                                                   | Issuance of Common Stock               |                                 |        | 19,958 |        |      |        | 514   |        |  |        | 1,183 |       
|                                                   | Exercise of stock options and warrants |                                 |        | 7,313  |        |      |        | 1,967 |        |  |        | 2,366 |       
|                                                   | Purchase of Common Stock               |                                 |        | (73    | )      |      |        | (35   | )      |  |        |      |       
|                                                   |                                        |                                 |        |        |        |      |        |       |        |  |        |      
|                                                   |                                        | Shares outstanding, end of year |        |        | 74,135 |      |        |       | 76,581 |  |        |       | 80,130 | 
|                                                   |                                        |                                 |        |        |        |      |        |       |        |  |        |      

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Incorporation and Authorized Capital

The Companys Articles of Incorporation, as
amended, authorize the Company to issue 500 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 3,863,635
shares of the Companys Common Stock at $0.02 per share.
Under the terms of the stock purchase agreements, the Company
has the right to purchase the shares of Common Stock at the
original issue price in the event any one of the founders ceases
to be an employee of the Company. These repurchase rights lapse
by 25% on the first anniversary of the vesting start date and
ratably each month thereafter for 36 months. On
September 1, 1999, 80,508 shares were repurchased in
connection with the early termination of one of the founders. At
December 31, 2001 and 2002, there were no shares of Common
Stock subject to repurchase rights. In connection with the
issuance of these shares, the Company recorded unearned
compensation of $1,306,000 that is being recognized over the
periods in which the Companys repurchase rights lapse.
During 2000 and 2001, $428,000 and $106,000, respectively, were
recognized as compensation expense. No expense was recognized in
2002.

In October 1998, an officer exercised stock
options to purchase 1,274,687 shares of the Companys
Common Stock at a price of $0.84 per share. Under the terms of
the option, the Company has the right to repurchase the unvested
shares of Common Stock at the original issue price in the event
the officer ceases to be an employee of the Company. The
repurchase rights lapse 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 and 2002, 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 600,000 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 1,000,000 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
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 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
2000, 2001 and 2002 were 112,665, 489,096 and 1,182,992,
respectively, at a price of $20.40 and $40.27 per share in 2000,
$1.28 and $0.78 per share in 2001 and $0.78 and $0.39 per share
in 2002. As of December 31, 2002, 749,301 shares were
available under the ESPP for future issuance.

The estimated weighted-average value of purchase
rights granted under the ESPP during 2000, 2001 and 2002 was
$6.97, $0.56 and $0.38 per share. The fair value of each stock
purchase right granted under the

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ESPP is estimated using the Black-Scholes option
valuation method, with the following weighted-average
assumptions:


|                        |  |          |  |          |  |         
|----------------------- |  | -------- |  | -------- |  | --------
|                        |  | 2002     |  | 2001     |  | 2000    
|                        |  |          |  |          |  |         
|Expected life of option |  | 6 months |  | 6 months |  | 6 months
|Risk-free interest rate |  | 2.60%    |  | 3.01%    |  | 4.60%   
|Dividend yield          |  | 0.00%    |  | 0.00%    |  | 0.00%   
|Volatility              |  | 111%     |  | 250%     |  | 128%    

The aggregate fair value of purchase rights
granted in 2002, 2001 and 2000 was approximately $446,000,
$928,000 and $2.5 million, 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
40,788,741 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 28,250,000
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 11,250,000 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,
2002 the total number of shares of common stock available for
option grants was 15,679,617 and 1,436,779 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, 2001 and 2002, a
total of 481,229 and 388,180 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.

Changes in stock options outstanding, granted,
exercisable, cancelled and available, during 2000, 2001 and 2002
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).

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|                                 |                            |                     |        |                           |         |                  |        |        |         |   |       |       |       | 
|-------------------------------- | -------------------------- | ------------------- | ------ | ------------------------- | ------- | ---------------- | ------ | ------ | ------- | - | ----- | ----- | ----- | 
|                                 |                            |                     |        |                          
|                                 |                            | Options or Awards   |        | Outstanding Option Grants
|                                 |                            | Available           |        |                          
|                                 |                            | under the 1998      |        | Number of                 |         | Weighted Average
|                                 |                            | and 1999 Plans      |        | Shares                    |         | Exercise Price  
|                                 |                            |                     |        |                           |         |                 
|Outstanding December 31, 1999    |                            |                     | 10,278 |                           |         |                  | 14,360 |        |         | $ | 14.81 |      
|                                 | Additional shares reserved |                     |        | 15,500                    |         |                  |        |        |         |   |       |       |      
|                                 |                            | Granted and assumed |        |                           | (17,302 | )                |        |        | 18,639  |   |       | $     | 53.68 | 
|                                 |                            | Exercised           |        |                           |        |                  |        |        | (4,696  | ) |       | $     | 6.47  | 
|                                 |                            | Canceled            |        |                           | 6,435   |                  |        |        | (6,787  | ) |       | $     | 39.10 | 
|                                 |                            |                     |        |                           |         |                  |        |        |         |   |       |      
|Outstanding December 31, 2000    |                            |                     | 14,911 |                           |         |                  | 21,516 |        |         | $ | 42.64 |      
|                                 |                            |                     |        |                           |         |                  |        |        |         |   |       |      
|                                 | Additional shares reserved |                     |        | 27,250                    |         |                  |        |        |         |   |       |       |      
|                                 |                            | Granted and assumed |        |                           | (42,268 | )                |        |        | 42,268  |   |       | $     | 0.99  | 
|                                 |                            | Exercised           |        |                           |         |                  |        |        | (1,976  | ) |       | $     | 1.08  | 
|                                 |                            | Canceled            |        |                           | 20,580  |                  |        |        | (21,522 | ) |       | $     | 27.84 | 
|                                 |                            |                     |        |                           |         |                  |        |        |         |   |       |      
|Outstanding December 31, 2001    |                            |                     | 20,473 |                           |         |                  | 40,286 |        |         | $ | 8.89  |      
|                                 |                            |                     |        |                           |         |                  |        |        |         |   |       |      
|                                 | Additional shares reserved |                     |        | 10,000                    |         |                  |        |        |         |   |       |       |      
|                                 |                            | Granted and assumed |        |                           | (20,882 | )                |        |        | 20,882  |   |       | $     | 1.32  | 
|                                 |                            | Exercised           |        |                           |         |                  |        |        | (2,382  | ) |       | $     | 1.22  | 
|                                 |                            | Canceled            |        |                           | 7,525   |                  |        |        | (7,612  | ) |       | $     | 9.98  | 
|                                 |                            |                     |        |                           |         |                  |        |        |         |   |       |      
|Outstanding December 31, 2002    |                            |                     | 17,116 |                           |         |                  | 51,174 |        |         | $ | 5.99  |      
|                                 |                            |                     |        |                           |         |                  |        |        |         |   |       |      
|Outstanding Options Exercisable: |                            |                     |        |                           |         |                  |        |        |         |   |       |      
|                                 | December 31, 2000          |                     |        |                           |         |                  |        | 3,518  |         |   | $     | 31.36 |      
|                                 | December 31, 2001          |                     |        |                           |         |                  |        | 7,962  |         |   | $     | 18.67 |      
|                                 | December 31, 2002          |                     |        |                           |         |                  |        | 23,449 |         |   | $     | 8.81  |      

The following table summarizes information about
stock options outstanding at December 31, 2002 (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-$ 0.02 |                     |  |                     | 32     |                |  |             | 5.17 |                |  |   | 0.02  |  |  |  | 32     |  |  |   | 0.02  | 
|$               | 0.22-$ 0.36 |                     |  |                     | 5,509  |                |  |             | 8.58 |                |  |   | 0.35  |  |  |  | 4,856  |  |  |   | 0.36  | 
|$               | 0.38-$ 0.53 |                     |  |                     | 5,800  |                |  |             | 9.30 |                |  |   | 0.47  |  |  |  | 1,029  |  |  |   | 0.45  | 
|$               | 0.54-$ 0.59 |                     |  |                     | 2,619  |                |  |             | 9.01 |                |  |   | 0.58  |  |  |  | 1,095  |  |  |   | 0.59  | 
|$               | 0.67-$ 0.88 |                     |  |                     | 6,596  |                |  |             | 9.55 |                |  |   | 0.88  |  |  |  | 933    |  |  |   | 0.88  | 
|$               | 0.89-$ 0.91 |                     |  |                     | 1,058  |                |  |             | 9.37 |                |  |   | 0.90  |  |  |  | 312    |  |  |   | 0.91  | 
|$               | 0.92-$ 1.00 |                     |  |                     | 5,555  |                |  |             | 7.90 |                |  |   | 1.00  |  |  |  | 4,607  |  |  |   | 1.00  | 
|$               | 1.01-$ 1.09 |                     |  |                     | 1,919  |                |  |             | 8.79 |                |  |   | 1.06  |  |  |  | 1,094  |  |  |   | 1.08  | 
|$               | 1.11-$ 1.13 |                     |  |                     | 6,602  |                |  |             | 8.88 |                |  |   | 1.13  |  |  |  | 3,733  |  |  |   | 1.13  | 
|$               | 1.14-$87.00 |                     |  |                     | 15,484 |                |  |             | 8.51 |                |  |   | 18.00 |  |  |  | 5,755  |  |  |   | 31.94 | 
|                |             |                     |  |                     |        |                |  |             |      |                |  |   |       |  |  |  |        |  |  |   |       | 
|                |             |                     |  |                     | 51,174 |                |  |             | 8.77 |                |  | $ | 5.99  |  |  |  | 23,449 |  |  | $ | 8.81  | 
|                |             |                     |  |                     |        |                |  |             |      |                |  |   |       |  |  |  |        |  |  |   |       | 

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

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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 2000, 2001 and 2002 totaled approximately
$25.2 million, $38.2 million and $10.0 million,
respectively. Based on the functions of the employees and
consultants participating in the related option grants, during
2000, 2001 and 2002, expenses of $1.6 million,
$4.1 million and $1.2 million, 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 2000, the Company incurred stock-based
charges of approximately $5.7 million in connection with
certain severance agreements for terminated employees.
Approximately $3.4 million of this charge was included in
employee severance expense in connection with the Companys
plan to reduce worldwide headcount and the remaining
$2.3 million was included in stock-based expenses. During
2001 and 2002, we incurred stock-based charges of approximately
$1.7 million and $17,000, 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.

Note 17  Impairment of Long-Lived
Assets

During 2000, the Company recorded a
$1.3 billion impairment charge to reduce goodwill, other
intangible assets and deferred costs associated with its ICQ and
Qwest relationships to their estimated fair values. In
connection with the impairment analysis, the estimates of fair
values were based upon the

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discounted estimated cash flows of the Company
for the succeeding three years using a discount rate of 25% and
an estimated terminal value. The assumptions supporting the
estimated cash flows, including the discount rate and an
estimated terminal value, reflects managements best
estimates. The discount rate was primarily based upon the
weighted average cost of capital for comparable companies.


During 2001 and in connection the Companys
strategic restructuring effort an additional assessment was
performed on certain of its remaining long-lived assets. The
restructuring plan identified and formulated a plan to exit
certain products and services that were determined to be
non-core to the Companys business strategy. The Company
reviewed the intangible assets related to these non-core
products and services and, as a result of its assessment,
recorded a $14.2 million impairment charge in the second
quarter to eliminate these assets. During the fourth quarter of
2001, the Company recorded a further impairment charge of
$12.4 million related to long-lived assets within its core
business.

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.

Note 19  Loss Per Share

Net loss per share is calculated as follows:

|                                       |                                                                        |                                          |        |            |   |      |       |         |   |   |       |          |  
|-------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------- | ------ | ---------- | - | ---- | ----- | ------- | - | - | ----- | -------- | -
|                                       |                                                                        |                                         
|                                       |                                                                        | Year Ended December 31,                 
|                                       |                                                                        |                                         
|                                       |                                                                        | 2000                                     |        | 2001       |   | 2002
|                                       |                                                                        |                                          |        |            |   |     
|                                       |                                                                        |                                         
|                                       |                                                                        | (In thousands, except per share amounts)
|Net loss                               |                                                                        |                                          |        |            |   |      |       |         |   |   |       |         
|                                       | Net loss                                                               |                                          | $      | (1,855,465 | ) |      | $     | (79,464 | ) |   | $     | (117,911 | )
|                                       | Accretion on mandatorily redeemable preferred
    stock                |                                          |        |           |   |      |       | (356    | ) |   |       | (13,904  | )
|                                       |                                                                        |                                          |        |            |   |      |       |         |   |   |       |         
|                                       | Net loss attributable to common shares                                 |                                          | $      | (1,855,465 | ) |      | $     | (79,820 | ) |   | $     | (131,815 | )
|Weighted average shares outstanding    |                                                                        |                                          |        |            |   |      |       |         |   |   |       |         
|                                       | Weighted average shares outstanding                                    |                                          |        | 63,379     |   |      |       | 75,148  |   |   |       | 78,655   |  
|                                       | Weighted average shares subject to repurchase
    agreements           |                                          |        | (1,493     | ) |      |       | (188    | ) |   |       | (529     | )
|                                       | Weighted average shares held in escrow related to
    acquisitions     |                                          |        | (1,487     | ) |      |       | (979    | ) |   |       | (344     | )
|                                       |                                                                        |                                          |        |            |   |      |       |         |   |   |       |         
|                                       | Shares used in computation of basic and diluted
    net loss per share |                                          |        | 60,399     |   |      |       | 73,981  |   |   |       | 77,782   |  
|Basic and diluted net loss per share   |                                                                        |                                          |        |            |   |      |       |         |   |   |       |         
|                                       | Net loss                                                               |                                          | $      | (30.67     | ) |      | $     | (1.07   | ) |   | $     | (1.51    | )
|                                       | Accretion on mandatorily redeemable preferred
    stock                |                                          |        |           |   |      |       | (0.01   | ) |   |       | (0.18    | )
|                                       |                                                                        |                                          |        |            |   |      |       |         |   |   |       |         
|Net loss attributable to common shares |                                                                        | $                                        | (30.67 | )          |   | $    | (1.08 | )       |   | $ | (1.69 | )       

During 2000, 2001 and 2002, there were 7,907,018,
89,206,120 and 116,429,133, 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.

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Note 20  Product and Geographic
Information

Revenue information on a product basis is as
follows:

|             |                  |                               |         |      |        |      |         |   |        |   |        |   |        | 
|------------ | ---------------- | ----------------------------- | ------- | ---- | ------ | ---- | ------- | - | ------ | - | ------ | - | ------ | 
|             |                  |                              
|             |                  | Year Ended December 31,      
|             |                  |                              
|             |                  | 2000                          |         | 2001 |        | 2002
|             |                  |                               |         |      |        |     
|             |                  |                              
|             |                  | (In thousands)               
|Net revenues |                  |                               |         |      |        |      |         |   |        |   |        |  
|             | Software license |                               |         |      |        |      |         |   |        |   |        |   |       
|             |                  | Messaging solutions           |         | $    | 27,853 |      |         | $ | 11,822 |   |        | $ | 16,662 | 
|             |                  | Identity management solutions |         |      | 7,060  |      |         |   | 9,822  |   |        |   | 15,944 | 
|             |                  | Other                         |         |      | 16,694 |      |         |   | 9,316  |   |        |   | 2,569  | 
|             | Service          |                               |         |      |        |      |         |   |        |   |        |   |       
|             |                  | Hosted messaging              |         |      | 44,666 |      |         |   | 37,467 |   |        |   | 24,894 | 
|             |                  | Fax messaging (1)             |         |      | 13,887 |      |         |   | 6,354  |   |        |   |       | 
|             |                  | Maintenance and support       |         |      | 10,966 |      |         |   | 16,819 |   |        |   | 15,471 | 
|             |                  | Professional services         |         |      | 14,527 |      |         |   | 12,573 |   |        |   | 11,593 | 
|             |                  |                               |         |      |        |      |         |   |        |   |        |  
|             |                  | $                             | 135,653 |      |        | $    | 104,173 |   |        | $ | 87,133 |  
|             |                  |                               |         |      |        |      |         |   |        |   |        |  



---



|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Fax messaging was discontinued in connection with
    the 2001 restructuring. See also Note 4  Strategic
    Restructuring and Employee Severance.

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,
|             |               |                        
|             |               | 2000                    |         | 2001   |  | 2002
|             |               |                         |         |        |  |     
|             |               |                        
|             |               | (In thousands)         
|Net revenues |               |                         |         |        |  |      |         |        |  |   |        |       
|             | United States |                         | $       | 83,864 |  |      | $       | 62,928 |  |   | $      | 43,197 | 
|             | Italy         |                         |         | 14,708 |  |      |         | 14,205 |  |   |        | 15,458 | 
|             | Ireland       |                         |         | 23,916 |  |      |         | 14,564 |  |   |        | 13,104 | 
|             | Other         |                         |         | 13,165 |  |      |         | 12,476 |  |   |        | 15,374 | 
|             |               |                         |         |        |  |      |         |        |  |   |        |       
|             |               | $                       | 135,653 |        |  | $    | 104,173 |        |  | $ | 87,133 |       
|             |               |                         |         |        |  |      |         |        |  |   |        |       

|                  |               |              |         |         |  |      |        |        |  |   |        |        | 
|----------------- | ------------- | ------------ | ------- | ------- |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                  |               |             
|                  |               | December 31,
|                  |               |             
|                  |               | 2000         |         | 2001    |  | 2002
|                  |               |              |         |         |  |     
|Long-lived assets |               |              |         |         |  |      |        |        |  |   |        |       
|                  | United States |              | $       | 202,897 |  |      | $      | 77,248 |  |   | $      | 17,366 | 
|                  | Italy         |              |         | 2,032   |  |      |        | 3,374  |  |   |        | 3,374  | 
|                  | Other         |              |         | 4,469   |  |      |        | 4,304  |  |   |        | 4,015  | 
|                  |               |              |         |         |  |      |        |        |  |   |        |       
|                  |               | $            | 209,398 |         |  | $    | 84,926 |        |  | $ | 24,755 |       
|                  |               |              |         |         |  |      |        |        |  |   |        |       

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Note 21  Quarterly Financial Data
(Unaudited)

Quarterly Results of Operations (In
thousands)

|                                                                                  |  |       |         |           |  |          |         |           |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ----- | ------- | --------- |  | -------- | ------- | --------- |  | - | ------- | - |  | - | ------- | -
|2001                                                                              |  | First |         | Second(3) |  | Third(4) |         | Fourth(5)
|                                                                                  |  |       |         |           |  |          |         |          
|Net revenues                                                                      |  | $     | 27,143  |           |  | $        | 27,085  |           |  | $ | 26,787  |   |  | $ | 23,158  |  
|Gross profit (loss)                                                               |  |       | (3,613  | )         |  |          | (6,837  | )         |  |   | 1,285   |   |  |   | (9,703  | )
|Loss from operations (6)                                                          |  |       | (66,285 | )         |  |          | (80,230 | )         |  |   | (44,144 | ) |  |   | (51,039 | )
|Net income (loss)                                                                 |  |       | (70,046 | )         |  |          | (81,081 | )         |  |   | 86,901  |   |  |   | (15,238 | )
|Net income (loss) attributable to common
    shares                               |  |       | (70,046 | )         |  |          | (81,081 | )         |  |   | 86,901  |   |  |   | (15,594 | )
|Net income (loss) per share attributable to
    common shares  basic and diluted |  |       | (0.97   | )         |  |          | (1.10   | )         |  |   | 1.17    |   |  |   | (0.21   | )

|                                                                         |  |       |         |        |  |       |         |        |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ----- | ------- | ------ |  | ----- | ------- | ------ |  | - | ------- | - |  | - | ------- | -
|2002                                                                     |  | First |         | Second |  | Third |         | Fourth
|                                                                         |  |       |         |        |  |       |         |       
|Net revenues                                                             |  | $     | 23,689  |        |  | $     | 22,442  |        |  | $ | 19,168  |   |  | $ | 21,833  |  
|Gross profit                                                             |  |       | 5,992   |        |  |       | 4,487   |        |  |   | 1,656   |   |  |   | 4,215   |  
|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 |  |       | (0.38   | )      |  |       | (0.50   | )      |  |   | (0.38   | ) |  |   | (0.43   | )



---



|    |                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a $6.7 million charge related to
    employee severance expense. See also Note 4  Strategic
    Restructuring and Employee Severance.                                                                                                                                                                                     
|   
|(2) | Includes a $1.31 billion charge related to
    impairment of intangible assets including the deferred costs
    associated with our ICQ and Qwest relationships. See also Note
    17  Impairment of Long-Lived Assets.                                                                                                            
|   
|(3) | Includes a $14.2 million charge related to
    impairment of certain long-lived assets and an $8.5 million
    charge related to costs incurred as a result of our strategic
    restructuring initiative. See also Note 4  Strategic
    Restructuring and Employee Severance and Note 17 
    Impairment of Long-Lived Assets.  
|   
|(4) | Includes a $3.8 million charge related to
    costs incurred as a result of our strategic restructuring
    initiative. See also Note 4  Strategic Restructuring and
    Employee Severance and Note 17  Impairment of Long-Lived
    Assets.                                                                                     
|   
|(5) | Includes a $12.4 million charge related to
    impairment of certain long-lived assets, primarily network
    infrastructure and equipment, and a $6.0 million charge
    related to costs incurred as a result of our strategic
    restructuring initiative. See also Note 4  Strategic
    Restructuring and Employee Severance.
|   
|(6) | Included in operating expenses in the first,
    second, third and fourth quarters of 2001 were goodwill
    amortization charges of $148,000, $116,000, $151,000 and
    $228,000, respectively. In accordance with SFAS No. 142,
    the Company ceased amortization of goodwill on January 1,
    2002.                          

109



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##### Table of Contents



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    
|                        |  |              |       |            |  |             |       |           
|2002                    |  | $            | 1,182 |            |  | $           | 673   |            |  | $ | (269   | ) |  | $ | 1,586 | 
|2001                    |  | $            | 3,525 |            |  | $           | 5,242 |            |  | $ | (7,585 | ) |  | $ | 1,182 | 
|2000                    |  | $            | 623   |            |  | $           | 5,492 |            |  | $ | (2,590 | ) |  | $ | 3,525 | 

110



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused
this 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 28th day of
March, 2003.



| |                    
| | -------------------
| | Critical Path, Inc.



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

| |                             
| | ----------------------------
| |                             
| | Paul Bartlett               
| | Executive Vice President and
| | Chief Financial Officer     

Each person whose signature appears below
constitutes and appoints William E. McGlashan, Jr. and Paul
Bartlett and each of them, as attorneys-in-fact, each with the
power of substitution, for him or her in any and all capacities,
to sign any amendment to this Report and to file the same, with
exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting to said
attorneys-in-fact, and each of them, full power and authority to
do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact
or either of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.

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 and Chief Executive Officer
    (Principal Executive Officer)                   |  | March 28, 2003
|                                                      
|/s/ PAUL BARTLETTPaul Bartlett                         |  | Executive Vice President and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | March 28, 2003
|                                                      
|/s/ WILLIAM S. COHENWilliam S. Cohen                   |  | Director                                                                                              |  | March 28, 2003
|                                                      
|/s/ RAUL J. FERNANDEZRaul J. Fernandez                 |  | Director                                                                                              |  | March 28, 2003
|                                                      
|/s/ WILLIAM E. FORDWilliam E. Ford                     |  | Director                                                                                              |  | March 28, 2003
|                                                      
|/s/ WM. CHRISTOPHER GOROGWm. Christopher Gorog         |  | Director                                                                                              |  | March 28, 2003
|                                                      
|/s/ JEFFREY WEBBERJeffrey Webber                       |  | Director                                                                                              |  | March 28, 2003



---



##### Table of Contents



CERTIFICATIONS

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



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this Annual Report on
    Form 10-K of Critical Path, Inc.                                                                                                                                                                                                                                                                  
|
| | 2. Based on my knowledge, this annual report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report.
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report.                   
|
| | 4. The registrants other certifying
    officers and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



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



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



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



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

Date: March 28, 2003



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



---



##### Table of Contents



I, Paul Bartlett, certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this Annual Report on
    Form 10-K of Critical Path, Inc.                                                                                                                                                                                                                                                                  
|
| | 2. Based on my knowledge, this annual report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report.
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report.                   
|
| | 4. The registrants other certifying
    officers and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



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



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



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



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

Date: March 28, 2003



| |                            
| | ---------------------------
| | /s/ PAUL BARTLETT          
| |                            
| | Paul Bartlett              
| | Chief Financial Officer and
| | Executive Vice President