##### 



________________________________________________________________________________


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,
	2001
|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

The aggregate market value of voting stock held
by non-affiliates of the Registrant was approximately
$185,776,193 as of March 25, 2002, based on the closing
price of the Common Stock as reported on the Nasdaq National
Market for that date. There were 77,406,747 shares of the
Registrants Common Stock issued and outstanding on
March 25, 2002.

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 2002 Annual Meeting of
Shareholders scheduled to be held on June 5, 2002.



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CRITICAL PATH, INC.

INDEX

|         |  |                                                                                        |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                        |  | Page
|         |  |                                                                                        |  |     
|PART I  
|Item 1.  |  | Business                                                                               |  |      | 3  | 
|Item 2.  |  | Properties                                                                             |  |      | 16 | 
|Item 3.  |  | Legal                                                                                  |  |      | 16 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
	Holders                                   |  |      | 18 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |  |      | 19 | 
|Item 6   |  | Selected Financial Data                                                                |  |      | 20 | 
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 21 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |  |      | 52 | 
|Item 8.  |  | Financial Statements and Supplemental Data                                             |  |      | 53 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |      | 55 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                     |  |      | 55 | 
|Item 11. |  | Executive Compensation                                                                 |  |      | 57 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 57 | 
|Item 13. |  | Certain Relationships and Related Party
	Transactions                                  |  |      | 57 | 
|PART IV 
|Item 14. |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |  |      | 58 | 



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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 relationships with strategic partners, growth of our
competition, our ability to compete, investments in product
development, the adequacy of our current facilities and our
ability to obtain additional space, our litigation strategy, use
of future earnings, the feature, benefits and performance of our
current and future products and services, plans to reduce
operating costs through continued expense reduction, anticipated
effects of restructuring and retirement of debt, and our belief
as to our ability to successfully emerge from the restructuring
and refocusing of our operations, 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
litigation and the settlement of the SEC investigation, 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 the Company does business, risks associated
with our international operations, foreign currency
fluctuations, unplanned system interruptions and capacity
constraints, software defects, and failure to expand our sales
and marketing activities, potential difficulties associated with
strategic relationships, investments and uncollected bills,
risks associated with an inability to maintain continued
compliance with the Nasdaq National Market listing requirements,
risks associated with our international operations, unplanned
system interruptions and capacity constraints, software defects,
and those discussed in Managements Discussion and
Analysis of Financial Condition and Results of Operations
and 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 means 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, Inc., a global leader in Internet
communications, delivers software and services that are designed
to maximize the value of Internet communications. We provide
messaging and collaboration solutions  from wireless,
secure and unified messaging to basic email and personal
information management  as well as identity
management solutions that simplify user profile management and
strengthen information security. The standards-based Critical
Path Communications PlatformTM, built to perform
reliably at the scale of public networks, delivers the
industrys lowest total cost of ownership for messaging
solutions, as noted by industry experts, and lays a solid
foundation for next-generation communications services. As of
December 31, 2001, our customers include more than
700 enterprises, 180 carriers and service providers,
eight

3



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national postal authorities and
40 government agencies. Critical Path is headquartered in
San Francisco, with offices throughout North America, Europe,
Asia and Latin America.


We were incorporated as a California corporation
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.cp.net. The information contained in our
website does not form any part of this Annual Report on
Form 10-K.

Recent Developments

Financing
Transaction.In November 2001, the
Company announced that it had entered into a financing
transaction with a group of investors that resulted in gross
cash proceeds to the Company of approximately $30 million
as well as the retirement of $65 million in face value of
our 5 3/4% Convertible Subordinated Notes. In connection
with this transaction, the Company issued and sold four million
shares of convertible preferred stock (convertible into
approximately 52.4 million shares of our common stock) and
warrants to purchase 2.5 million shares of our common
stock. The financing transaction was led by General Atlantic
Partners LLC and its affiliates, and also included Cheung Kong
Limited and affiliates, Hutchison Whampoa Limited and
affiliates, and Vectis Group LLC and affiliates. In connection
with this financing, a representative of General Atlantic
Partners, as well as an additional independent director, also
joined the Board of Directors.

Management Changes.Throughout 2001, we underwent several
series of changes in our management, including the replacement
of virtually all of the senior management of the Company in the
first half of 2001. In May 2001, after joining the Board,
William E. McGlashan, Jr. was appointed Interim President and
Chief Operating Officer. In August 2001, Mr. McGlashan was
named Interim Chief Executive Officer and later in the year he
accepted the appointment as Chief Executive Officer and Vice
Chairman of the Board. The Company also added a number of senior
executive officers between April and September 2001 replacing
the executives who departed during that period. Specifically,
Laureen DeBuono joined the Company as Interim Chief Financial
Officer in September 2001 and Pierre Van Beneden joined the
Company as President in October 2001. In January 2002,
Ms. DeBuono was named Executive Vice President and Chief
Financial Officer.

Strategic and Operational
Restructuring.In April 2001, the
Company announced a broad strategic restructuring initiative
that involved organizing the Companys product and service
offerings around a group of core communication solutions and an
operational restructuring effort related to its business
infrastructure and overhead. The Company implemented an
aggressive expense management program designed to further reduce
operating costs, including the divestiture of many non-core
products, a significant reduction in headcount, the closing of
numerous facilities around the world and the termination of
consulting and other service contracts. The Company incurred
significant charges related to the restructuring including
employee severance and benefits payments associated with
terminations and costs associated with the buy out of existing
property and equipment leases. As a result of those strategic
and operational initiatives, the Company expects to reduce
future quarterly costs, excluding special charges, by nearly
$30.0 million as compared to the first quarter of 2001.

Class Action and Shareholder Derivative
Litigation.Beginning on February 2,
2001, a number of securities class action complaints were filed
against us, certain of our current and former officers and
directors, in the United States District Court for the Northern
District of California. Additionally, beginning on
February 5, 2001, we were 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. In
November 2001, the Company announced that it had reached an
agreement in principle to settle these cases. In February 2002,
the Court gave preliminary approval to the settlement of the
class action litigation. The Court also set the final hearing
date for approval of the Court of the settlement agreement for
May 23, 2002.

SEC Investigation.In February 2001, the Securities and Exchange Commission issued
a formal order of investigation of our company and certain
unidentified individuals associated with us with respect to
non-specified accounting matters, financial reports, other
public disclosures and trading activity in our securities. The
Company fully cooperated with the SEC in its investigation. The
SEC investigation was concluded as

4



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against the Company in January 2002 with no
imposition of fines or penalties against the Company. The
Company consented, without admitting or denying liability, to an
administrative order stating that the Company violated certain
non-fraud provisions of the federal securities laws and to a
cease and desist order. We understand that the investigation
with respect to former officers and directors of the Company is
continuing. The Company is fully cooperating with such
investigation, however, the status of the investigation of the
former officers and directors is not known at this time.


Critical Paths Business

Market Overview

The growth and pervasiveness of global public
networks (the Internet and wireless networks) has fueled
dramatic growth in electronic communications. Experts predict
that soon more people will access the Internet with a wireless
device than with wireline personal computers. Already, industry
experts believe that 400 million people use cellular phones
and 300 million people are online. Those same experts
estimate that in 2002, more than one third of the global
document delivery market will be moved electronically. As a
result, todays corporations and service providers face an
increasing number of technological challenges, as well as new
business imperatives, that demand a new breed of communications
solutions.

In todays market, communications solutions
for corporations and service providers must serve a much larger
user base than in the past. In the corporate environment,
employees are receiving company communications in electronic
form, and Internet messaging services are increasingly used to
streamline communications with customers, partners and
suppliers. Furthermore, service providers are expanding beyond
consumer markets as an increasing number of small- to
medium-sized businesses turn to Internet Service Providers
(ISPs), telecommunications companies and mobile operators for
turn-key communications solutions. Todays communications
solutions must not only meet the varying needs of different
types of users, they must also provide efficient ways for
organizations to manage growing and diverse user populations.

In the evolving area of Internet communication,
corporations and service providers must provide richer
communications applications. As the complexity of digital media
expands, users need not only basic email, but services such as
secure messaging for online business transactions, wireless
messaging for mobile commerce, and multimedia messaging for new
media content and entertainment. Communications solutions must
support a wide array of content from text messages to encrypted
and digitally signed documents, to audio, video and other
multimedia.

Todays users demand ubiquitous access to
communications services. Users expect to access email and other
communications services through multiple devices 
from laptops and cellular phones to wireless handhelds, palm
devices and pagers. As a result, communications services must
support a growing range of devices, protocols and technologies.

Along with todays technological challenges,
corporations and service providers also face new business
imperatives. To stay competitive, mobile operators,
telecommunications companies and other service providers must
expand and differentiate their service offerings, moving beyond
basic connectivity services and email to offer value-added
services that increase average revenue per user and reduce
churn. Furthermore, corporations must support a growing number
of e-business initiatives and deploy innovative Web services
that make information and communications readily accessible to
employees, partners and customers around the globe. Our
solutions allow corporations and service providers to provide
these communications services to their employees, customers and
partners.

Critical Paths Solutions

Critical Paths Communications Platform
provides a complete range of solutions that help corporations
and service providers tackle technological challenges and
respond to new business imperatives and opportunities. Through
the Critical Path Communications Platform, corporations and
service providers can deliver a broad spectrum of wireless and
wireline communications services  from mobile, secure
and unified messaging to basic email and personal information
management. In addition, Critical Paths platform provides

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a solid infrastructure for user management,
streamlining the costs and complexities of deploying
communications services, providing security and enabling the
customization of services at the end-user level.


Our platform allows us to provide Messaging and
Collaboration solutions, as well as Identity Management
solutions.

Messaging
and Collaboration Solutions

Core
Messaging

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | With more than 145 million licensed
	electronic mailboxes as of December 31, 2001, our Core
	Messaging solution provides highly reliable email services that
	users can access via the Web, with standards-based email clients
	and with wireless devices. For corporations, the Core Messaging
	solution presents a cost-effective alternative to groupware,
	providing only the functionality that typical users need. For
	service providers, Core Messaging provides essential email
	services at the industry rated lowest cost of ownership and very
	large scalability.

Personal
Information Management (PIM)

| |                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Critical Paths PIM solution provides users
	with a personal calendar, personal address book, task lists and
	notes. Users can access these services via the Web and wireless
	devices and also use them offline with Personal Digital
	Assistant and PIM clients. With Critical Paths PIM
	solution, service providers can easily offer value-added
	services in addition to email.

Business
Communications Suite

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Most users today need messaging and collaborative
	applications without the added functionality and expense of full
	groupware solutions. Critical Paths Business
	Communications Suite combines our Core Messaging and PIM
	solutions to provide users with business email, calendaring,
	personal address books and secure online file storage in one
	suite. Built-in features enhance collaboration and allow users
	to share schedules, personal contacts and files with other
	users. In addition, the Business Communications Suite supports
	Web, wireless, voice and client-based access. The Suite
	integrates easily with third-party applications and existing
	infrastructure and helps minimize corporations costs by
	eliminating costly groupware where those features are not
	required. The Suite is also ideal for service providers seeking
	to penetrate the lucrative small- to medium-sized business
	market with a cost-effective service offering.

Secure
Messaging

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Critical Paths Secure Messaging solution
	provides a secure way to send and receive messages and files
	through the Internet. It enables secure and auditable delivery,
	online file collaboration and Public Key Infrastructure
	(PKI)-enabled messaging that allows users to digitally sign
	documents and conduct legally binding online transactions. For
	corporations, Secure Messaging provides a cost-effective and
	efficient alternative to physical mail, courier services and
	paper contracts, and for service providers, it offers yet
	another way to offer value-added services that generate more
	revenue per user.

Mobile
Messaging

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Mobile Messaging enables Short Message
	Services (SMS) for more than 44 telecommunications
	carriers around the globe. Our Mobile Messaging solution, with
	an interface that bridges the gap between SMS and Internet
	email, enables users to send and receive simple text messages
	via any SMS-enabled device. Additionally, our Mobile Messaging
	solution supports the emerging multimedia messaging market.
	Critical Path provides message album and smart message filtering
	to protect, store, access and route complex file types, combined
	with strategic partners solutions that provide [MMSC]s and
	media converter technology to provide a complete multimedia
	messaging solution that enables users to send and receive rich,
	integrated content (including digital video, audio, color images
	and animations) over wireless devices.

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Unified
Communications

| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Critical Path helps service providers capitalize
	on this very large market with a Unified Communications solution
	that offers centralized access to voice, fax and email messages.
	Our Core Messaging solution provides the central message store,
	while partner technologies are readily integrated to enable
	voice and fax capabilities.

Identity
Management Solutions

Core
Directory

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Critical Paths Core Directory solution
	provides a central repository for user profile data. Consisting
	of a standard Lightweight Directory Access Protocol, or LDAP,
	directory with superior fault tolerance and business continuity
	assurance, Critical Paths Core Directory solution provides
	single-point user management, simplifying user authentication
	and administration and laying a solid foundation for extranet,
	e-commerce and distributed application services.

Unified
User Management

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Critical Paths Unified User Management
	solution enables organizations to unify user profiles across
	distributed applications, realizing an immediate return on
	investment through the elimination of manual, redundant and
	scattered user administration tasks. Accurate and consistent
	user profiles are shared by heterogeneous systems, strengthening
	information security, improving information access and
	streamlining services provisioning. The Unified User Management
	solution eliminates information silos and is essential for
	next-generation, directory-enabled services, such as Web
	services, single sign-on and access management.

Single
Sign-On

| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Critical Paths directory and meta-directory
	technology is combined with strategic partner solutions to
	provide centralized access management, Web single sign-on,
	policy-based delegated administration and user self-service.

Public
Key Infrastructure (PKI)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Critical Paths PKI solution facilitates
	successful PKI deployments by leveraging the reliability,
	scalability and high performance of Critical Paths
	directory and meta-directory technology. The CPTM
	Directory Server stores user digital certificates, enabling fast
	search access and supporting user authentication, while the
	CPTM Meta-Directory Server keeps user profiles
	up-to-date and ensures the data consistency and accuracy
	necessary for secure communications.

The Critical Path Communications
Platform

All of the components of our Messaging and
Collaboration and Identity Management solutions are delivered
through a common Internet communications platform. The Critical
Path Communications Platform is designed for expanding Internet
communications, offering:




| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | Support for 24 hour, 7 day a week
	high-availability environments.                          
|
| |  | Scalability designed to adjust from just a few
	thousand users to tens of millions of users.
|
| |  | Standards-based technology, enabling rapid
	deployment of communications services.          
|
| |  | The industry rated lowest total cost of ownership.                                          

With its foundation centered on our messaging and
directory technology, the Critical Path Communications Platform
consists of three product layers: Access, Services and
Management.

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The Access Layer.The Access layer provides
universal wireless/ wireline access to communications services,
making services accessible from PCs, telephones and mobile
devices, on Web browsers and standard clients. The Access layer
includes:

CPTM
Presentation Server

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The CP Presentation Server is a
	standards-based, carrier-class application server that enables
	the delivery of tightly integrated collaborative applications
	into a highly customized and personalized workspace. The
	CP Presentation Server provides single sign-on, an
	integrated user interface, Web, wireless and voice access, and
	out-of-the-box integration with Critical Path servers.
	Additionally, the CP Presentation Server enables the
	integration of third-party applications, providing a common
	interface to virtually any communications service that can be
	presented on a Web (HTML) or wireless (WML) device.

CPTM
SMS Access Server

| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The CP SMS Access Server provides a
	network-independent, feature-rich gateway between SMS (Short
	Message Service) and the Internet mail protocol, SMTP (Simple
	Mail Transfer Protocol), bridging the gap between numerous
	applications and wireless technologies.

CPTM
Digital Certification Services

| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | CPTM Digital Certification Services
	provide the added security and functionality of client-side
	digital signatures, encryption and digital receipts to messages
	and documents transferred through the CP Messaging Server
	and CP Registered Mail Server.

The Services Layer.The Services layer powers a broad
range of communications services, including email, personal
information management, mobile messaging, multimedia messaging,
secure messaging and unified communications.

CPTM
Messaging Server

| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At the core of the Services layer is the CP
	Messaging Server  a scalable and robust messaging
	solution, enabling standards-based email (Web, SMTP, POP3 and
	IMAP4). The CP Messaging Server offers high levels of
	performance, reliability and scalability.

CPTM
Calendar Server

| |                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The CP Calendar Server is a powerful Web-based
	solution that fully integrates personal and group calendaring.
	Ease of use and a diverse range of features make the
	CP Calendar Server a valuable solution for both
	corporations and service providers who want to offer value-added
	calendaring services to generate more revenue per user.

CPTM
Personal Address Book Server

| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The CPTM Personal Address Book Server
	stores contact information in a central location, giving end
	users always available access to personal address books from any
	device or application. A standards-based, Web- and
	wireless-accessible product, the CP Personal Address Book Server
	allows end users to easily access important phone numbers or
	email addresses from a Web browser, PC client or mobile phone.

CPTM
Registered Mail Server

| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The CP Registered Mail Server enables users to
	efficiently send and receive documents through the Internet
	without compromising security. End-to-end encryption and
	real-time tracking information protect messages and file
	deliveries.

8



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The Management Layer.The Management layer unifies user
profiles, simplifying user management, enabling customization at
the user level and increasing security across communications
services.

CPTM
Directory Server

| |                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The CP Directory Server provides a central
	repository for user profile information and other data shared by
	multiple systems and applications. This state-of-the-art LDAP
	directory is currently deployed in primarily mission-critical
	environments, including corporate intranets/ extranets, online
	banking services, Internet postal services and government
	services.

CPTM
Meta-Directory Server

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The CP Meta-Directory Server enables more
	effective communication and streamlines business processes by
	ensuring that user profiles throughout an organization are both
	consistent and current, and by allowing administrators to
	maintain strict access controls for sensitive information. The
	CP Meta-Directory Server automatically propagates data from one
	application, database or directory to others across the entire
	enterprise, and it automates the tedious tasks of transferring
	data from one system to another. The CP Meta-Directory Server
	technology integrates multiple data sources into an LDAP
	directory, such as the CP Directory Server, and a powerful
	set of connectors exchange the information between the
	CP Meta-Directory Server and various data stores.

Target Markets, Customers and Strategic
Partners

Customers and
Target Markets

Our customers and target customers are corporate
enterprises, wireless and telecommunications providers,
broadband and service providers, governments and postal
authority markets.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Corporate Enterprises.Communications infrastructure products
	and services are an increasingly important concern for
	businesses. Enterprises need to control costs of messaging in
	the face of tightening budgets and expanding message volume.
	With the globalization of the workforce, enterprises have become
	increasingly reliant upon digital communication. With such
	globalization, critical business information is leveraged across
	an enterprise in eBusiness applications and the need for
	reliable messaging and security access controls expands
	significantly. Additionally, such enterprises require identity
	management solutions to ensure security and to enable portals,
	extranets and Web-based services.                                                                                                                                                                                                                                                                                                 
|
| |  | Wireless and Telecommunications Providers.Wireless users require access to the
	Internet and the ability to send and receive messages through
	chosen platforms and devices. Wireless and telecommunications
	providers are challenged with meeting ever evolving customer
	needs, decreasing voice revenues and heightened global
	competition. We provide the necessary access and messaging
	capability to provide wireless service providers with a low
	total cost of ownership, increased scalability, improved
	reliability and an open, easily integrated standards based
	platform. Additionally, to increase the value of their own
	service, and to grow the value of and retain their customers,
	telecommunications providers often add our advanced Internet
	messaging solutions to their connectivity and data management
	offerings.                                                                                                                                                                                   
|
| |  | Broadband and Service Providers.Broadband providers, such as cable,
	ISDN and DSL operators, face increasing messaging and identity
	management complexity as their businesses grow and evolve. Large
	bandwidth providers offer increased multimedia capabilities and
	services. These services require highly scalable and reliable
	infrastructure to handle the increasing user numbers and message
	volume for both individual message size and message quantity.
	Critical Path provides reliable and scalable messaging
	infrastructure to handle this growth. Additionally, broadband
	service providers (XSPs) basic connection services have
	become increasingly commoditized. XSPs are aggressively
	expanding value-added services, including wireless messaging,
	unified messaging and mobile commerce. Application service
	providers (ASPs) offer application hosting services and custom
	application development for corporate customers. Many ASPs offer
	email messaging as one of their core applications and can

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | take advantage of our outsourced offering and
	brand-behind-the-brand strategy to reduce costs and
	provide high-quality service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Governments and Postal Authorities.Governments and postal authorities are
	increasingly entering into digital services. Their challenges
	are to provide services at a national level that can support
	large volume, very large scale and complex applications. Postal
	authorities worldwide use our email solutions to provide
	country-wide email for life and our directory and
	meta-directory products to serve as central repositories of user
	profile information that provide security and access control
	over trusted third party services for hundreds of millions of
	postal customers. Government agencies use our directories to
	help identify users and the services they should be allowed to
	access. By leveraging our highly scalable directory products,
	countries are able to build eBusiness infrastructures that
	enable such authorities to reduce business costs, create new
	revenue streams, and deliver the trackability, security, and
	reliability needed for information exchange with national
	agencies.

Strategic
Partners

A key element of Critical Paths sales
strategy is to expand distribution channels through strategic
reseller or joint sales relationships. Our current strategic
partners fall into two primary categories:
i) telecommunications, Internet and wireless infrastructure
service providers, and ii) Internet security and privilege
management infrastructure partners. The following are examples
of existing strategic relationships that we believe will
position us to increase market presence and penetration:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Telecommunications, Internet and Wireless
	Infrastructure Service Providers.Our
	technology supports one-way and two-way messaging services to
	millions of wireless devices and we are one of only a few
	companies able to provide end-users with the means to send and
	receive messages to and from mobile phones, pagers and other
	wireless devices. We have relationships with leading
	telecommunications and Internet infrastructure providers as a
	means to develop the growing market for messaging. We believe
	these relationships provide vital, value-added services that
	enable our strategic partners to retain customers, grow into new
	business areas, and increase revenue from their installed
	customer bases. Strategic partners include: Mediagate, Nokia
	Networks OY and Logica UK Limited, among others.
|
| |  | Internet Security and Privilege Management
	Infrastructure Partners.Critical Path
	has established relationships with major public key
	infrastructure and Internet security vendors. Our InJoin
	Directory Server is included in several of our customers
	security solutions. Additionally, our InJoin Meta-Directory
	plays a growing role in large corporations efforts to
	develop comprehensive privilege management systems. By working
	with leading public key infrastructure, secure relationship
	management, and provisioning vendors as well as systems
	integrators that specialize in this area, we are expanding our
	channel of large corporations and enterprises. Strategic
	partners include Netegrity, Inc., EDS and Entrust Technologies
	Limited, among others.                                              

Information regarding customers and sales by
geographic area is included in Note 19 of Notes to the
Consolidated Financial Statements  Product and
Geographic Information.

Sales and Marketing

Sales
Strategies

Direct Sales.In
addition to our channel relationships, we maintain our own
direct sales force to introduce prospective customers and
partners to our products and services and to work in tandem with
our business partners. Our worldwide direct sales team is
organized in each of our key geographic regions around our
target markets. Currently, we have sales staff located in
domestic offices in San Francisco, Los Angeles, Austin, Chicago,
Milwaukee, Boston, Pensacola, New York and other cities
throughout the United States. Internationally we have members of
our sales organization located in Australia, Brazil, Canada,
France, Germany, Hong Kong, India, Ireland, Italy, Malaysia,
Netherlands, Spain, Switzerland and the United Kingdom.

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Channel Partner Sales.The Company embraces and integrates
partners and alternative channels with the goal of gaining
market presence and share in its target markets. Our flexible
solutions are well suited for partner and channel execution.
Critical Path teams 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. These partners include Nokia
Networks OY, Logica UK Limited, Hewlett-Packard, Bull,
Entrust Technologies Limited, EDS and Ernst & Young Cap
Gemini. In addition, Critical Path maintains partner
relationships to resell its products and services throughout
most of Asia and Latin America.

Marketing
Strategies

We are focused on industry marketing, media
relations and public relations to educate our key markets about
the business value of Internet communications, and to reinforce
Critical Paths reputation as a leading solutions provider.
The Company intends to continue to focus on industry events,
trade-show participation and solutions seminars to promote our
brand presence and acquire customers. Additionally, joint
programs with strategic partners promote focused offerings for
specific market segments.

Competition

Because we have numerous Internet communications
solutions and services, we are not aware of a single company
that competes across all of our products and services. However,
we encounter different competitors at each level of our
solutions. For customers seeking messaging solutions, we compete
with Sun Microsystems iPlanet division, OpenWave Systems,
Inc., Mirapoint Inc., Oracle Corporation, Microsoft Corporation
and IBM Corporations Lotus division. For secure delivery
services, competitors include Tumbleweed Communications Corp.,
Slam Dunk Networks, Atabok Inc. and Zix it Corporation. In
the identity management market, we encounter primarily Sun
Microsystems iPlanet division, Microsoft and Novell
Corporation in the enterprise/eBusiness directory category; and
Sun Microsystems iPlanet division, Microsoft, Novell and
Siemens Corporation are among our competitors in the
meta-directory market. 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
exchange services.

While these competitors and others exist in each
of our individual product markets, we believe our complete
solution of products and services serves as a competitive
advantage, because our customers can easily integrate their
infrastructure with our broad product line, selecting multiple
products and services from Critical Path as their requirements
demand.

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



| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Breadth of platform features and functionality;                                                                                                                                                                            
|
| |  | Ease of integration into customers existing
	systems;                                                                                                                                                                     
|
| |  | Scalability, reliability, performance and ease of
	expansion and upgrade;                                                                                                                                                  
|
| |  | Flexibility to enable customers to manage certain
	aspects of their systems internally and leverage outsourced
	services in other cases when resources, costs and time to market
	reasons favor an outsourced offering; and
|
| |  | Total cost of ownership and operation.                                                                                                                                                                                     

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

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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 competitors additional time to improve their service or
product offerings, and provide time for new competitors to
develop Internet messaging 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.


Technology

CP Communications Platform

Our core expertise is in messaging and directory
technology. This allows us to deliver highly scalable digital
communications software, services and solutions with our
Critical Path Communications Platform.

The CP Communications Platform is divided into
three layers: Access, Services and Management. Each layer
contains a number of server software components that together
can provide a broad range of digital communications solutions
like email, mobile messaging, personal information management,
unified messaging, multimedia messaging and the integration
necessary to enable and provision communications solutions to
large populations of users in the corporate enterprise and the
service provider.

All CP Communications Platform components are
designed to support mission critical environments. Our high
performance, scalable and reliable servers operate in
installations ranging from hundreds of thousands to tens of
millions of users. Our components are all designed to deliver
custom solutions and thus include a range of tools including
software development kits (SDKs). They can be used alone or
together, in many combinations. They are often used with third
party components and therefore are developed to support
interoperability with many best of breed technologies. All of
our Communications Platform components operate on Sun
Microsystems Solaris and Microsofts Windows NT/2000
operating systems and a subset of our components also operate on
Hewlett Packard HPUX, IBM AIX and Linux operating systems.

Access
Layer

Our Access Layer is anchored by our CP
Presentation Server, a powerful application framework that is
integrated with all CP Platform components. The CP Presentation
Server allows for the creation of customized, personalized
application user interfaces to Communications Platform
components and third party technologies using a powerful SDK. It
enables 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 CP 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 CP Presentation Server is our CP
Short Message Service Access Server, a powerful application
framework that enables the development of applications which
send Short Message Service (SMS) messages. CP SMS Access Server
includes an application development SDK (SMASI) that
applications can use to drive SMS traffic to a number of
SMS-Cs. To date, support is provided for a number of
SMS-Cs through protocols like SMPP. The CP SMS Access
Server also includes WAP-Push support to enable next generation
wireless applications like Multimedia Messaging Service (MMS).

Services
Layer

Our Services Layer is anchored by our CP
Messaging Server, a highly scalable, standards-based, messaging
server. The CP Messaging Server enables services from Core Email
to Unified Messaging and next generation Multimedia Messaging
Services through its powerful native IMAP mail store and SMTP
relay. It has a scalable architecture, allowing single or
multiple domains to be split over multiple servers,
geographically distributed and setup as clusters. It also has
support for security features including secure-socket-layer
(SSL), anti-virus and anti-spam.

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Alongside our CP Messaging Server, our CP
Personal Address Book Server, CP Calendar Server, CP File
Storage Server and CP Registered Mail Server provide access to
personal and group information such as contacts, calendars,
files and secure, trackable messages. These servers can be
combined to provide a Personal Information Management Suite, a
Business Messaging Suite, an Electronic Bill Presentment
Service, a Multimedia Messaging Service and many other
solutions, reliably and on a large scale.

Management
Layer

Our Management Layer is anchored by our CP Meta
Directory Server and CP Directory Server. Our CP Meta
Directory software enables user/ resource provisioning, keeping
information consistent between disparate 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 CP Platform components. CP
Meta Directory includes wide support for connected systems
including SQL Server, Sybase, Oracle, Microsoft Exchange, Lotus
Notes, Peoplesoft, Siebel and mainframe applications. It also
includes wide interoperability with directory software including
CP Directory Server, Microsoft Active Directory, Novell
eDirectory and iPlanet Directory Server. The CP Meta
Directory includes a powerful SDK that enables the development
of custom connectors using Perl, Java and XML.

The CP Directory Server is useful in providing a
common store of user or resource information that can be
accessed via standard LDAP and X.500 protocols. The
CP Directory Server can be used to store user profiles,
digital certificates from PKI, PKI software and eBusiness
information. The CP Directory Server is a distributed
database, meaning that it can be partitioned both logically and
physically, in order to provide improved performance and ease of
replication and updates. Both CP Directory Server and
CP Meta Directory Server incorporate security technology
like SSL for secure transport and authentication.

Alongside CP Directory and CP Meta
Directory, our CP System Console provides systems
management functionality to the CP Platform. This includes
system start/stop, systems monitoring, and configuration.
CP Systems Console uses Sun JDMK technology and is designed
to be interoperable with SNMP standards-based systems like
Hewlett Packard OpenView.

Hosted
Messaging

We also provide a hosted messaging service that
offers standards-based email service for Internet service
providers, telecommunications 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 and messaging software that
uses Oracle databases for account provisioning and management.
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. Our hosted messaging
service hardware and software consists of Sun Microsystems
servers running Solaris, Cisco routers, EMC redundant storage
arrays, Veritas software and rack-mounted Intel processor-based
servers. All aspects of our hosted messaging service are
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
throughout in two data centers. With multiple high-speed
connections to diverse backbone providers and a robust network

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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 mostly based on
systems which 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 $7.7 million in research and
development in 1999, $31.0 million in 2000 and
$30.7 million in 2001. 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 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 which 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.

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We have registered and/or 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
large 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, 2001, we had 562 employees,
including 192 in operations, 131 in sales and marketing,
148 in research and development and 91 in general corporate
and administration. Our future success depends, in significant
part, upon the continued service of our key technical and senior
management personnel and our continuing ability to attract and
retain highly qualified and experienced technical, sales and
managerial personnel. Competition for such personnel is intense,
and we cannot guarantee that we can retain our key technical and
managerial employees or that we will be able to attract,
assimilate or retain other highly qualified technical, sales and
managerial personnel in the future. None of our employees are
represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be
good.

Government Regulation

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

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

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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.


Item 2. Properties

Our current corporate headquarters and primary
operations and development facilities are located in two office
buildings in San Francisco, California. We have several leases
that relate to our San Francisco locations, including one that
expires on March 31, 2002, another that expires on
June 30, 2002 and the lease for our new office space that
expires on March 25, 2012. The Company took occupancy of a
total of 45,467 square feet of that new leased space on
March 25, 2002. We are in the process of consolidating all
of our San Francisco-based operations into our new headquarters.
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,
Malaysia, Spain, Sweden, Switzerland, the United Kingdom and
several cities throughout the United States. We continually
evaluate the adequacy of our existing facilities, and we believe
that the current facilities will be 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

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

Securities Class Actions in Northern
District of California.Beginning on
February 2, 2001, a number of securities class action
complaints were filed against the Company and certain of our
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 the Companys common stock
during a purported class period and sought an unspecified amount
in damages; the alleged class periods vary 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, the Company and certain of its former
officers made false or misleading statements of material fact
about the Companys financial statements, including its
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,
Critical Path announced that it had reached an agreement in
principle to settle these cases. In February 2002, the
Court gave preliminary approval to the settlement of the class
action litigation. The Court also set the hearing date for final
approval of the settlement agreement for May 23, 2002.

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

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Securities and Exchange Commission
Investigation.In February 2001, the
Securities and Exchange Commission (the SEC) issued
a formal order of investigation of the Company and certain of
the Companys current and former officers and directors
associated with the Company with respect to non-specified
accounting matters, financial reports, other public disclosures
and trading activity in the Companys securities. The
Company fully cooperated with the SEC in its investigation. The
SECs investigation was concluded against the Company in
January 2002 with no imposition of fines or penalties
against the Company. The Company consented, without admitting or
denying liability, to an administrative order that the Company
violated certain non-fraud provisions of the federal securities
laws and to a cease and desist order.

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

Breach of Contract Action.On January 18, 2001, we entered
into a non-exclusive licensing agreement with Comverse Network
Systems, Inc. (Comverse) with respect to our CP
Messaging and Directory software, with rights of distribution to
Comverses customers. On October 9, 2001, we notified
Comverse that we were terminating the Software License Agreement
based on our belief that Comverse materially breached the
contract. On or about October 15, 2001, Comverse filed a
complaint in the United States District Court for the Southern
District of New York against the Company, challenging the
Companys right to terminate the agreement. Comverse
asserted causes of action for specific performance, requesting
that the Company be required to perform and to recognize
Comverses alleged rights under the Agreement, and
injunctive relief, prohibiting the Company from taking action to
suspend, terminate or interfere with Comverses alleged
rights, remedies or privileges. Concurrently with the filing of
the Complaint, Comverse also filed a Demand for Arbitration with
the American Arbitration Association, seeking a determination
that Critical Path did not have the right to terminate the
agreement. Comverse does not seek money damages in either the
Complaint or the Demand for Arbitration. In December 2001, the
District Court issued a preliminary injunction prohibiting us
from taking various actions relative to the termination,
including demanding the return of the licensed software or
publicly indicating that Comverses rights under the
license agreement were terminated. The Company has appealed the
preliminary injunction and has also succeeded in having the
arbitration moved to San Francisco. No date has yet been set for
the arbitration or hearing of the appeal. While it is difficult
to determine what the eventual outcome of this matter will be,
the Company intends to defend its rights vigorously.

Securities Class Action in Northern
District of California.Beginning on
February 1, 2002, a number of securities class action
complaints were filed against the Company, and certain of our
former officers. The purported class action complaints allege
that during a period from April 21, 2000 through
September 25, 2000 and in same cases April 31 (sic),
2000 through October 19, 2000, the Company reported
materially misleading financial statements and made materially
misleading statements about the Companys ability to
collect on recognized revenue from our customers based on the
current economic climate and uncertainty about continued
viability of many Internet based businesses as well as in
recognition of changes in accounting regulations. The suit
further alleges that the Company knew these issues would
severely impair future revenue growth and the ability to make
future stock sales and extract future bonuses tied to the
Companys performance. The complaints seek an unspecified
amount in damages. The Company believes that these allegations
are without merit and intends to vigorously defend such suits.

The uncertainty associated with these and other
unresolved or threatened lawsuits could seriously harm the
Companys business and financial condition. In particular,
the lawsuits or the continued effects of the SEC investigation
could harm our relationships with existing customers and our
ability to obtain new customers.

17



---



##### 



The continued defense of the lawsuits could also
result in the diversion of managements time and attention
away from business operations, which could harm the
Companys business. Although some of the named lawsuits are
in the final stages of settlement, there can be no assurance
that the applicable courts will accept the final settlement as
executed, or at all. Negative developments with respect to the
settlements or the lawsuits could cause the Companys stock
price to decline significantly. In addition, although the
Company is unable to determine the amount, if any, that it may
be required to pay in connection with the resolution of these
lawsuits or the investigation by settlement or otherwise, the
size of any such payments could seriously harm the
Companys financial condition.


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

None.

18



---



##### 



PART II



|        |                                                                       
|------- | ----------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
	and Related Stockholder 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, 2000 |                                                             |      |   |        |  |  |   |      
|                             | First Quarter (from January 1, 2000 to
	March 31, 2000)     |      | $ | 119.50 |  |  | $ | 60.00 | 
|                             | Second Quarter (from April 1, 2000 to
	June 30, 2000)       |      | $ | 87.00  |  |  | $ | 26.00 | 
|                             | Third Quarter (from July 1, 2000 to
	September 30, 2000)    |      | $ | 79.38  |  |  | $ | 46.13 | 
|                             | Fourth Quarter (from October 1, 2000 to
	December 31, 2000) |      | $ | 59.75  |  |  | $ | 19.38 | 
|                            
|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  | 

As of March 25, 2002, there were
approximately 1,461 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. 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



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | On July 20, 2001 and December 7, 2001,
	respectively, we issued an aggregate of 9,000 shares and 15,000
	shares of common stock in connection with the settlement of two
	separate lawsuits against the Company by former employees
	alleging wrongful termination. The shares of common stock were
	issued at fair market value, as determined by the closing price
	listed on the Nasdaq National Market, on the date of issuance
	which was the settlement date as indicated. These securities
	were issued in reliance on the exemption from the registration
	requirements of the Securities Act provided in Section 4(2)
	thereof.                                                                                                                                                                                                                                                                         
|  
|2. | On November 8, 2001, we issued 4,000,000
	shares of Series D Cumulative Redeemable Convertible
	Participating Preferred Stock and warrants to purchase common
	stock of the Company, to a group of investors that included
	General Atlantic Partners LLC and its affiliates, Cheung
	Kong Limited and affiliates, Hutchison Whampoa Limited and
	affiliates and Vectis Group LLC and its affiliated entities. The
	Preferred Stock will accrue and cumulate dividends at eight
	percent (8%) and is convertible into shares of the
	Companys common stock at the option of the holder. The
	warrants are exercisable at any time from November 8, 2002
	until November 8, 2006. The exercise price of the common
	stock underlying the warrants is $1.05. The securities were
	issued in reliance upon the exemption from registration
	requirements from the Securities Act provided in
	Section 4(2) thereof.

19



---



##### 



Item 6. Selected Financial
Data

SELECTED CONSOLIDATED FINANCIAL
INFORMATION

(in thousands, except per share data and
footnotes)


The selected consolidated statement of operations
data for the period from February 19, 1997 (our inception)
to December 31, 1997, and during the years ended
December 31, 1998, 1999, 2000 and 2001, and selected
consolidated balance sheet data as of December 31, 1997,
1998, 1999, 2000 and 2001, 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,
|                                                              |  |                        
|                                                              |  | 1997                    |        | 1998 |  | 1999 |         | 2000(1) |  | 2001(2)
|                                                              |  |                         |        |      |  |      |         |         |  |        
|Consolidated Statement of Operations
	Data:                   |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  
|Net revenues                                                  |  | $                       |       |      |  | $    | 897     |         |  | $       | 16,157   |   |  | $ | 135,653    |   |  | $ | 104,173  |  
|Gross profit (loss)                                           |  |                         |       |      |  |      | (1,449  | )       |  |         | (5,400   | ) |  |   | 13,732     |   |  |   | (18,868  | )
|Operating expenses                                            |  |                         | (1,056 | )    |  |      | (9,999  | )       |  |         | (117,850 | ) |  |   | (1,831,449 | ) |  |   | (222,830 | )
|                                                              |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  
|Loss from operations                                          |  |                         | (1,056 | )    |  |      | (11,448 | )       |  |         | (123,250 | ) |  |   | (1,817,717 | ) |  |   | (241,698 | )
|Non-operating expenses                                        |  |                         | (18    | )    |  |      | (13     | )       |  |         | 6,309    |   |  |   | (28,235    | ) |  |   | (11,442  | )
|                                                              |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  
|Loss before extraordinary item and income taxes               |  |                         | (1,074 | )    |  |      | (11,461 | )       |  |         | (116,941 | ) |  |   | (1,845,952 | ) |  |   | (253,140 | )
|Provision for income taxes                                    |  |                         |       |      |  |      |        |         |  |         |         |   |  |   | (6,513     | ) |  |   | (5,606   | )
|                                                              |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  
|Loss before extraordinary item                                |  | $                       | (1,074 | )    |  | $    | (11,461 | )       |  | $       | (116,941 | ) |  | $ | (1,852,465 | ) |  | $ | (258,746 | )
|Gain on retirement of convertible subordinated
	notes, net(3) |  | $                       |       |      |  | $    |        |         |  | $       |         |   |  | $ |           |   |  | $ | 179,282  |  
|                                                              |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  
|Net loss                                                      |  | $                       | (1,074 | )    |  | $    | (11,461 | )       |  | $       | (116,941 | ) |  | $ | (1,852,465 | ) |  | $ | (79,464  | )
|Accretion on redeemable convertible preferred
	shares         |  | $                       |       |      |  | $    |        |         |  | $       |         |   |  | $ |           |   |  | $ | (356     | )
|                                                              |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  
|Net loss attributable to common shares                        |  | $                       | (1,074 | )    |  | $    | (11,461 | )       |  | $       | (116,941 | ) |  | $ | (1,852,465 | ) |  | $ | (79,820  | )
|                                                              |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  
|Net loss per common share  basic and
	diluted:               |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  
|Net loss before extraordinary item                            |  | $                       | (0.54  | )    |  | $    | (2.94   | )       |  | $       | (3.93    | ) |  | $ | (30.67     | ) |  | $ | (3.50    | )
|                                                              |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  
|Net loss per common share                                     |  | $                       | (0.54  | )    |  | $    | (2.94   | )       |  | $       | (3.93    | ) |  | $ | (30.67     | ) |  | $ | (1.08    | )
|                                                              |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  
|Weighted average shares  basic and
	diluted                  |  |                         | 1,994  |      |  |      | 3,899   |         |  |         | 29,770   |   |  |   | 60,399     |   |  |   | 73,981   |  
|                                                              |  |                         |        |      |  |      |         |         |  |         |          |   |  |   |            |   |  |   |          |  

|                                                  |  |                 |        |      |  |      |        |      |  |      |         |  |  |   |         |  |  |   |         | 
|------------------------------------------------- |  | --------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                  |  |                
|                                                  |  | At December 31,
|                                                  |  |                
|                                                  |  | 1997            |        | 1998 |  | 1999 |        | 2000 |  | 2001
|                                                  |  |                 |        |      |  |      |        |      |  |     
|Consolidated Balance Sheet Data:                  |  |                 |        |      |  |      |        |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash, cash equivalents and short-term investments |  | $               | 1      |      |  | $    | 14,791 |      |  | $    | 75,932  |  |  | $ | 216,542 |  |  | $ | 69,165  | 
|Working capital (deficit)                         |  | $               | (1,524 | )    |  | $    | 12,524 |      |  | $    | 76,060  |  |  | $ | 186,777 |  |  | $ | 57,983  | 
|Total assets                                      |  | $               | 550    |      |  | $    | 20,663 |      |  | $    | 673,805 |  |  | $ | 497,610 |  |  | $ | 199,952 | 
|Convertible subordinated notes payable            |  | $               |       |      |  | $    |       |      |  | $    |        |  |  | $ | 300,000 |  |  | $ | 38,360  | 
|Capital lease obligations, long-term portion      |  | $               | 42     |      |  | $    | 2,454  |      |  | $    | 5,669   |  |  | $ | 4,687   |  |  | $ | 1,149   | 
|Mandatorily redeemable preferred stock            |  | $               |       |      |  | $    |       |      |  | $    |        |  |  | $ |        |  |  | $ | 5,373   | 
|Shareholders equity (deficit)                    |  | $               | (1,021 | )    |  | $    | 15,358 |      |  | $    | 616,992 |  |  | $ | 113,104 |  |  | $ | 109,155 | 




|    |                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating expenses for the year ended
	December 31, 2000, include a $1.31 billion charge
	related to impairment of intangible assets including the
	deferred costs associated with our ICQ and Qwest

20



---



##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | relationships. See also Note 16 to the 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 to the
	Notes to Consolidated Financial Statements  Strategic
	Restructuring and Employee Severance and Note 16 to the
	Notes to Consolidated Financial Statements 
	Impairment of Long-Lived Assets.
|   
|(3) | Extraordinary gains of $179.3 million, net
	of applicable taxes and write downs of related debt issuance
	costs, were recorded for the year ended December 31, 2001
	related to gains recognized on the retirement of
	$261.4 million of face value of Critical Paths
	convertible subordinated notes. See also Note 10 to the
	Notes to Consolidated Financial Statements 
	Convertible Subordinated Notes.                                                          



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

The following discussion contains
forward-looking statements within the meaning of the safe
harbor provisions of the Private Securities Litigation
Reform Act of 1995, as amended and in effect from time to time.
The words anticipate, expect,
intend, plan, believe,
seek, and estimate and similar
expressions are intended to identify forward-looking statements.
These are statements, which include statements as to the
Companys future strategic, operational and financial
plans, anticipated or projected revenues, sources of revenues,
net losses, expenses and operational growth, future revenues
derived from non-core product and services, investments in sales
and marketing, operating losses, the need for additional
financing, competition in and competitive factors affecting our
markets, historical trends for revenue, expenses and personnel
as indicative of future results, our critical accounting
policies, changes in the price of our common stock, the impact
of stock-based expenses, period-to-period comparisons of our
operating results as an indicator of future performance, markets
and potential customers for Critical Path products and services,
plans related to sales strategies and global sales efforts,
plans to reduce operating costs through continued expense
reduction, anticipated effects of restructuring and retirement
of debt, anticipated charges and cost savings as a result of
these plans, our belief as to our ability to successfully emerge
from the restructuring and refocusing of our operations and our
intellectual property strategy 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 product and service, finalization of pending litigation
and the settlement of the SEC investigation, 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 the Company does business, risks associated with our
international operations, foreign currency fluctuations,
unplanned system interruptions and capacity constraints,
software defects, failure to expand our sales and marketing
activities, potential difficulties associated with strategic
relationships, investments and uncollected bills, risks
associated with an inability to maintain continued compliance
with the Nasdaq National Market listing requirements, risks
associated with our international operations, unplanned system
interruptions and capacity constraints, software defects, and
those discussed in Managements Discussion and
Analysis of Financial Condition and Results of Operations
and 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.

21



---



##### 



|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |      |     |   
|----------------------------------------------------------- | -------------------------------------------- | ---------------------------------- | -------- | ------ | ------- | ---- | ---------- | ---------------------- | --------- | - | -------- | ------ | ------- | - | ---------- | --------- | --------- |  | ---- | ---- | ---- | - | --------- | ---------- | ---------- | - | ---- | ---- | --- | --
|                                                            |                                              |                                    |          |        |         |      |            |                       
|                                                            |                                              |                                    |          |        |         |      |            | Change Over Prior Year
|                                                            |                                              |                                    |          |        |         |      |            |                       
|                                                            |                                              |                                    |          |        |         |     
|                                                            |                                              | Historical Amounts                 |          | 2000   |         | 2001
|                                                            |                                              |                                    |          |        |         |     
|                                                            |                                              | 1999                               |          | 2000   |         | 2001 |            | $                      |           | % |          | $      |         | %
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |  
|                                                            |                                              |                                   
|                                                            |                                              | (in thousands, except percentages)
|Period Ended December 31                                    |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|Net revenues                                                |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|                                                            | Software license                             |                                    | $        |       |         |      | $          | 51,607                 |           |   | $        | 30,960 |         |   | $          | 51,607    |           |  |      | (1   | )    |   | $         | (20,647    | )          |   |      | (40  | )% 
|                                                            | Hosted messaging                             |                                    |          | 16,157 |         |      |            | 58,553                 |           |   |          | 43,821 |         |   |            | 42,396    |           |  |      | 262  | %    |   |           | (14,732    | )          |   |      | (25  | )% 
|                                                            | Professional services                        |                                    |          |       |         |      |            | 14,527                 |           |   |          | 12,573 |         |   |            | 14,527    |           |  |      | (1   | )    |   |           | (1,954     | )          |   |      | (13  | )% 
|                                                            | Maintenance and support                      |                                    |          |       |         |      |            | 10,966                 |           |   |          | 16,819 |         |   |            | 10,966    |           |  |      | (1   | )    |   |           | 5,853      |            |   |      | 53   | %  
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|                                                            |                                              | Total net revenues                 |          |        | 16,157  |      |            |                        | 135,653   |   |          |        | 104,173 |   |            |           | 119,496   |  |      |      | 740  | % |           |            | (31,480    | ) |      |      | (23 | )%
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|Cost of net revenues                                        |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|                                                            | Software license                             |                                    |          |       |         |      |            | 2,731                  |           |   |          | 1,533  |         |   |            | 2,731     |           |  |      | (1   | )    |   |           | (1,198     | )          |   |      | (44  | )% 
|                                                            | Hosted messaging                             |                                    |          | 16,505 |         |      |            | 59,104                 |           |   |          | 59,124 |         |   |            | 42,599    |           |  |      | 258  | %    |   |           | 20         |            |   |      | 0    | %  
|                                                            | Professional services                        |                                    |          |       |         |      |            | 5,945                  |           |   |          | 10,315 |         |   |            | 5,945     |           |  |      | (1   | )    |   |           | 4,370      |            |   |      | 74   | %  
|                                                            | Maintenance and support                      |                                    |          |       |         |      |            | 8,060                  |           |   |          | 10,081 |         |   |            | 8,060     |           |  |      | (1   | )    |   |           | 2,021      |            |   |      | 25   | %  
|                                                            | Amortization of purchased technology         |                                    |          |       |         |      |            | 18,140                 |           |   |          | 21,284 |         |   |            | 18,140    |           |  |      | (1   | )    |   |           | 3,144      |            |   |      | 17   | %  
|                                                            | Acquisition-related retention bonuses        |                                    |          | 520    |         |      |            | 1,040                  |           |   |          |       |         |   |            | 520       |           |  |      | 100  | %    |   |           | (1,040     | )          |   |      | (100 | )% 
|                                                            | Stock-based expenses                         |                                    |          | 4,532  |         |      |            | 1,586                  |           |   |          | 4,050  |         |   |            | (2,946    | )         |  |      | (65  | )%   |   |           | 2,464      |            |   |      | 155  | %  
|                                                            | Impairment of long-lived assets              |                                    |          |       |         |      |            | 25,315                 |           |   |          | 16,654 |         |   |            | 25,315    |           |  |      | (1   | )    |   |           | (8,661     | )          |   |      | (34  | )% 
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|                                                            |                                              | Total cost of net revenues         |          |        | 21,557  |      |            |                        | 121,921   |   |          |        | 123,041 |   |            |           | 100,364   |  |      |      | 466  | % |           |            | 1,120      |   |      |      | 1   | % 
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|Gross profit (loss)                                         |                                              |                                    | (5,400   | )      |         |      | 13,732     |                        |           |   | (18,868  | )      |         |   | 19,132     |           |           |  | (1   | )    |      |   | (32,600   | )          |            |   | (237 | )%  
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|Operating expenses                                          |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|                                                            | Sales and marketing                          |                                    |          | 13,811 |         |      |            | 66,125                 |           |   |          | 53,356 |         |   |            | 52,314    |           |  |      | 379  | %    |   |           | (12,769    | )          |   |      | (19  | )% 
|                                                            | Research and development                     |                                    |          | 7,682  |         |      |            | 31,022                 |           |   |          | 30,744 |         |   |            | 23,340    |           |  |      | 304  | %    |   |           | (278       | )          |   |      | (1   | )% 
|                                                            | General and administrative                   |                                    |          | 14,051 |         |      |            | 30,444                 |           |   |          | 42,260 |         |   |            | 16,393    |           |  |      | 117  | %    |   |           | 11,816     |            |   |      | 39   | %  
|                                                            | Amortization of intangible assets            |                                    |          | 32,259 |         |      |            | 355,868                |           |   |          | 13,216 |         |   |            | 323,609   |           |  |      | 1003 | %    |   |           | (342,652   | )          |   |      | (96  | )% 
|                                                            | Acquisition-related retention bonuses        |                                    |          | 3,587  |         |      |            | 8,294                  |           |   |          | 1,381  |         |   |            | 4,707     |           |  |      | 131  | %    |   |           | (6,913     | )          |   |      | (83  | )% 
|                                                            | Stock-based expenses                         |                                    |          | 46,460 |         |      |            | 50,598                 |           |   |          | 53,615 |         |   |            | 4,138     |           |  |      | 9    | %    |   |           | 3,017      |            |   |      | 6    | %  
|                                                            | Acquired in-process research and development |                                    |          |       |         |      |            | 3,700                  |           |   |          |       |         |   |            | 3,700     |           |  |      | (1   | )    |   |           | (3,700     | )          |   |      | (100 | )% 
|                                                            | Restructuring and other expenses             |                                    |          |       |         |      |            | 3,248                  |           |   |          | 18,267 |         |   |            | 3,248     |           |  |      | (1   | )    |   |           | 15,019     |            |   |      | 462  | %  
|                                                            | Impairment of long-lived assets              |                                    |          |       |         |      |            | 1,282,150              |           |   |          | 9,991  |         |   |            | 1,282,150 |           |  |      | (1   | )    |   |           | (1,272,159 | )          |   |      | (99  | )% 
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|                                                            |                                              | Total operating expenses           |          |        | 117,850 |      |            |                        | 1,831,449 |   |          |        | 222,830 |   |            |           | 1,713,599 |  |      |      | 1454 | % |           |            | (1,608,619 | ) |      |      | (88 | )%
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|Loss from operations                                        |                                              |                                    | (123,250 | )      |         |      | (1,817,717 | )                      |           |   | (241,698 | )      |         |   | (1,694,467 | )         |           |  | (1   | )    |      |   | 1,576,019 |            |            |   |      |     
|Interest and other income (expense), net                    |                                              |                                    | 7,061    |        |         |      | 12,970     |                        |           |   | 5,840    |        |         |   | 5,909      |           |           |  | 84   | %    |      |   | (7,130    | )          |            |   | (55  | )%  
|Interest expense                                            |                                              |                                    | (752     | )      |         |      | (15,948    | )                      |           |   | (14,714  | )      |         |   | (15,196    | )         |           |  | 2021 | %    |      |   | 1,234     |            |            |   | (8   | )%  
|Equity in net loss of joint venture                         |                                              |                                    |         |        |         |      | (1,019     | )                      |           |   | (1,866   | )      |         |   | (1,019     | )         |           |  | (1   | )    |      |   | (847      | )          |            |   | 83   | %   
|Minority interest in net income of consolidated
	subsidiary |                                              |                                    |         |        |         |      | (649       | )                      |           |   |         |        |         |   | (649       | )         |           |  | (1   | )    |      |   | 649       |            |            |   | (100 | )%  
|Loss on investments                                         |                                              |                                    |         |        |         |      | (23,589    | )                      |           |   | (702     | )      |         |   | (23,589    | )         |           |  | (1   | )    |      |   | 22,887    |            |            |   | (97  | )%  
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|Loss before extraordinary item and income taxes             |                                              |                                    | (116,941 | )      |         |      | (1,845,952 | )                      |           |   | (253,140 | )      |         |   | (1,729,011 | )         |           |  | 1479 | %    |      |   | 1,592,812 |            |            |   | (86  | )%  
|Provision for income taxes                                  |                                              |                                    |         |        |         |      | (6,513     | )                      |           |   | (5,606   | )      |         |   | (6,513     | )         |           |  | (1   | )    |      |   | 907       |            |            |   | (14  | )%  
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|Loss before extraordinary item                              |                                              | $                                  | (116,941 | )      |         | $    | (1,852,465 | )                      |           | $ | (258,746 | )      |         |   | (1,735,524 | )         |           |  | 1484 | %    |      |   | 1,593,719 |            |            |   | (86  | )%  
|Gain on retirement of convertible subordinated
	notes, net  |                                              |                                    |         |        |         |      |           |                        |           |   | 179,282  |        |         |   | -          |           |           |  | (1   | )    |      |   | 179,282   |            |            |   |      |     
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|Net loss                                                    |                                              | $                                  | (116,941 | )      |         | $    | (1,852,465 | )                      |           | $ | (79,464  | )      |         |   | (1,735,524 | )         |           |  | 1484 | %    |      |   | 1,773,001 |            |            |   | (96  | )%  
|Accretion on redeemable convertible preferred
	shares       |                                              |                                    |         |        |         |      |           |                        |           |   | (356     | )      |         |   |           |           |           |  | (1   | )    |      |   | (356      | )          |            |   |      |     
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     
|Net loss attributable to common shares                      |                                              | $                                  | (116,941 | )      |         | $    | (1,852,465 | )                      |           | $ | (79,820  | )      |         | $ | (1,735,524 | )         |           |  | 1484 | %    |      | $ | 1,772,645 |            |            |   | (96  | )%  
|                                                            |                                              |                                    |          |        |         |      |            |                        |           |   |          |        |         |   |            |           |           |  |      |      |      |   |           |            |            |   |      |     



---

(1) Non-material percentage.

Overview

Critical Path, Inc. is a global leader in
Internet communications that delivers software and services that
are designed to maximize the value of Internet communications.
We provide messaging and collaboration solutions from wireless,
secure and unified messaging to basic email and personal
information management, as well as identity management solutions
that simplify user profile management and strengthen information

22



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##### 



security. Our standards-based Critical Path
Communications Platform, built to perform reliably at the scale
of public networks, delivers the industrys lowest total
cost of ownership for messaging solutions and lays a solid
foundation for next-generation communications services. Critical
Paths customers are corporate enterprises, carriers and
service providers, postal authorities and government agencies.


Critical Path was founded in 1997 and is
headquartered in San Francisco, California with offices
throughout North America, Europe, Asia and Latin America. From
inception through 1999, our primary source of revenue came from
service fees related to hosted messaging. Through a series of
acquisitions during 1999 and 2000, we expanded our product
offerings to include a wide range of messaging and collaboration
licensed software and solutions.

During 2001 we evaluated our various products,
services, facilities and the business plan under which we were
operating. As part of this evaluation, we reviewed the products
and services we sell to customers, the locations in which we
operate, and the manner in which we go to market with our core
product and service offerings. In connection with this review,
we implemented and completed a three part strategic
restructuring plan that involved reorganizing Critical
Paths product and service offerings around a group of core
communication solutions. The three primary elements of the plan
included:



| |   |                                          
| | - | -----------------------------------------
| |  | Focusing on core communication solutions;
|
| |  | Workforce reduction; and                 
|
| |  | Facilities and operations consolidation. 

Additionally, we implemented an aggressive
expense management plan to further reduce operating costs while
maintaining strong customer service for our core solutions. As
of December 31, 2001 we had divested all of our non-core
products and services, reduced headcount by 44%, reduced
facilities and operations by 65% and implemented other cost
cutting measures, resulting in a significant reduction in
overall operating expenses. The non-core products and services
which were divested during 2001, comprised approximately 26% and
21% of total revenues in the years ended December 31, 2000
and 2001 and were insignificant in 1999. These products and
services are expected to be an insignificant part of Critical
Paths revenue stream going forward. Additionally as of
December 31, 2001, we had substantially completed an
extensive assessment of our core hosted messaging services,
which resulted in a $12.4 million impairment charge during
the fourth quarter of 2001 associated with excess capacity and
equipment. As a result of these strategic initiatives, we have
significantly reduced our overall operating expenses and we
expect to realize significant future annual cost savings, as our
quarterly operating cost structure, excluding special charges,
has been reduced by nearly $30 million since the first
quarter of 2001.

During the fourth quarter of 2001, we closed a
financing transaction with a group of investors led by General
Atlantic Partners LLC and its affiliates, and other
investors including Hutchison Whampoa Limited and affiliates and
Vectis Group LLC. Vectis Group had previously been retained
by the Company to provide advice with respect to strategic
alternatives and other management related services.
Mr. McGlashan, our Chief Executive Officer, is a principal
in the Vectis Group. 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 connection with this
transaction, we issued and sold four million shares of
convertible preferred stock to several investors and warrants to
purchase 2.5 million shares of common stock to General
Atlantic and its affiliates. The related proceeds will be used
for working capital and general corporate purposes.

We have incurred significant losses since our
inception, and as of December 31, 2001, we had an
accumulated deficit of approximately $2.06 billion,
inclusive of a $1.31 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 expect to continue to incur operating losses
through the end of 2002, however we do not anticipate the need
for additional financing prior to December 31, 2002.

23



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##### 



In view of the rapidly evolving nature of our
business, acquisitions, recent 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, 2001, we had
562 employees, in comparison with 1,041 employees at
December 31, 2000 and 488 employees at December 31,
1999. 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 Critical
Paths 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.
Critical Path believes the following are the most critical
accounting policies underlying Critical Paths presentation
of its financial condition and related operating results:



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

Revenue
recognition

Revenues are recognized once the related products
or services have been delivered and collection of all fees is
considered probable. We recognize revenues related to the sale
of our licensed software products, hosted messaging and
communication services, professional services and post-contract
customer support.

Software license.We
derive software license revenues from perpetual and term
licenses for our messaging, collaboration and identity
management solutions. 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
element of the arrangement based on the fair values of the
elements, such as software products, upgrades and enhancements,
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 revenues to each component 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, revenues are recognized ratably over the term of
the agreement.

We also receive license fees 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

24



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##### 



license fees from resellers are initially
deferred and are recognized when they are reported as sold to
end-users by the reseller.


Hosted messaging services.We derive hosted messaging revenues
related to fees for hosting services we offer related to our
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.We derive 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.We derive maintenance and support
service revenues from fees for post-contract customer support
agreements associated with product licenses. Such services
typically include rights to future update and upgrade product
releases and dial-up phone services. Fees are deferred and
recognized ratably over the term of the support contract, which
is generally one year.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | 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 an 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 in the second
quarter to these assets. 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.



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

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
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
collectibility of our 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

25



---



##### 



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
the financial results of Critical Path.


Results of Operations

The following table presents Critical Paths
net revenue and selected cost of net revenue data during 1999,
2000 and 2001 and the relative composition of net revenues and
the selected cost of net revenue data as a percentage of net
revenues during 1999, 2000 and 2001.

|                          |                         |                    |   |                                  |        |      |   |        |         |      |   |        |         |  |  |     |     |   |  |    |     |   |  |    |     |  
|------------------------- | ----------------------- | ------------------ | - | -------------------------------- | ------ | ---- | - | ------ | ------- | ---- | - | ------ | ------- |  |  | --- | --- | - |  | -- | --- | - |  | -- | --- | -
|                          |                         |                    |   |                                 
|                          |                         | Historical Amounts |   | Percentage of Total Net Revenues
|                          |                         |                    |   |                                 
|                          |                         | 1999               |   | 2000                             |        | 2001 |   | 1999   |         | 2000 |   | 2001  
|                          |                         |                    |   |                                  |        |      |   |        |         |      |   |       
|                          |                         |                    |   |                                  |        |      |   |       
|                          |                         | (in thousands)     |   |                                  |        |      |   |       
|Period Ended December 31, |                         |                    |   |                                  |        |      |   |        |         |      |   |        |         |  |  |     |     |   |  |    |     |   |  |   
|Net revenues              |                         |                    |   |                                  |        |      |   |        |         |      |   |        |         |  |  |     |     |   |  |    |     |   |  |   
|                          | Software license        |                    | $ |                                 |        |      | $ | 51,607 |         |      | $ | 30,960 |         |  |  |    | %   |   |  | 38 | %   |   |  | 30 | %  
|                          | Hosted messaging        |                    |   | 16,157                           |        |      |   | 58,553 |         |      |   | 43,821 |         |  |  | 100 |     |   |  | 43 |     |   |  | 42 |    
|                          | Professional services   |                    |   |                                 |        |      |   | 14,527 |         |      |   | 12,573 |         |  |  |    |     |   |  | 11 |     |   |  | 12 |    
|                          | Maintenance and support |                    |   |                                 |        |      |   | 10,966 |         |      |   | 16,819 |         |  |  |    |     |   |  | 8  |     |   |  | 16 |    
|                          |                         |                    |   |                                  |        |      |   |        |         |      |   |        |         |  |  |     |     |   |  |    |     |   |  |   
|                          |                         | Total net revenues |   | $                                | 16,157 |      |   | $      | 135,653 |      |   | $      | 104,173 |  |  |     | 100 | % |  |    | 100 | % |  |    | 100 | %
|                          |                         |                    |   |                                  |        |      |   |        |         |      |   |        |         |  |  |     |     |   |  |    |     |   |  |   

|                     |                         |                            |      |        |        |   |        |                                    |        |   |        |        |        |  |    |     |     |   |    |     |    |   |    |     |    |  
|-------------------- | ----------------------- | -------------------------- | ---- | ------ | ------ | - | ------ | ---------------------------------- | ------ | - | ------ | ------ | ------ |  | -- | --- | --- | - | -- | --- | -- | - | -- | --- | -- | -
|                     |                         |                            |      |        |        |   |        |                                   
|                     |                         |                            |      |        |        |   |        | Percentage of Related Net Revenues
|                     |                         |                            |      |        |        |   |        |                                   
|Cost of net revenues |                         |                            |      |        |        |   |        |                                    |        |   |        |        |        |  |    |     |     |   |    |     |    |   |    |    
|                     | Software license        |                            | $    |       |        |   | $      | 2,731                              |        |   | $      | 1,533  |        |  |    |    | %   |   |    | 5   | %  |   |    | 5   | % 
|                     | Hosted messaging        |                            |      | 16,505 |        |   |        | 59,104                             |        |   |        | 59,124 |        |  |    | 102 |     |   |    | 101 |    |   |    | 135 |   
|                     | Professional services   |                            |      |       |        |   |        | 5,945                              |        |   |        | 10,315 |        |  |    |    |     |   |    | 41  |    |   |    | 82  |   
|                     | Maintenance and support |                            |      |       |        |   |        | 8,060                              |        |   |        | 10,081 |        |  |    |    |     |   |    | 73  |    |   |    | 60  |   
|                     |                         |                            |      |        |        |   |        |                                    |        |   |        |        |        |  |    |     |     |   |    |     |    |   |    |    
|                     |                         | Total cost of net revenues |      | $      | 16,505 |   |        | $                                  | 75,840 |   |        | $      | 81,053 |  |    |     | 102 | % |    |     | 56 | % |    |     | 78 | %
|                     |                         |                            |      |        |        |   |        |                                    |        |   |        |        |        |  |    |     |     |   |    |     |    |   |    |    
|Gross profit (loss)  |                         | $                          | (348 | )      |        | $ | 59,813 |                                    |        | $ | 23,120 |        |        |  | (2 | )%  |     |   | 44 | %   |    |   | 22 | %  
|                     |                         |                            |      |        |        |   |        |                                    |        |   |        |        |        |  |    |     |     |   |    |     |    |   |    |    

Net Revenues

Software License.We
recognized $30.1 million in software license revenues
during 2001, as compared to $51.6 million in 2000 and none
in 1999. The significant decrease in software license revenues
between 2001 and 2000 was attributed to several factors that
impacted our operating results during 2001. Delays in
information technology spending were experienced across many
industries due to unfavorable macroeconomic conditions and these
delays were exacerbated by circumstances at the Company. Many
potential customers who were evaluating our products delayed
making decisions until they could gain a level of comfort in us
as we emerged from our management transition and restructuring
initiatives. Additionally, our sales organization was distracted
by the termination and resignation of much of its leadership in
the first quarter of 2001 and its focus on rebuilding also has
caused a reduction in effectiveness. The decrease in software
license revenues was further exacerbated as a result of the
terrorist attacks of September 11, 2001. These tragic
events significantly impacted the 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, in connection with
our restructuring initiative, we identified certain non-core
software license products, of which all have either been exited
or sold to third parties. Software license revenues related to
these non-core products were approximately $2.5 million in 2001,
down from $4.5 million in 2000. We anticipate non-core
product revenues will be insignificant during 2002. Software
license revenues increased in 2000 as compared to 1999 as a
result of the introduction of our software license product
offerings related to messaging, directory and meta-directory
through our acquisitions of Amplitude Software Corporation,
ISOCOR Corporation, and PeerLogic, Inc.

26



---



##### 



Hosted Messaging.We
recognized $43.8 million in hosted messaging revenue during
2001, as compared to $58.6 million in 2000 and
$16.2 million in 1999. This decrease in 2001 as compared
with 2000 resulted from our restructuring initiative, as we
identified certain non-core hosted messaging services, of which
all have either been exited or sold to third parties. Hosted
messaging revenues related to these non-core services was
approximately $13.6 million in 2001, down from
$27.0 million in 2000. We anticipate non-core service
revenues will be insignificant during 2002. Hosted messaging
revenues increased in 2000 as compared to 1999 as a result of
the introduction of new product offerings, primarily
attributable to our acquisitions of FaxNet Corporation and
RemarQ Communities, Inc. Additionally, we experienced
penetration into the hosted messaging services market, and
significantly increased the number of email boxes hosted.

Professional Services.We recognized $12.6 million in
professional services revenues during 2001, as compared to
$14.5 million in 2000. This decrease in 2001 as compared
with 2000 resulted primarily from our restructuring initiative,
as we identified certain non-core products and services, of
which all have either been exited or sold to third parties.
Professional services revenues related to these non-core
products and services was approximately $1.7 million in
2001, down from $3.0 million in 2000. We anticipate
non-core service revenues will be insignificant during 2002.
Additionally, as a result of the reduction in software license
sales during 2001, we experienced a similar decline in
professional services revenues. There were no professional
services revenues in 1999. Professional services revenues
increased in 2000 as compared to 1999 as a result of the
introduction of our software license product and professional
services offerings related to messaging, directory and
meta-directory software products added through our acquisitions
of Amplitude Software Corporation, ISOCOR Corporation, and
PeerLogic, Inc.

Maintenance and Support.We recognized $16.8 million in
maintenance and support revenues during 2001, as compared to
$11.0 million in 2000. Maintenance and support revenues
increased as a result of the completion of several acquisitions
during 2000 and additional sales of software license products
during 2000 and 2001. However, these increases were offset by
the effects of our restructuring, as we identified certain
non-core products and services, of which all have either been
exited or sold to third parties. Maintenance and support
revenues related to these non-core products and services was
approximately $3.8 million in 2001, as compared to
$1.1 million in 2000. We anticipate non-core service
revenues will be insignificant during 2002. There were no
maintenance and support revenues in 1999. Maintenance and
support revenues increased in 2000 as compared to 1999 as a
result of the introduction of our software license product and
maintenance and support service offerings related to messaging,
directory and meta-directory software products added through our
acquisitions of Amplitude Software Corporation, ISOCOR
Corporation, and PeerLogic, Inc.

Critical Paths international operations
accounted for approximately 40% and 38% of net revenues during
2001 and 2000, respectively. Revenues from international
operations were insignificant in 1999. This significant increase
in international revenues from 1999 to 2000 related primarily to
the acquisition of ISOCOR Corporation.

Cost of Net Revenues

Software License.Cost of net software license revenues
consists primarily of product media duplication, manuals and
packaging materials, personnel and facilities costs, and
third-party royalties. The overall decrease in 2001 from 2000
was directly related to the reduction in software license
revenues between these two periods. In 2000, cost of net
software license revenues increased significantly from 1999
levels as a result of the introduction of our software license
product offerings related to messaging, directory and
meta-directory through our acquisitions of Amplitude Software
Corporation, ISOCOR Corporation, and PeerLogic, Inc.

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.
These costs remained flat in 2001 as compared to 2000. Costs
associated with hosted messaging increased significantly during
the end of 2000 and the first quarter of 2001 as a result of
adding 15 new hosted messaging clusters to our data centers
during 2000, expanding the capacity of our hosting network to
manage current

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customer requirements and future growth.
Additionally, costs were incurred to add technology platforms
for new service offerings. As a result of these initiatives we
acquired equipment and increased related support and
professional services resources, causing depreciation and other
costs to increase substantially in comparison with 1999.
However, these increases were offset in the second half of 2001
by the effects of our restructuring initiative and the exiting
of certain non-core products and services. As a result of the
sale and divestiture of several non-core services, the
termination of employees through our restructuring initiative
and the implementation of other cost cutting measures, we
significantly reduced the cost of net hosted messaging revenues
in 2001.


Professional Services.Cost of professional services revenues
consists primarily of personnel costs including custom
engineering, installation and training services for both hosted
and licensed solutions, and other direct and allocated indirect
costs. As a result of the acquisitions completed in 2000,
additional costs, primarily related to personnel costs, were
incurred on professional services resources resulting in a 74%
increase in 2001 from 2000. There were no professional services
revenues or related costs in 1999.

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. As a
result of the acquisitions completed in 2000, additional costs,
primarily related to personnel costs, were incurred on
maintenance and support resources resulting in an increase in
2001 from 2000. There were no maintenance and support revenues
or related costs in 1999.

Operations, customer support, and professional
services staff decreased to 192 employees at
December 31, 2001 from 340 employees at
December 31, 2000, but increased from 174 employees at
December 31, 1999. Headcount decreased in 2001 as a result
of our strategic restructuring initiative and increased in 2000
as a result of our numerous acquisitions.

The following table presents selected operating
expenses of Critical Path during 1999, 2000 and 2001.

|                          |                            |                          |   |                                  |        |      |   |        |         |      |   |        |         |  |  |    |     |   |  |    |    |   |  |    |     |  
|------------------------- | -------------------------- | ------------------------ | - | -------------------------------- | ------ | ---- | - | ------ | ------- | ---- | - | ------ | ------- |  |  | -- | --- | - |  | -- | -- | - |  | -- | --- | -
|                          |                            |                          |   |                                 
|                          |                            | Historical Amounts       |   | Percentage of Total Net Revenues
|                          |                            |                          |   |                                 
|                          |                            | 1999                     |   | 2000                             |        | 2001 |   | 1999   |         | 2000 |   | 2001  
|Period Ended December 31, |                            |                          |   |                                  |        |      |   |        |         |      |   |       
|                          |                            |                          |   |                                  |        |      |   |       
|                          |                            | (in thousands)           |   |                                  |        |      |   |       
|Operating expenses        |                            |                          |   |                                  |        |      |   |        |         |      |   |        |         |  |  |    |     |   |  |    |    |   |  |   
|                          | Sales and marketing        |                          | $ | 13,811                           |        |      | $ | 66,125 |         |      | $ | 53,356 |         |  |  | 85 | %   |   |  | 49 | %  |   |  | 51 | %  
|                          | Research and development   |                          |   | 7,682                            |        |      |   | 31,022 |         |      |   | 30,744 |         |  |  | 48 |     |   |  | 23 |    |   |  | 30 |    
|                          | General and administrative |                          |   | 14,051                           |        |      |   | 30,444 |         |      |   | 42,260 |         |  |  | 87 |     |   |  | 22 |    |   |  | 41 |    
|                          |                            |                          |   |                                  |        |      |   |        |         |      |   |        |         |  |  |    |     |   |  |    |    |   |  |   
|                          |                            | Total operating expenses |   | $                                | 35,544 |      |   | $      | 127,591 |      |   | $      | 126,360 |  |  |    | 220 | % |  |    | 94 | % |  |    | 121 | %

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. These costs decreased in 2001
from 2000 primarily due to the termination and resignation of
several 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 our restructuring plan,
primarily a reduction in headcount. The significant increase in
2000 from 1999 related to marketing and promotional expenses,
incentive compensation payments to sales personnel, and
increases in compensation associated with additional headcount
added through our ten acquisitions completed during 1999 and
2000. Sales and marketing staff decreased to 131 employees
at December 31, 2001 from 305 employees at
December 31, 2000, but increased from 168 employees at
December 31, 1999. Headcount decreased in 2001 as a result
of our strategic restructuring initiative and increased in 2000
primarily as a result of our numerous acquisitions.

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. These costs decreased in 2001
from 2000 as a result of our restructuring initiative, including
the termination of several employees as well as certain

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contracts with outside consultants, and the
implementation of other cost cutting measures. The significant
increase in 2000 from 1999 resulted primarily from increased
compensation and other personnel costs from the additional
headcount added through our ten acquisitions completed during
1999 and 2000. Additionally, during 1999 and 2000 we increased
headcount to continue to develop and enhance our portfolio of
messaging, directory and security solutions. Research and
development staff decreased to 148 employees at
December 31, 2001, from 252 employees at December 31,
2000, but increased from 94 employees at December 31,
1999. Headcount decreased in 2001 as a result of our strategic
restructuring initiative and increased in 2000 primarily as a
result of our numerous acquisitions.


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
increased in 2001 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 restructuring initiative and the
implementation of other cost cutting measures. The significant
increase in 2000 from 1999 resulted primarily from increased
compensation and other personnel costs associated with
additional headcount added through our ten acquisitions
completed during 1999 and 2000, and higher fees for outside
professional services. General and administrative staff
decreased to 91 employees at December 31, 2001, from
144 employees at December 31, 2000, but increased from
52 employees at December 31, 1999. Headcount decreased
in 2001 as a result of our strategic restructuring initiative
and increased in 2000 primarily as a result of our numerous
acquisitions.

Management expects operating expenses to
moderately increase during 2002, primarily related to higher
personnel costs associated with adding to the Companys
sales and marketing organization.

Intangible
Assets

Amortization of Intangible
Assets.In connection with our 1999
and 2000 acquisitions, which were all accounted for using the
purchase method of accounting, we recorded goodwill and other
intangible assets, primarily including assembled workforce,
customer base, and existing technology. Based on the types of
identifiable intangibles acquired, during 2000 and 2001
amortization expense of $18.1 million and
$21.3 million was allocated to the cost of net revenues and
amortization expense of $355.9 million and
$13.2 million was allocated to operating expenses,
respectively. All amortization expense was allocated to
operating expenses in 1999. Additionally, during 2000 and 2001,
we recorded charges of $1.3 billion and $26.6 million,
respectively, related to the impairment of certain long-lived
assets, including intangible assets. This was the primary cause
of the significant reduction in amortization expense in 2001
from 2000.

Acquired In-Process Research And
Development.In connection with the
acquisitions of ISOCOR and PeerLogic during 2000, we 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,
2001, 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 resulting from
acquired in-process research and development during 1999 or 2001.

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

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Critical Path. Based on the employees
participating in these programs, during 1999 and 2000 expenses
of $520,000 and $1.0 million were allocated to cost of net
revenues and expenses of $3.6 million and $8.3 million
were allocated to operating expenses, respectively. During 2001,
expenses of $1.4 million were allocated to operating
expenses related to these retention bonus programs. The
significant decrease in acquisition-related retention bonus
expense from 2000 to 2001 resulted from the completion, during
2000, of all but one of these bonus programs. The remaining
program is expected to conclude in April 2002.


Stock-Based Expenses

Stock-based expenses totaled $51.0 million,
$52.2 million, $57.7 million in 1999, 2000 and 2001,
respectively. These amounts were comprised of stock-based
charges related to stock options granted and warrants issued.
Stock-based expenses related to stock options granted to
employees, directors and consultants amounted to
$19.9 million, $25.1 million and $37.5 million
during 1999, 2000, and 2001, respectively. Stock-based expenses
related to warrants issued to strategic partners and consultants
amounted to $31.1 million, $27.1 million and
$20.2 million during 1999, 2000, and 2001, respectively.
The consecutive increases in stock-based expense from 1999
through 2001 was primarily caused by the increase in stock
option grants with exercise prices below fair market value in
each of these successive fiscal years and issuance of warrants.
We expect that future changes in the trading price of our common
stock at the end of each quarter, and if certain milestones are
ever achieved, will cause additional substantial changes in the
ultimate amount of the related stock-based charges.

Stock Options.We
granted certain stock options with exercise prices below market
value on the date of grant and issued certain common stock to
employees, directors and advisors during 1999 and 1998. As a
result, we recorded unearned compensation totaling
$22.3 million in 1999 and $19.9 million in 1998. These
amounts are being amortized over the vesting periods of the
related options. In March 2001, in connection with an
employee retention program, we granted options with exercise
prices below market value on the date of grant to certain
employees. As a result of this program, we recorded unearned
compensation totaling approximately $21.4 million. During
2001 certain of these unearned compensation balances were
significantly reduced as a result of employee terminations
throughout the year, affecting a reduction in future stock-based
expenses of $8.2 million.

Additionally, during 2001, we incurred
stock-based charges of approximately $1.7 million 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. During
1999, we incurred a stock-based charge of approximately
$2.0 million in connection with a severance agreement for a
terminated employee. This charge was included in cost of net
revenues based on the employees function.

Warrants.During
1999 and 2000, we issued warrants to purchase shares of our
preferred and common stock pursuant to certain strategic
agreements. See also Note 8 of Notes to Consolidated
Financial Statements  Intangible Assets and
Note 16  Impairment of Long-Lived Assets. We
believe that these warrants could have a significant current and
potential 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 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 will be
amortized over the remaining benefit period.

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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 will be
amortized over the remaining benefit period.

In December 1999, we entered into an agreement
with Worldsport Network Ltd., the sole and exclusive provider of
Internet solutions for the General Association of International
Sports Federations or GAISF and a majority of the international
federations it recognizes. Under the terms of the agreement,
Worldsport offered Critical Path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 Critical Path 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 is being amortized to general
and administrative expenses using the straight-line method over
10 years.

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 the Telcos customers. As part
of the agreement, Telco agreed to provide marketing, publicity,
and promotional services to docSpace. As a result of the
completion of our acquisition of docSpace, Critical Path assumed
warrants that allowed Telco to purchase up to a maximum of
349,123 shares of Critical Path common stock upon attainment of
each of three milestones. Subsequent to the acquisition, we
entered into discussions with Telco to modify our relationship.
Accordingly, we believe the vesting provisions of the proposed
agreement will be modified to reflect the requirements of the
new relationship. As of December 31, 2001, 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.

Strategic
Restructuring and Employee Severance

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, composed 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 headcount
reduction plan. During 2000, the Company paid all amounts
related to employee severance.

In April 2001, we announced a three part
strategic restructuring plan that involved reorganizing Critical
Paths product and service offerings around a group of core
communication solutions. The three elements of the plan
included: (i) focusing on core communication solutions;
(ii) workforce reduction; and (iii) facilities

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and operations consolidation. Additionally, we
have implemented an aggressive expense management plan designed
to further reduce operating costs while maintaining strong
customer service for our core solutions. We completed the
restructuring plan in 2001, including the divestiture of all of
our non-core products and services, a 44% reduction in
headcount, a 65% reduction in facilities and the implementation
of other cost cutting measures, resulting in a significant
reduction in overall operating expenses. As a result of these
strategic initiatives, we anticipate that we will realize
significant future annual cost savings. The non-core products
and services comprised approximately 26% and 21% of total
revenues in the years ended December 31, 2000 and 2001.
These products and services will be an insignificant part of
Critical Paths revenue stream going forward.


Refocusing on Core Communications Solutions.We consider our core communication
solutions to be our messaging, collaboration and identity
management solutions, including mail, calendar, address book,
file storage, secure delivery, directory and meta-directory, and
access services supporting wireline and wireless users.
Restructuring charges associated with this refocusing of our
products and services consisted primarily of contract
termination fees, gains and losses related to asset sales and
dispositions, and lease termination fees. During 2001, Critical
Path sold or discontinued all of its non-core products and
services. As a result of these transactions, a net gain of
$1.0 million was recorded for the year ended
December 31, 2001.

Reduction of Workforce, Facility and Other
Expenses.Critical Path reduced its
headcount from 1,011 at March 31, 2001 to 562 employees at
December 31, 2001, and consolidated its facilities from 77
at December 31, 2000 to 27 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. Included in this
charge was approximately $1.5 million related to the
forgiveness of a note receivable to one of the Companys
former executives. Facilities and other expenses consisted
primarily of costs associated with lease terminations, future
lease payments and related fees, and aggregated approximately
$9.0 million during 2001.

Summary of
Year-To-Date Restructuring Costs

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

Net Revenues
Related to Our Core Communication Solutions

|                      |                       |                                |      |      |  |      |       |       |  |   |       |      | 
|--------------------- | --------------------- | ------------------------------ | ---- | ---- |  | ---- | ----- | ----- |  | - | ----- | ---- | 
|                      |                       |                               
|                      |                       | Fiscal Year Ended December 31,
|                      |                       |                               
|                      |                       | 1999                           |      | 2000 |  | 2001
|                      |                       |                                |      |      |  |     
|                      |                       |                               
|                      |                       | (in millions)                 
|Core Net Revenues     |                       |                                |      |      |  |      |       |       |  |   |       |     
|                      | Software licensing    |                                | $    |     |  |      | $     | 47.1  |  |   | $     | 28.1 | 
|                      | Hosted messaging      |                                |      | 15.1 |  |      |       | 31.6  |  |   |       | 30.2 | 
|                      | Professional services |                                |      |     |  |      |       | 11.6  |  |   |       | 10.7 | 
|                      | Maintenance & support |                                |      |     |  |      |       | 9.9   |  |   |       | 13.0 | 
|                      |                       |                                |      |      |  |      |       |       |  |   |       |     
|                      | Total core revenues   |                                | $    | 15.1 |  |      | $     | 100.2 |  |   | $     | 82.0 | 
|Non-Core Net Revenues |                       | $                              | 1.1  |      |  | $    | 35.5  |       |  | $ | 22.2  |     
|                      |                       |                                |      |      |  |      |       |       |  |   |       |     
|Total Net Revenues    |                       | $                              | 16.2 |      |  | $    | 135.7 |       |  | $ | 104.2 |     
|                      |                       |                                |      |      |  |      |       |       |  |   |       |     

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Impairment of
Long-Lived Assets

We recorded a $1.3 billion impairment charge
to reduce goodwill, other intangible assets and deferred costs
associated with our ICQ and Qwest relationships to their
estimated fair values in the fourth quarter of 2000. In
connection with the impairment analysis, 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 an 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 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 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 of 2001 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.

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
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 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 and as well as a significant
amount of cash to fund our operating activities. As a result of
this reduction in cash, interest income significantly decreased
in 2001 from 2000. During 2000, we recognized a net loss from
foreign currency transactions associated with our international
operations in the amount of $280,000 and a net gain of $947,000
in 2001. Foreign currency transaction gains or losses were
insignificant during 1999.

Interest
Expense

Interest expense consists primarily of interest
and the amortization of issuance costs related to our
5 3/4% Convertible Subordinated Notes we issued in March
2000, and interest on certain capital leases. We incurred
approximately $13.0 million and $12.1 million in
interest expense on the Convertible Subordinated Notes, and
approximately $1.6 million and $1.5 million related to
amortization of debt issuance costs in 2000 and 2001,
respectively. Interest on capital leases and other long-term
obligations amounted to approximately $1.3 million during 2001,
$1.3 million during 2000 and $688,000 during 1999.

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
$8.1 million, $34.4 million and $43.0 million
during 1999, 2000 and 2001, respectively. Included in these
amounts was depreciation expense related to cost of net hosted
messaging revenues, which totaled $5.2 million,
$23.9 million and $26.3 million during 1999, 2000 and
2001, respectively. The remaining depreciation expense related
to capital expenditures incurred for general operations of our
business and has been allocated to cost of net revenue and
operating expense, as appropriate.

Loss on
Investments

During 2000 and 2001, we determined that certain
of our investments were permanently impaired and recorded write
downs of $23.6 million and $702,000, respectively. During
2001, these adjustments reduced the carrying value by
$2.6 million in investments in marketable securities and
$21.0 million in investments in non-

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marketable securities. During 2001, investments
in non-marketable securities were written-down by $702,000. See
also Note 6 to the Notes to Consolidated Financial
Statements  Investments.


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 hold a 40% ownership interest in
the joint venture. This investment is being accounted for using
the equity method. During 2000 and 2001, we recorded equity in
net loss of joint venture of approximately $1.0 million and
$1.9 million, respectively. Management does not expect to
provide any additional cash funding for into this joint venture
and, as of December 31, 2001, Critical Path Pacifics
liabilities were insignificant.

Minority Interest in Net Income of
Consolidated Subsidiary

As of December 31, 2000, we owned a 72.87%
interest in CP Italia, a consolidated subsidiary, which was
acquired in connection with the acquisition of ISOCOR. The
minority interest in net income of CP Italia 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.

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 and 2001 as
certain of our European operations generated income taxable in
certain European jurisdictions.

Convertible Subordinated
Notes

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 in March 2000. 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, 2000 and 2001, there was approximately
$4.3 million and $600,000 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 as well as a portion was
retired through the issuance of the preferred stock in the
financing transaction completed in December 2001. See also Note
14 to the Notes to Consolidated Financial Statements 
Financing Transaction. As of December 31, 2000 and 2001,
the total balance outstanding was $300.0 million and
$38.4 million, respectively. These Notes are carried at
cost and had an approximate fair value at December 31, 2001
of $21.5 million.

Accretion on redeemable
convertible preferred shares

In connection with the financing transaction
Critical Path 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 Note 14
of Notes to the Financial Statements  Financing
Transaction. The fair value

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ascribed to the shares of 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 principal 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. 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.


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
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 life of the warrants, and expected volatility of
215%, the 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, as the relationship is
terminable at any time. During the term of the agreements, we
paid Vectis Group an aggregate of approximately
$1.1 million in retainer fees and expenses and
approximately $3.1 million in transactional fees, including
approximately $2.75 million in connection with our recent
preferred stock financing transaction. Vectis Group was also one
of three investors (and their affiliates) that participated in
this transaction led by General Atlantic Partners. See also
Note 14 to the 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, 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 have become employees of
Critical Path. Although the agreements terminated, certain
obligations under the agreements survived, including payment of
the transaction fee in connection with the Companys recent
financing transaction and related indemnification obligations.
The total potential remaining fees aggregate between zero and
$135,000.

Loans to Officers and Employees.During 1998, Critical Path issued
notes receivable to shareholder and former Chief Executive
Officer, Douglas Hickey, equal to $1.06 million in full
recourse and $500,000 in non-recourse notes. Hickeys notes
accrue interest at the rate of 4.51% per annum. In February
2001, Mr. Hickey terminated his employment with the
Company. In connection with the termination, the repayment of
the $1.06 million note and accrued interest was extended to
May 9, 2002 and the repayment of the $500,000 note and
accrued interest was extended to March 9, 2002. As of
December 31, 2000 and 2001, accrued interest totaled
$160,000 and $231,000, respectively. Mr. Hickey repaid both
notes in full with interest in March 2002.

During 2000, Critical Path issued a full recourse
note to its then Chief Financial Officer, Lawrence Reinhold,
equal to $1.7 million. 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 Reinholds employment with
Critical Path approximately $270,000 of principal and interest
was forgiven, 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s employment with Critical Path
terminated. In connection with his termination all outstanding
principal and interest, totalling of $1.5 million, was
forgiven.

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During 2001 and in connection with each of their
respective employment agreements, the Company made loans and
held notes receivable from David C. Hayden, Executive
Chairman, and Pierre Van Beneden, President, totaling
$1.5 million and $350,000, respectively. Haydens full
recourse note accrues interest at the rate of 6.75% per annum
and shall be repaid by the achievement of performance-based
milestones described in Mr. Haydens employment
agreement and performance loan agreement. As of
December 31, 2001, accrued interest totaled $40,000
pursuant to the note to Mr. Hayden. Mr. Van
Benedens loan shall be interest free for the first year
and shall be 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. In the event of Mr. Van
Benedens departure prior to one year from employment, the
note shall be repayable and interest due in accordance with the
terms of his employment agreement. Mr. Van Benedens
employment agreement and loan were not effective until
October 8, 2001.

In December 2001, the Board approved a full
recourse loan to William E. McGlashan, Jr. of up to
$4.0 million in connection with the purchase of a principal
residence in the San Francisco Bay Area. The loan is to be
collateralized by the residence, and to the extent necessary
should an appraisal of the property equal less than 120% of the
loans value, be secured by Mr. McGlashans
personal shareholdings pledged to the Company, such that the
amount outstanding shall be at all times fully collateralized or
secured by at least 120% of the principal outstanding. Interest
on the loan is accrued at the Applicable Prime Rate, deferred
until principal is due, over a 10 year term. The loan shall
be forgiven upon a defined Change of Control event. In the event
Mr. McGlashan terminates employment either by voluntary
resignation or for Cause, the loan shall be due and payable,
with interest, no later than 12 months following such
termination. In the event Mr. McGlashan is terminated for
any reason other than Cause, the loan shall remain outstanding
for the remainder of its terms. The Company has not yet funded
the loan and as such no accrued interest was outstanding as of
December 31, 2001.

Acquisitions

The following is a summary of the ten
acquisitions Critical Path completed during 1999 and 2000. There
were no acquisitions completed during 2001. All acquisitions
were accounted for 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. Net assets 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 intangible assets in the
accompanying consolidated balance sheet. The fair value of
separately identified intangible assets was determined based
upon independent valuations using various valuation
methodologies. See also Note 2 to the 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, including the ongoing
business operations as well as nearly 500 customer
relationships 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
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 AcquisitionsOn
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

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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

Working capital declined to $58.0 million at
December 31, 2001 from $186.8 million at
December 31, 2000 due primarily to the use of cash to fund
the Companys net loss for 2001, adjusted for non-cash
charges, and cash utilized to retire a significant portion of
the Companys convertible debt obligations.

Cash, cash equivalents and short-term investments
were $69.2 million at December 31, 2001 and
$216.5 million at December 31, 2000. The Company
primarily invests its 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 2001, we also began
investing a portion of our cash in high-grade, low risk
investments with an average maturity of three- to twelve-months.
As of December 31, 2001, these short-term investments
totaled approximately $9.7 million.

Cash and cash equivalents decreased by
$156.5 million during 2001 after having increased by
$140.6 million in the prior year. The Company used cash to
fund operating activities of $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, significantly exceeded the
related sales of our software products and services. A more
detailed discussion of our 2000 and 2001 operating results can
be found in the Results of Operations section of this document.
Also contributing to the use of cash in operating activities in
2001 were net cash outlays totaling $8.2 million related to
employee and facilities reduction costs and the divestiture of
non-core products and services, associated with the
Companys 2001 strategic restructuring activities. In 2000,
the payment of $11.6 million in acquisition-related
retention bonuses contributed to the net use of cash in
operating activities.

During 2001, we used cash in investing activities
of $34.9 million to purchase property and equipment,
primarily for the acquisition of additional network
infrastructure equipment for our data centers, for certain
strategic investments and short-term investments in high-grade,
low risk instruments. 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 used cash in investing activities
totaling $90.4 million primarily to purchase property,
equipment and other capital assets and to fund certain strategic
acquisitions and investments. The significant outlay in capital
expenditures during 2000 was primarily related to installation
of additional network infrastructure equipment in our data
centers, licenses of new software platforms, and purchases of
furniture and equipment for new employees. During 2000, we
completed our acquisitions of ISOCOR, docSpace, RemarQ,
Netmosphere, and PeerLogic, and as a result, expended a
significant amount of capital. In addition, we made several
strategic investments in private entities and an initial capital
contribution to fund our 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 2001, the Company used cash in financing
activities of $30.3 million as funds were used to retire a
significant portion of the Companys convertible debt and
to payoff capital lease obligations. These cash outlays were
partially offset by proceeds raised in a financing transaction
closed in the fourth quarter of 2001 (detailed below) and from
the exercise of stock options.

During 2001, the Company 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. The Company 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 14 to the Notes to the
Consolidated Financial Statements  Financing
Transaction. As of December 31, 2000 and 2001 the total
balance outstanding was $300.0 million and
$38.4 million, respectively.

During the fourth quarter of 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

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$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 related
proceeds will be used for working capital and general corporate
purposes. The cash proceeds to the Company, net of transaction
costs, totaled $26.8 million. The related proceeds will be used
for working capital and general corporate purposes.


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 to
retire a note payable assumed in the PeerLogic acquisition and
payments to retire principal on capital lease obligations.

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

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

The Contractual Obligations and Commitments Table
below sets forth our significant obligations and commitments as
of December 31, 2001.

|                              |                                                        |                                    |         |         |        |         |        |        |        |        |         |            |   |        |        | 
|----------------------------- | ------------------------------------------------------ | ---------------------------------- | ------- | ------- | ------ | ------- | ------ | ------ | ------ | ------ | ------- | ---------- | - | ------ | ------ | 
|                              |                                                        |                                   
|                              |                                                        | Fiscal Year                       
|                              |                                                        |                                   
|                              |                                                        |                                    |         | 2006   
|                              |                                                        | Total                              |         | 2002    |        | 2003    |        | 2004   |        | 2005   |         | and beyond
|                              |                                                        |                                    |         |         |        |         |        |        |        |        |         |           
|                              |                                                        |                                   
|                              |                                                        | (in thousands)                    
|Contractual Cash Obligations: |                                                        |                                    |         |         |        |         |        |        |        |        |         |            |   |       
|                              | Convertible subordinated notes, including
	interest(1) |                                    | $45,898 |         | $2,206 |         | $2,206 |        | $2,206 |        | $39,280 |            | $ |       |       
|                              | Operating lease obligations                            |                                    | 42,192  |         | 5,819  |         | 5,290  |        | 5,028  |        | 4,514   |            |   | 21,541 |       
|                              | Capital lease obligations                              |                                    | 2,081   |         | 1,232  |         | 536    |        | 313    |        |        |            |   |       |       
|                              | Other purchase obligations(2)                          |                                    | 4,905   |         | 4,635  |         | 270    |        |       |        |        |            |   |       |       
|                              |                                                        |                                    |         |         |        |         |        |        |        |        |         |            |   |       
|                              |                                                        | Total Contractual Cash Obligations |         | $95,076 |        | $13,892 |        | $8,302 |        | $7,547 |         | $43,794    |   | $      | 21,541 | 
|                              |                                                        |                                    |         |         |        |         |        |        |        |        |         |            |   |       



---



|    |                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|(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 and network
	infrastructure storage costs.

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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 and to 30% in
2001. Our revenues have in some quarters and could continue to
fall short of expectations if we experience delays or
cancellations of even a small number of orders. We often offer
volume-based pricing, which may affect operating margins. A
number of factors are likely to cause fluctuations in operating
results, including, but not limited to:



| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the demand for outsourced messaging services
	generally and the use of messaging and directory infrastructure
	products and services in particular;                                           
|
| |  | the demand for licensed solutions for messaging,
	directory, and other products;                                                                                                              
|
| |  | 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 cycles of our customers and
	potential customers;                                                                                                                               
|
| |  | the amount and timing of operating costs and
	capital expenditures relating to expansion of business and
	infrastructure;                                                                     
|
| |  | our ability to quickly handle and alleviate
	technical difficulties or system outages;                                                                                                        
|
| |  | the announcement or introduction of new or
	enhanced services by competitors; and                                                                                                             
|
| |  | general economic and market conditions and their
	affect on our operations and that of our customers.                                                                                         

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

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

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

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

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

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

In the first quarter of 2001, in response to the
restatement of our financial results, we announced a series of
changes in our management that included the departure of many
senior executives. In the second quarter of 2001, we announced a
series of additional changes in our management and board of
directors that also included the departures of senior executives
and board members. A majority of the current senior executives
of the Company joined us in the second and third quarters of
2001. Because of these recent changes and their recent
recruitment, our management team has not worked together for a
significant length of time and may not be able to work together
effectively to successfully implement our strategy. If our
management team is unable to accomplish our business objectives,
our ability to grow our business and successfully meet
operational challenges could be severely impaired. We do not
have long-term employment agreements with any of our executive
officers. It is possible this high turnover at our senior
management levels may also continue for a variety of reasons.
The loss of the services of one or more of our current senior
executive officers could harm our business and affect our
ability to successfully implement our business objectives.

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

As of December 31, 2001, we had an
accumulated deficit, including other comprehensive income, of
approximately $2.1 billion. We have not achieved
profitability in any period and expect to continue to incur net
losses in accordance with generally accepted accounting
principles for the foreseeable future. We do expect that our
operating expenses will continue to decrease as a result of our
strategic and operational restructuring and other cost-cutting
efforts. However, we will continue to spend resources on
maintaining and strengthening our business, and this may, in the
near term, have a negative effect on our operating results and
our financial condition.

In past quarters, we have spent heavily on
technology and infrastructure development. We may continue to
spend substantial financial and other resources to develop and
introduce new end-to-end messaging and directory infrastructure
solutions, and to improve our sales and marketing organizations,
strategic relationships and operating infrastructure. In
addition, in future periods we will continue to incur
significant non-cash charges related to the ten acquisitions we
completed in 1999 and 2000 and related stock-based compensation.
We expect that our cost of revenues, sales and marketing
expenses, general and administrative expenses, operations and
customer support expenses and depreciation and amortization
expenses could continue to

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increase in absolute dollars and may increase as
a percent of revenues. If revenues do not correspondingly
increase, our operating results and financial condition could be
harmed. If we continue to incur net losses in future periods, we
may not be able to retain employees, or fund investments in
capital equipment, sales and marketing programs, and research
and development to successfully compete against our competitors.
We may never obtain sufficient revenues to achieve
profitability. If we do achieve profitability, we may not
sustain or increase profitability in the future. This may also,
in turn, cause the price of our common stock to demonstrate
volatility and/or to decline.


If we fail to improve our sales and marketing
results, we may be unable to grow our business affecting our
operating results.

Our ability to increase revenues will depend on
our ability to successfully recruit, train and retain
experienced and effective sales and marketing personnel.
Competition for qualified personnel 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 efforts would impair our ability to attract new
customers and enhance our relationships with existing customers,
and ultimately, grow revenues. This would also adversely impact
the timing and extent of our revenues. Because we have
experienced turnover in our sales force and the majority of our
current sales and marketing personnel have recently joined us
and have limited experience working together, our sales and
marketing organizations may not be able to compete successfully
against the sales and marketing organizations of our
competitors. If we do not successfully operate and grow our
sales and marketing activities, our business could suffer and
the price of our common stock could decline.

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 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
a major customer could harm our business. Our agreements with
our customers typically have terms of one to three years often
with automatic one year renewals and can be terminated without
cause upon 30 - 120 days notice. In addition, a
number of our technology industry customers have also suffered
from falling revenue, job losses, restructuring and decreased
technology spending in the recent economic downturn. 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, our
business will not grow and we will not generate additional
revenues.

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

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

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



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

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

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

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

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

We believe that existing capital resources will
enable us to maintain current and planned operations through
December 31, 2002. However, additional capital may be
required to continue operations and achieve profitability. In
addition, we may be required to raise additional funds due to
unforeseen circumstances. If our capital requirements vary
materially from those currently planned, we may require
additional financing sooner than anticipated. Such financing may
not be available in sufficient amounts or on terms acceptable to
us and may be dilutive to existing shareholders. Additionally,
we face a number of challenges in operating our business,
including but not limited to the resources to maintain worldwide
operations, our leveraged capital structure and significant
contingent liabilities associated with litigation. In the event
that resolution of these or other operational matters involve
issuance of stock or other derivative instruments, our existing
shareholders may experience significant dilution.

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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.

We have had filed in recent years, a number of
lawsuits against us, including securities class action and
shareholder derivative litigation filed in February and August
2001 and February 2002, and certain of our current and 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, the
uncertainty associated with substantial unresolved lawsuits
could seriously harm our business, financial condition and
reputation, whether material individually or in the aggregate.
In particular, this uncertainty could harm our relationships
with existing customers, our ability to obtain new customers and
our ability to operate certain aspects of our business.

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

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

Although the Company has reached settlement
agreements in connection with the securities class action
pending in the U.S. District Court for the Northern District of
California, we cannot provide assurance that a final settlement
shall be approved in accordance with the settlement agreement,
or at all. The approval of the definitive settlement agreements
between the parties is subject to other factors, such as court
review and approval, before the subject actions are dismissed.
In addition, the definitive settlement agreements entered into
between the parties are also subject to notice to the putative
class and of the shareholders of the Company, as well as review
and approval by the court. There can be no assurance that the
court will approve the settlement. If the settlement were not
given final approval, it could have a number of materially
detrimental effects on the Companys financial condition
and business.

Should the Court fail to approve the settlement,
and the litigation continue, there can be no assurance that fees
and expenses, and any ultimate resolution associated with such
litigation, shall be within the coverage limits of our insurance
and/or our ability to pay such amounts. Although the terms of
the settlement agreement are within the coverage limits of the
Companys directors and officers insurance, should the
current agreement in principle fail to be approved by the court,
there can be no assurance that the Company will be able to
conclude 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 complete the settlement could
also cast doubt as to the prospects of the Company in the eyes
of our customers, potential customers and investors, and cause
the Companys stock price to decline.

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

In February 2001, the Securities and Exchange
Commission, or SEC, issued a formal order of investigation of us
and certain current and former officers associated with us. The
investigation relates to non-specified accounting matters,
financial reports, other public disclosures and trading activity
in our stock. In February 2002, the SEC announced the conclusion
of the investigation as to the Company. Although the SEC did not
impose any penalties against the Company, we consented without
admitting or denying liability, to an administrative order that
the Company violated certain non-fraud provisions of the federal
securities laws

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and to a cease and desist order. In addition, the
SEC and the Department of Justice charged two former employees
of the Company with various violations of the securities laws.
Despite the conclusion of the investigation of the Company,
lingering concerns about the actions leading up to the
restatement of financials for the third and fourth quarters of
2000 has nevertheless cast doubt on the future of the Company in
the eyes of customers and investors and could continue to harm
our business and cause the price of our common stock to continue
to fluctuate and/or decline significantly.


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

The Nasdaq Stock Market has quantitative
maintenance criteria for the continued listing of common stock
on the Nasdaq National Market. The current requirements
affecting us include (i) having net tangible assets of at
least $4 million and (ii) maintaining a minimum bid
price per share of $1. As of December 31, 2001 we were in
compliance with all Nasdaq National Market listing requirements.
However, there were periods in the second and third quarters of
2001 when the closing bid price per share for our common stock
was well below $1. Although our bid price has been above $1 per
share since November 1, 2001, if the bid price of our
common stock price again slips below $1 per share for more than
60 days, our common stock may not remain listed on The
Nasdaq National Market. Also effective November 1, 2002, we
will also 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. We believe that we currently comply with
this requirement. However, there can be no assurance that we
will be able to comply with the quantitative maintenance
criteria or any of the Nasdaq National Markets rules in
the future. If we fail to maintain continued listing on the
Nasdaq National Market and must move to a market with less
liquidity, our financial condition could be harmed and our stock
price would likely decline. If we are delisted, it could have a
material adverse effect on the market price of, and the
liquidity of the trading market for, our common stock.

Our stock price has demonstrated volatility
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 and wide fluctuations.
For example, during the fourth quarter of 2001, the closing sale
prices of our common stock on the Nasdaq National Market ranged
from $0.51 on October 1, 2001 to $2.83 on November 21,
2001, and the closing sale price of our common stock on
December 31, 2001 was $2.74. Our stock price may further
fluctuate or decline in response to any number of factors and
events, such as announcements related to litigation,
technological innovations, strategic and sales relationships,
new product and service offerings by us or our competitors,
changes in senior management, changes in financial estimates and
recommendations of securities analysts, the operating and stock
price performance of other companies that investors may deem
comparable, news reports relating to trends in our markets and
overall market conditions. In addition, the stock market in
general, particularly with respect to technology stocks, has
experienced extreme volatility and a significant cumulative
decline in recent quarters. This volatility and decline has
affected many companies, including our company, irrespective of
the specific operating performance of such companies. These
broad market influences and fluctuations may adversely affect
the price of our stock, and our ability to remain listed on the
Nasdaq National Market, regardless of our operating performance
or other factors.

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

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

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through March 2002, and our current insurance
that was renewed through March 2003, contain similar
provisions.


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

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

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

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

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

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

If we are not successful in finalizing our
strategic plan, including the exit of certain non-core products
and services, our business could be negatively
impacted.

In the first quarter of 2001, we developed a
strategic plan that involved reorganizing 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. In the second and third quarters of 2001,
implementation of the plan occurred and, accordingly, products
and services determined to be non-core to our strategy were
strategically exited. 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 some
addition charges in connection previously announced reductions
in force and were able to finalize the consolidation of
additional facilities and related contracts and expenses
associated with those facilities. The non-core products and
services comprised approximately 37% of total revenues in the
first quarter of 2001, approximately 24% of total revenues in
the second quarter of 2001, approximately 18% of total revenues
in the third quarter of 2001, and 3% of total revenues in the
fourth quarter of 2001. We expect that any further charges
associated with the strategic restructuring will be minimal in
future quarters.

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

Acquisitions involve risks related to the
integration and management of acquired technology, operations
and personnel. In addition, in connection with our strategic
restructuring, the Company elected to divest or discontinue many
of the acquired businesses. Both the integration and divestiture
of acquired businesses have been and will continue to be
complex, time consuming and expensive processes, which may
disrupt and distract our management from its core business. With
respect to integration, we must operate as a combined
organization utilizing common information and communication
systems, operating procedures, financial controls and human
resources practices to be successful. In particular, we are
currently evaluating, upgrading or replacing our financial
information systems and establishing uniformity among the
systems of the acquired businesses. With divestitures, the
timing and transition of those businesses and their customers to
other entities has required and will continue to require
resources from our legal, finance and corporate development
teams as well as expenses associated with the conclusion of
those transactions.

Consequently, we may not be successful or
efficient in integrating or divesting acquired businesses or
technologies and may not achieve anticipated revenues and
benefit and/or cost reductions. We also cannot guarantee that
these acquisitions will result in sufficient revenues or
earnings to justify our investment in, or expenses related to,
these acquisitions or that any synergies will be realized. In
addition, if we are not successful in divesting non-core
acquired businesses, we will incur costs associated with the
cessation of operations or wind up of acquired businesses. In
either event, we will likely further incur significant expenses
as well as non-cash charges to write-off acquired assets, which
could seriously harm our financial condition and operating
results.

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

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

We intend to continue to license certain
technologies from third parties and incorporate such
technologies into our products and services, including web
server technology, virus and anti-spam solutions 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 which could
materially harm our business and operations.

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

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

A fundamental requirement for online
communications is the secure transmission of confidential
information over public networks. Third parties may attempt to
breach our security or that of our customers. If

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


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

Few laws currently apply directly to activity on
the Internet and the messaging business, however new laws are
proposed and other laws made applicable to Internet
communications every year. In particular, the Company 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 service or the loss of or
decrease in business by a key partner due to regulation or the
expense of compliance with any regulation, could either increase
the costs associated with our business or affect revenue, either
of which could harm our financial condition or operating
results. Certain of our service offerings include operations
subject to the Digital Millenium Copyright Act of 1998. The
Company has expended resources and implemented processes and
controls in order to remain in compliance with DMCA but there
can be no assurance that our efforts will be sufficient and/or
new legislation and case law will not affect the operation of
certain services.

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.

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

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

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

As a provider of messaging and directory
services, we face potential liability for defamation,
negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the materials

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transmitted via our services. We do not and
cannot screen all of the content generated by our users, and we
could be exposed to liability with respect to this content.
Furthermore, some foreign governments, such as Germany, have
enforced laws and regulations related to content distributed
over the Internet that are more strict than those currently in
place in the United States. In some instances, we may be subject
to criminal liability in connection with Internet content
transmission.


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

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

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

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

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

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

48



---



##### 



Our proprietary rights may not be adequately
protected because:



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

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

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

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

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

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

We derived 40% of our revenues from international
sales in the fiscal year ended December 31, 2001 and 38% of
our revenues from international sales in 2000. We intend to
continue to operate in international markets and to spend
significant financial and managerial resources to do so. If
revenues from international operations do not exceed the expense
of establishing and maintaining these operations, our business,
financial

49



---



##### 



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;                                                                    
|
| |  | difficulties in collecting accounts receivable
	and longer collection periods;                     
|
| |  | changes in regulatory requirements, including
	U.S. export restrictions on encryption technologies;
|
| |  | political and economic instability;                                                                
|
| |  | potential adverse tax consequences; and                                                            
|
| |  | reduced protection for intellectual property
	rights in some countries.                            

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

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

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

Furthermore, the deregulation of the energy
industry instituted in 1996 by the California government and
shortages in wholesale electricity supplies have caused power
prices to increase. If wholesale prices continue to increase,
our operating expenses will likely increase, as our headquarters
and many employees are based in California.

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

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



| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

50



---



##### 



SUPPLEMENTAL ALTERNATIVE MEASUREMENT FINANCIAL
DATA

(in thousands)


The following supplemental alternative
measurement financial information presents Critical Paths
condensed consolidated results of operations during 1999, 2000
and 2001, excluding the impact of certain special charges
consisting of (i) amortization of intangible assets
associated with purchase business combinations,
(ii) accruals for employee retention bonuses associated
with purchase business combinations, (iii) stock-based
compensation associated with outstanding options and warrants,
(iv) one-time charges related to our restructuring
initiative, (v) impairment of long-lived assets,
(vi) write-down of investments, (vii) gain on the
retirement of convertible subordinated debt, and
(viii) accretion on redeemable convertible preferred
shares. This supplemental presentation is for informational
purposes only, and attempts to depict the financial results of
Critical Path excluding certain non-cash and extraordinary
one-time charges and gains. It is not intended to replace the
consolidated operating results prepared and presented in
accordance with generally accepted accounting principles.

|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |        |         | 
|----------------------------------------------------------- | -------------------------- | -------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------- | - | -------- | ------ | ------- | 
|                                                            |                            |                           
|                                                            |                            | Year Ended December 31,   
|                                                            |                            |                           
|                                                            |                            | 1999                       |         | 2000   |        | 2001
|                                                            |                            |                            |         |        |        |     
|Consolidated Statement of Operations
	Data:                 |                            |                            |         |        |        |      |         |        |         |   |          |       
|Net revenues                                                |                            |                            |         |        |        |      |         |        |         |   |          |       
|                                                            | Software license           |                            | $       |       |        |      | $       | 51,607 |         |   | $        | 30,960 |        
|                                                            | Hosted messaging           |                            |         | 16,157 |        |      |         | 58,553 |         |   |          | 43,821 |        
|                                                            | Professional services      |                            |         |       |        |      |         | 14,527 |         |   |          | 12,573 |        
|                                                            | Maintenance and support    |                            |         |       |        |      |         | 10,966 |         |   |          | 16,819 |        
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|                                                            |                            | Total net revenues         |         |        | 16,157 |      |         |        | 135,653 |   |          |        | 104,173 | 
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|Cost of net revenues                                        |                            |                            |         |        |        |      |         |        |         |   |          |       
|                                                            | Software license           |                            |         |       |        |      |         | 2,731  |         |   |          | 1,533  |        
|                                                            | Hosted messaging           |                            |         | 16,505 |        |      |         | 59,104 |         |   |          | 59,124 |        
|                                                            | Professional services      |                            |         |       |        |      |         | 5,945  |         |   |          | 10,315 |        
|                                                            | Maintenance and support    |                            |         |       |        |      |         | 8,060  |         |   |          | 10,081 |        
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|                                                            |                            | Total cost of net revenues |         |        | 16,505 |      |         |        | 75,840  |   |          |        | 81,053  | 
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|Gross profit (loss)                                         |                            |                            | (348    | )      |        |      | 59,813  |        |         |   | 23,120   |       
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|Operating expenses                                          |                            |                            |         |        |        |      |         |        |         |   |          |       
|                                                            | Sales and marketing        |                            |         | 13,811 |        |      |         | 66,125 |         |   |          | 53,356 |        
|                                                            | Research and development   |                            |         | 7,682  |        |      |         | 31,022 |         |   |          | 30,744 |        
|                                                            | General and administrative |                            |         | 14,051 |        |      |         | 30,444 |         |   |          | 42,260 |        
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|                                                            |                            | Total operating expenses   |         |        | 35,544 |      |         |        | 127,591 |   |          |        | 126,360 | 
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|Loss from operations                                        |                            |                            | (35,892 | )      |        |      | (67,778 | )      |         |   | (103,240 | )     
|Interest and other income (expense), net                    |                            |                            | 7,061   |        |        |      | 12,970  |        |         |   | 5,840    |       
|Interest expense                                            |                            |                            | (752    | )      |        |      | (15,948 | )      |         |   | (14,714  | )     
|Equity in net loss of joint venture                         |                            |                            |        |        |        |      | (1,019  | )      |         |   | (1,866   | )     
|Minority interest in net income of consolidated
	subsidiary |                            |                            |        |        |        |      | (649    | )      |         |   |         |       
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|Loss before income taxes                                    |                            |                            | (29,583 | )      |        |      | (72,424 | )      |         |   | (113,980 | )     
|Provision for income taxes                                  |                            |                            |        |        |        |      | (6,513  | )      |         |   | (5,606   | )     
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|Net loss                                                    |                            | $                          | (29,583 | )      |        | $    | (78,937 | )      |         | $ | (119,586 | )     
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|Net loss per share  basic and diluted                      |                            | $                          | (0.99   | )      |        | $    | (1.31   | )      |         | $ | (1.62    | )     
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       
|Weighted average shares  basic and
	diluted                |                            |                            | 29,770  |        |        |      | 60,399  |        |         |   | 73,981   |       
|EBITDA(1)                                                   |                            | $                          | (27,829 | )      |        | $    | (31,798 | )      |         | $ | (58,343  | )     
|                                                            |                            |                            |         |        |        |      |         |        |         |   |          |       




|    |                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings before interest, taxes, depreciation and
	amortization (excluding equity in net loss, minority interest in
	net income, one-time charges identified in the table below).

51



---



##### 



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

|                                                                                                                             |                                                                |                                                       |          |         |         |      |            |            |            |   |          |         |          |  
|---------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ----------------------------------------------------- | -------- | ------- | ------- | ---- | ---------- | ---------- | ---------- | - | -------- | ------- | -------- | -
|                                                                                                                             |                                                                |                                                      
|                                                                                                                             |                                                                | Year Ended December 31,                              
|                                                                                                                             |                                                                |                                                      
|                                                                                                                             |                                                                | 1999                                                  |          | 2000    |         | 2001
|                                                                                                                             |                                                                |                                                       |          |         |         |     
|Supplemental pro forma net loss                                                                                              |                                                                | $                                                     | (29,583  | )       |         | $    | (78,937    | )          |            | $ | (119,586 | )      
|Add back cost of revenue, operating and
	non-operating expense amounts excluded from the calculation of
	pro forma net loss: |                                                                |                                                       |          |         |         |      |            |            |            |   |          |        
|                                                                                                                             | Amortization of purchased technology                           |                                                       |          |        |         |      |            | (18,140    | )          |   |          | (21,284 | )       
|                                                                                                                             | Amortization of intangible assets                              |                                                       |          | (32,259 | )       |      |            | (355,868   | )          |   |          | (13,216 | )       
|                                                                                                                             | Acquisition-related retention bonuses in cost of
	net revenues |                                                       |          | (520    | )       |      |            | (1,040     | )          |   |          |        |         
|                                                                                                                             | Acquisition-related retention bonuses in
	operating expenses   |                                                       |          | (3,587  | )       |      |            | (8,294     | )          |   |          | (1,381  | )       
|                                                                                                                             | Stock-based expense in cost of revenue                         |                                                       |          | (4,532  | )       |      |            | (1,586     | )          |   |          | (4,050  | )       
|                                                                                                                             | Stock-based expense in operating expenses                      |                                                       |          | (46,460 | )       |      |            | (50,598    | )          |   |          | (53,615 | )       
|                                                                                                                             | Impairment of long-lived assets in cost of net
	revenues       |                                                       |          |        |         |      |            | (25,315    | )          |   |          | (16,654 | )       
|                                                                                                                             | Impairment of long-lived assets in operating
	expenses         |                                                       |          |        |         |      |            | (1,282,150 | )          |   |          | (9,991  | )       
|                                                                                                                             | Acquired in-process research and development                   |                                                       |          |        |         |      |            | (3,700     | )          |   |          |        |         
|                                                                                                                             | Restructuring and other expense                                |                                                       |          |        |         |      |            | (3,248     | )          |   |          | (18,267 | )       
|                                                                                                                             | Loss on investments reported as a non-operating
	expense       |                                                       |          |        |         |      |            | (23,589    | )          |   |          | (702    | )       
|                                                                                                                             |                                                                |                                                       |          |         |         |      |            |            |            |   |          |        
|                                                                                                                             |                                                                | Subtotal of amounts excluded from pro forma net
	loss |          | $       | (87,358 | )    |            | $          | (1,773,528 | ) |          | $       | (139,160 | )
|                                                                                                                             |                                                                |                                                       |          |         |         |      |            |            |            |   |          |        
|GAAP loss before extraordinary item                                                                                          |                                                                |                                                       | (116,941 | )       |         |      | (1,852,465 | )          |            |   | (258,746 | )      
|Gain on retirement of convertible subordinated
	notes, net                                                                   |                                                                |                                                       |         |         |         |      |           |            |            |   | 179,282  |        
|                                                                                                                             |                                                                |                                                       |          |         |         |      |            |            |            |   |          |        
|GAAP net loss                                                                                                                |                                                                | $                                                     | (116,941 | )       |         | $    | (1,852,465 | )          |            | $ | (79,464  | )      
|Accretion on redeemable convertible preferred
	shares                                                                        |                                                                |                                                       |         |         |         |      |           |            |            |   | (356     | )      
|                                                                                                                             |                                                                |                                                       |          |         |         |      |            |            |            |   |          |        
|GAAP net loss attributable to common shares                                                                                  |                                                                | $                                                     | (116,941 | )       |         | $    | (1,852,465 | )          |            | $ | (79,820  | )      
|                                                                                                                             |                                                                |                                                       |          |         |         |      |            |            |            |   |          |        

Item 7A. Quantitative and
Qualitative Disclosures About Market Risk

As of December 31, 2001, the Companys
short-term investments consisted of available-for-sale
securities, excluding those classified as cash equivalents, of
$9.7 million. These investments are primarily comprised of
low risk government securities and corporate bonds. See also
Note 6 to the Notes to Consolidated Financial
Statements  Investments).

These securities are subject to equity price
risk. The Company has not attempted to reduce or eliminate its
market exposure on these equity securities. At December 31,
2001 the Company carried long-term investments totaling
$7.2 million, comprised of $1.0 million in investments
in marketable securities and $6.2 million in investments in
non-marketable securities. These securities represent strategic
equity investments in corporate partners, certain of which are
publicly traded and marketable and certain of which are
privately held. For each 10% decline in market value of its
available-for-sale equity securities from December 31,
2001, the Companys marketable securities would be
insignificantly impacted.

We do not attempt to reduce or eliminate our
market exposure on these securities.

The Companys long-term obligations consist
of the Companys $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 the Companys long-term
obligations or the Companys results of operations.

A significant portion of our international
operations has a functional currency other than the United
States dollar. Accordingly, we are exposed to foreign currency
exchange rate risk inherent in our sales commitments,
anticipated sales, and assets and liabilities of these
operations. Fluctuations in exchange rates may harm our results
of operations and could also result in exchange losses. The
impact of future exchange rate fluctuations cannot be predicted
with any certainty, however our exposure to foreign currency
rate risk is

52



---



##### 



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 and a net gain of
$947,000 in 2001. 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 on page F-1 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 F-2 of this report are incorporated into this
Item 8.

Supplemental Data

The following table sets forth certain unaudited
quarterly statements of operations data for each of Critical
Paths quarters during the 2000 and 2001 fiscal years. This
information has been derived from Critical Paths
consolidated unaudited financial statements, which, in
managements opinion, have been prepared on the same basis
as the audited consolidated financial statements, and include
all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the
information for the quarters presented. This information should
be read in conjunction with the audited consolidated financial
statements of Critical Path and the notes thereto included
elsewhere in this document. The operating results for any
quarter are not necessarily indicative of the operating results
for any future period.

|                                            |                                       |                            |       |        |        |       |        |        |        |       |        |        |        |       |         |        |        |  |        |        |        |  |        |        |        |  |       |        |        |  |        |        |        | 
|------------------------------------------- | ------------------------------------- | -------------------------- | ----- | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------- | ------ | ------ |  | ------ | ------ | ------ |  | ------ | ------ | ------ |  | ----- | ------ | ------ |  | ------ | ------ | ------ | 
|                                            |                                       |                            |       |       
|                                            |                                       | 2000                       |       | 2001  
|                                            |                                       |                            |       |       
|                                            |                                       | First                      |       | Second |        | Third |        | Fourth |        | First |        | Second |        | Third |         | Fourth
|                                            |                                       |                            |       |        |        |       |        |        |        |       |        |        |        |       |         |       
|                                            |                                       |                           
|                                            |                                       | (in thousands)            
|Consolidated Statement of Operations
	Data: |                                       |                            |       |        |        |       |        |        |        |       |        |        |        |       |         |        |        |  |        |        |        |  |        |        |        |  |       |        |        |  |        |       
|Net revenues                                |                                       |                            |       |        |        |       |        |        |        |       |        |        |        |       |         |        |        |  |        |        |        |  |        |        |        |  |       |        |        |  |        |       
|                                            | Software license                      |                            | $     | 11,070 |        |       | $      | 13,897 |        |       | $      | 12,365 |        |       | $       | 14,275 |        |  | $      | 5,550  |        |  | $      | 8,913  |        |  | $     | 7,724  |        |  | $      | 8,773  |       
|                                            | Hosted messaging                      |                            |       | 9,095  |        |       |        | 14,220 |        |       |        | 16,759 |        |       |         | 18,479 |        |  |        | 14,439 |        |  |        | 11,141 |        |  |       | 10,000 |        |  |        | 8,241  |       
|                                            | Professional services                 |                            |       | 2,493  |        |       |        | 3,030  |        |       |        | 3,609  |        |       |         | 5,395  |        |  |        | 3,417  |        |  |        | 2,900  |        |  |       | 4,206  |        |  |        | 2,050  |       
|                                            | Maintenance and support               |                            |       | 1,895  |        |       |        | 2,348  |        |       |        | 2,609  |        |       |         | 4,114  |        |  |        | 3,737  |        |  |        | 4,131  |        |  |       | 4,857  |        |  |        | 4,094  |       
|                                            |                                       |                            |       |        |        |       |        |        |        |       |        |        |        |       |         |        |        |  |        |        |        |  |        |        |        |  |       |        |        |  |        |       
|                                            |                                       | Total net revenues         |       |        | 24,553 |       |        |        | 33,495 |       |        |        | 35,342 |       |         |        | 42,263 |  |        |        | 27,143 |  |        |        | 27,085 |  |       |        | 26,787 |  |        |        | 23,158 | 
|                                            |                                       |                            |       |        |        |       |        |        |        |       |        |        |        |       |         |        |        |  |        |        |        |  |        |        |        |  |       |        |        |  |        |       
|Cost of net revenues                        |                                       |                            |       |        |        |       |        |        |        |       |        |        |        |       |         |        |        |  |        |        |        |  |        |        |        |  |       |        |        |  |        |       
|                                            | Software license                      |                            |       | 1,007  |        |       |        | 737    |        |       |        | 634    |        |       |         | 353    |        |  |        | 291    |        |  |        | 126    |        |  |       | 517    |        |  |        | 599    |       
|                                            | Hosted messaging                      |                            |       | 11,880 |        |       |        | 13,538 |        |       |        | 15,552 |        |       |         | 18,134 |        |  |        | 17,938 |        |  |        | 17,440 |        |  |       | 13,982 |        |  |        | 9,764  |       
|                                            | Professional services                 |                            |       | 1,056  |        |       |        | 1,388  |        |       |        | 1,317  |        |       |         | 2,184  |        |  |        | 2,966  |        |  |        | 2,594  |        |  |       | 2,565  |        |  |        | 2,190  |       
|                                            | Maintenance and support               |                            |       | 1,404  |        |       |        | 1,812  |        |       |        | 2,207  |        |       |         | 2,637  |        |  |        | 2,586  |        |  |        | 2,414  |        |  |       | 2,837  |        |  |        | 2,244  |       
|                                            | Amortization of purchased technology  |                            |       | 2,114  |        |       |        | 4,421  |        |       |        | 4,434  |        |       |         | 7,171  |        |  |        | 5,672  |        |  |        | 5,672  |        |  |       | 4,970  |        |  |        | 4,970  |       
|                                            | Acquisition-related retention bonuses |                            |       | 390    |        |       |        | 390    |        |       |        | 260    |        |       |         |       |        |  |        |       |        |  |        |       |        |  |       |       |        |  |        |       |       
|                                            | Stock-based expenses                  |                            |       | 493    |        |       |        | 383    |        |       |        | 381    |        |       |         | 329    |        |  |        | 1,303  |        |  |        | 1,469  |        |  |       | 631    |        |  |        | 647    |       
|                                            | Impairment of long-lived assets       |                            |       |       |        |       |        |       |        |       |        |       |        |       |         | 25,315 |        |  |        |       |        |  |        | 4,207  |        |  |       |       |        |  |        | 12,447 |       
|                                            |                                       |                            |       |        |        |       |        |        |        |       |        |        |        |       |         |        |        |  |        |        |        |  |        |        |        |  |       |        |        |  |        |       
|                                            |                                       | Total cost of net revenues |       |        | 18,344 |       |        |        | 22,669 |       |        |        | 24,785 |       |         |        | 56,123 |  |        |        | 30,756 |  |        |        | 33,922 |  |       |        | 25,502 |  |        |        | 32,861 | 
|                                            |                                       |                            |       |        |        |       |        |        |        |       |        |        |        |       |         |        |        |  |        |        |        |  |        |        |        |  |       |        |        |  |        |       
|Gross profit (loss)                         |                                       |                            | 6,209 |        |        |       | 10,826 |        |        |       | 10,557 |        |        |       | (13,860 | )      |        |  | (3,613 | )      |        |  | (6,837 | )      |        |  | 1,285 |        |        |  | (9,703 | )     
|                                            |                                       |                            |       |        |        |       |        |        |        |       |        |        |        |       |         |        |        |  |        |        |        |  |        |        |        |  |       |        |        |  |        |       

53



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##### 



|                                                            |                                              |                          |         |        |        |       |          |        |         |       |          |        |         |       |            |           |           |   |         |        |        |   |         |        |        |   |         |        |        |   |         |        |        | 
|----------------------------------------------------------- | -------------------------------------------- | ------------------------ | ------- | ------ | ------ | ----- | -------- | ------ | ------- | ----- | -------- | ------ | ------- | ----- | ---------- | --------- | --------- | - | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                            |                                              |                          |         |       
|                                                            |                                              | 2000                     |         | 2001  
|                                                            |                                              |                          |         |       
|                                                            |                                              | First                    |         | Second |        | Third |          | Fourth |         | First |          | Second |         | Third |            | Fourth   
|                                                            |                                              |                          |         |        |        |       |          |        |         |       |          |        |         |       |            |          
|                                                            |                                              |                         
|                                                            |                                              | (in thousands)          
|Operating expenses                                          |                                              |                          |         |        |        |       |          |        |         |       |          |        |         |       |            |           |           |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                                            | Sales and marketing                          |                          |         | 13,605 |        |       |          | 17,342 |         |       |          | 16,128 |         |       |            | 19,050    |           |   |         | 18,712 |        |   |         | 15,694 |        |   |         | 11,018 |        |   |         | 7,932  |       
|                                                            | Research and development                     |                          |         | 6,323  |        |       |          | 9,213  |         |       |          | 7,853  |         |       |            | 7,633     |           |   |         | 9,934  |        |   |         | 8,333  |        |   |         | 7,322  |        |   |         | 5,155  |       
|                                                            | General and administrative                   |                          |         | 6,766  |        |       |          | 7,332  |         |       |          | 6,568  |         |       |            | 9,778     |           |   |         | 13,293 |        |   |         | 11,745 |        |   |         | 9,447  |        |   |         | 7,775  |       
|                                                            | Amortization of intangible assets            |                          |         | 47,499 |        |       |          | 88,986 |         |       |          | 94,160 |         |       |            | 125,223   |           |   |         | 4,133  |        |   |         | 4,112  |        |   |         | 2,485  |        |   |         | 2,486  |       
|                                                            | Acquisition-related retention bonuses        |                          |         | 2,679  |        |       |          | 3,693  |         |       |          | 1,028  |         |       |            | 894       |           |   |         | 170    |        |   |         | 793    |        |   |         | 92     |        |   |         | 326    |       
|                                                            | Stock-based expenses                         |                          |         | 6,703  |        |       |          | 11,942 |         |       |          | 13,835 |         |       |            | 18,118    |           |   |         | 16,430 |        |   |         | 14,244 |        |   |         | 11,286 |        |   |         | 11,655 |       
|                                                            | Restructuring and other expenses             |                          |         |       |        |       |          |       |         |       |          | 3,248  |         |       |            |          |           |   |         |       |        |   |         | 8,481  |        |   |         | 3,779  |        |   |         | 6,007  |       
|                                                            | Acquired in-process research and development |                          |         | 200    |        |       |          |       |         |       |          | 3,500  |         |       |            |          |           |   |         |       |        |   |         |       |        |   |         |       |        |   |         |       |       
|                                                            | Impairment of long-lived assets              |                          |         |       |        |       |          |       |         |       |          |       |         |       |            | 1,282,150 |           |   |         |       |        |   |         | 9,991  |        |   |         |       |        |   |         |       |       
|                                                            |                                              |                          |         |        |        |       |          |        |         |       |          |        |         |       |            |           |           |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                                            |                                              | Total operating expenses |         |        | 83,775 |       |          |        | 138,508 |       |          |        | 146,320 |       |            |           | 1,462,846 |   |         |        | 62,672 |   |         |        | 73,393 |   |         |        | 45,429 |   |         |        | 41,336 | 
|                                                            |                                              |                          |         |        |        |       |          |        |         |       |          |        |         |       |            |           |           |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Loss from operations                                        |                                              |                          | (77,566 | )      |        |       | (127,682 | )      |         |       | (135,763 | )      |         |       | (1,476,706 | )         |           |   | (66,285 | )      |        |   | (80,230 | )      |        |   | (44,144 | )      |        |   | (51,039 | )     
|Interest and other income (expense), net                    |                                              |                          | 1,258   |        |        |       | 4,697    |        |         |       | 4,905    |        |         |       | 2,110      |           |           |   | 2,425   |        |        |   | 2,895   |        |        |   | 178     |        |        |   | 342     |       
|Interest expense                                            |                                              |                          | (274    | )      |        |       | (5,260   | )      |         |       | (5,214   | )      |         |       | (5,200     | )         |           |   | (5,067  | )      |        |   | (5,315  | )      |        |   | (3,829  | )      |        |   | (503    | )     
|Equity in net loss of joint venture                         |                                              |                          |        |        |        |       |         |        |         |       | (640     | )      |         |       | (379       | )         |           |   | (776    | )      |        |   | (397    | )      |        |   | (346    | )      |        |   | (347    | )     
|Minority interest in net income of consolidated
	subsidiary |                                              |                          |        |        |        |       | (325     | )      |         |       | (201     | )      |         |       | (123       | )         |           |   |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Loss on investments                                         |                                              |                          |        |        |        |       |         |        |         |       |         |        |         |       | (23,589    | )         |           |   |        |        |        |   | (702    | )      |        |   |        |        |        |   |        |       
|                                                            |                                              |                          |         |        |        |       |          |        |         |       |          |        |         |       |            |           |           |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Loss before extraordinary item and income taxes             |                                              |                          | (76,582 | )      |        |       | (128,570 | )      |         |       | (136,913 | )      |         |       | (1,503,887 | )         |           |   | (69,703 | )      |        |   | (83,749 | )      |        |   | (48,141 | )      |        |   | (51,547 | )     
|Provision for income taxes                                  |                                              |                          | (360    | )      |        |       | (1,439   | )      |         |       | (2,534   | )      |         |       | (2,180     | )         |           |   | (343    | )      |        |   | (1,150  | )      |        |   | (2,180  | )      |        |   | (1,933  | )     
|                                                            |                                              |                          |         |        |        |       |          |        |         |       |          |        |         |       |            |           |           |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Loss before extraordinary item                              |                                              | $                        | (76,942 | )      |        | $     | (130,009 | )      |         | $     | (139,447 | )      |         | $     | (1,506,067 | )         |           | $ | (70,046 | )      |        | $ | (84,899 | )      |        | $ | (50,321 | )      |        | $ | (53,480 | )     
|Gain on retirement of convertible subordinated
	notes, net  |                                              |                          |        |        |        |       |         |        |         |       |         |        |         |       |           |           |           |   |        |        |        |   | 3,818   |        |        |   | 137,222 |        |        |   | 38,242  |       
|                                                            |                                              |                          |         |        |        |       |          |        |         |       |          |        |         |       |            |           |           |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Net profit (loss)                                           |                                              | $                        | (76,942 | )      |        | $     | (130,009 | )      |         | $     | (139,447 | )      |         | $     | (1,506,067 | )         |           | $ | (70,046 | )      |        | $ | (81,081 | )      |        | $ | 86,901  |        |        | $ | (15,238 | )     
|Accretion on redeemable convertible preferred
	shares       |                                              |                          |        |        |        |       |         |        |         |       |         |        |         |       |           |           |           |   |        |        |        |   |        |        |        |   |        |        |        |   | (356    | )     
|                                                            |                                              |                          |         |        |        |       |          |        |         |       |          |        |         |       |            |           |           |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Net loss attributable to common shares                      |                                              | $                        | (76,942 | )      |        | $     | (130,009 | )      |         | $     | (139,447 | )      |         | $     | (1,506,067 | )         |           | $ | (70,046 | )      |        | $ | (81,081 | )      |        | $ | 86,901  |        |        | $ | (15,594 | )     
|                                                            |                                              |                          |         |        |        |       |          |        |         |       |          |        |         |       |            |           |           |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       

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|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|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,
2002 are as follows:

|                            |  |     |    |          |  |                                                                               
|--------------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------
|Name                        |  | Age |    | Position
|                            |  |     |    |         
|David C. Hayden             |  |     | 46 |          |  | Executive Chairman of the Board                                               
|William E. McGlashan, Jr.   |  |     | 38 |          |  | Vice Chairman of the Board and Chief Executive
	Officer                       
|Pierre Van Beneden          |  |     | 54 |          |  | President                                                                     
|Laureen DeBuono             |  |     | 44 |          |  | Executive Vice President and Chief Financial
	Officer                         
|Bernard Harguindeguy        |  |     | 44 |          |  | Executive Vice President and Chief Marketing
	Officer                         
|Laurie Priddy               |  |     | 39 |          |  | Executive Vice President, Operations and General
	Manager of Hosted Operations
|Michael J. Zukerman         |  |     | 42 |          |  | Senior Vice President, General Counsel and
	Secretary                         
|Menelaos (Michael) Serbinis |  |     | 28 |          |  | Vice President, Engineering and Chief Technology
	Officer                     
|Raul Fernandez(1)(2)        |  |     | 35 |          |  | Director                                                                      
|William E. Ford(1)(2)       |  |     | 40 |          |  | Director                                                                      
|Jeffrey Webber(2)           |  |     | 49 |          |  | Director                                                                      




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

David C. Haydenfounded Critical Path and served as
Director, Chairman, President, Chief Executive Officer and
Secretary from its inception in February 1997 to October 1998.
Mr. Hayden has served as Chairman of the Board of Directors
of Critical Path since October 1998 and was appointed Executive
Chairman of the Board in February 2001. From February 1993 to
August 1996, Mr. Hayden served as chairman, chief executive
officer, and co-founder of The McKinley Group, Inc.,
creators of Magellan, an Internet search engine. Mr. Hayden
is also a member of the Board of Directors of E*Trade, Inc.

William McGlashanhas served as our Vice Chairman and
Chief Executive Officer since December of 2001.
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 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.

Pierre Van Benedenhas served as our President since
October 2001. Mr. Van Beneden joined Critical Path as
President in October 2001. Prior to joining Critical Path,
Mr. Van Beneden was executive vice-president, worldwide
field operations at the Lotus unit of IBM Corp. from 2000 to
2001 and from 1995 to 2000, Mr. Van Beneden served in
various senior positions at Lotus and IBM Corp., including vice
president of software sales for the IBM Software Brands, IBM
EMEA and general manager and senior vice president, Lotus EMEA.

55



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##### 



Laureen DeBuonohas
served as of Executive Vice President and Chief Financial
Officer since January 2002. Ms. DeBuono joined Critical
Path in September 2001 as Senior Vice President and Interim
Chief Financial Officer. Prior to joining the Company,
Ms. DeBuono served as chief financial officer and chief
operating officer for More.com, Inc. from 1999 to 2000. Prior to
that, Ms. DeBuono was executive vice President, chief
operating officer and chief financial officer at ReSound
Corporation from 1998 to 1999. Prior to that, Ms. DeBuono
held several executive management positions with Nellcor Puritan
Bennett Inc. from 1992 to 1998.

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

Laurie Priddyhas
served as of Executive Vice President, Operations and General
Manager, Hosted Operations since February 2002. Ms. Priddy
joined Critical Path from Exodus Communications, where she last
served as executive vice president of operations from 2001 to
2002. Ms. Priddy came to Exodus as part of the acquisition
of GlobalCenter, Inc. where she was co-chief operating officer
from 2000 to 2001. Prior to that, Ms. Priddy served as
president and chief executive officer of NDTC, AT&T
Broadband and Internet Services, from 1999 to 2000.

Michael J. Zukermanhas served as our Senior Vice
President, General Counsel and Secretary since June 2001. From
1999 to 2001, Mr. Zukerman served as vice president of
business development for Driveway Corporation. Prior to that,
Mr. Zukerman was general counsel and vice president of
business development at SegaSoft Networks, a subsidiary of Sega
Networks, from 1996 to 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.

Menelaos (Michael) Serbinishas served as our 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.

Raul J. Fernandezhas served as a director of the
Company since December 2001. Mr. Fernandez is the Chief
Executive Officer of Dimension Data North America and was
appointed to the board of directors of Dimension Data Holdings
in 2001 following the Groups acquisition of Proxicom
Corporation. Mr Fernandez was the founder and chief executive
officer of Proxicom. 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.

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 2002 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, 2001. 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.

56



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##### 



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

The information required by this item 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 2002 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 2002 Annual Meeting of
Shareholders.

57



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##### 



PART IV

Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K

(a)(1) Index to Consolidated Financial
Statements

Please see the accompanying Index to Consolidated
Financial Statements that appears on page F-1 of this report.
The Report of Independent Accountants, Consolidated Financial
Statements and Notes to Consolidated Financial Statements which
are listed in the Index to Consolidated Financial Statements and
which appear beginning on page F-2 of this report are
incorporated by reference into Item 8 above.

(a)(2) Financial Statement Schedule

Schedule II  Valuation and
Qualifying Accounts for the years ended December 31, 1998,
1999 and 2000 appears on page S-1 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

For the quarter ended December 31, 2001, we
filed the following reports on Form 8-K:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) On October 15, 2001, we filed a
	current report on Form 8-K dated October 9, 2001,
	reporting under Item 5 and Item 7 our balance sheet
	restructuring by repurchasing approximately $192 million of
	face value of our outstanding 5 3/4% Convertible
	Subordinated Notes due April 1, 2005. As part of this
	report, we filed our Pro Forma Balance Sheet as of June 30,
	2001.                                                                                                                    
|
| | (2) On November 7, 2001, we filed a
	current report on Form 8-K dated October 23, 2001,
	reporting under Item 5 the appointment of Pierre Van
	Beneden as President and William McGlashan, Jr. as Interim Chief
	Executive Officer.                                                                                                                                                                                                                                                                      
|
| | (3) On November 13, 2001, we filed a
	current report on Form 8-K dated November 8, 2001,
	reporting under Item 5 that we entered into binding
	memoranda of understanding with respect to the settlement of
	securities class action and shareholder derivative litigation
	pending against us in the U.S. District Court for the Northern
	District of California and that we had announced the closing of
	a $95 million financing transaction from a group of investors
	and their affiliate entities.
|
| | (4) On December 17, 2001, we filed a
	current report on Form 8-K dated December 11, 2001,
	reporting under Item 5 the appointments of William E.
	Ford and Raul J. Fernandez to our board of directors and
	the resignations of Larry Weber and Stephen J. Richards
	from our board of directors.                                                                                                                                                                                                        

(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.                                 
| | 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)).                                               

58



---



##### 



| |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                
| | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.2  |  |  | Preferred Stock Rights Agreement dated as of
	March 19, 2001 between Registrant and ComputerShare Trust
	Company, Inc., including the Certificate of Determination, the
	form of Rights Certificate and the Summary of Rights attached
	thereto as Exhibits A, B and C respectively (Incorporated
	by reference to Exhibit 4.5 of Registrants
	Form 8-A filed on May 7, 2001).
| | 4.3  |  |  | Indenture, dated March 31, 2000, by and
	between Registrant and State Street Bank and Trust Company of
	California, N.A., Trustee, relating to the $300 million
	five-year, 5.75% Convertible Subordinated Notes due
	April 1, 2005 (Incorporated by reference to
	Exhibit 4.5 to the Registrants Quarterly Report on
	Form 10-Q for the quarter ended March 31, 2000).       
| | 4.4  |  |  | Warrant to Purchase Common Stock dated
	March 29, 2001 issued by the Registrant to Vectis Group LLC
	(Incorporated by reference to Exhibit 4.3 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended September 30, 2001).                                                                                                                                      
| | 4.5  |  |  | Warrant to Purchase Common Stock dated
	January 29, 1999 issued by the Registrant to America
	Online, Inc. (Incorporated by reference to Exhibit 4.4 to
	the Registrants Registration Statement on Form S-1
	(File No. 333-71499)).                                                                                                                                           
| | 4.6  |  |  | Warrant to Purchase up to 25,000 Shares of Common
	Stock dated as of December 29, 1999 by and between Ecker
	Folsom Properties, LLC.                                                                                                                                                                                                                                           
| | 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.                                                                                                                                                                                                                                                
| | 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.                                                                                                        
| | 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.                                                                                                                                
| | 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.                                                                                                                         
| | 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.                                                                                                                                      
| | 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)).                                                                                                                                   
| | 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.                                                                                                                                                                                                                                                         

59



---



##### 



| |       |  |  |                                                                                                                                                                                                                                                             
| | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                               
| | 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.                                                                                                                                    
| | 10.12 |  |  | Nonstatutory Stock Option Agreement dated as of
	November 8, 2001 by and between Registrant and
	William E. McGlashan, Jr.                                                                                                                                  
| | 10.13 |  |  | First Amended and Restated Employment Agreement
	dated as of January 7, 2002 by and between Registrant and
	William E. McGlashan, Jr.                                                                                                                       
| | 10.14 |  |  | Nonstatutory Stock Option Agreement dated as of
	December 21, 2001 by and between Registrant and William E.
	McGlashan, Jr.                                                                                                                                 
| | 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.                                                                                                                                         
| | 10.17 |  |  | Nonstatutory Stock Option Agreement dated as of
	November 8, 2001 by and between Registrant and Pierre Van
	Beneden.                                                                                                                                        
| | 10.18 |  |  | Consulting Agreement dated as of August 16,
	2001 by and between Registrant and Laureen DeBuono.                                                                                                                                                            
| | 10.19 |  |  | Nonstatutory Stock Option Agreement dated as of
	September 5, 2001 by and between Registrant and Laureen
	DeBuono.                                                                                                                                          
| | 10.20 |  |  | Addendum to Consulting Agreement dated as of
	October 31, 2001 by and between Registrant and Laureen
	DeBuono.                                                                                                                                              
| | 10.21 |  |  | Nonstatutory Stock Option Agreement dated as of
	October 31, 2001 by and between Registrant and Laureen
	DeBuono.                                                                                                                                           
| | 10.22 |  |  | Nonstatutory Stock Option Agreement dated as of
	November 8, 2001 by and between Registrant and Laureen
	DeBuono.                                                                                                                                           
| | 10.23 |  |  | Employment Agreement dated as of January 14,
	2002 by and between Registrant and Bernard Harguindeguy.                                                                                                                                                      
| | 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).                     

60



---



##### 



|                                       |       |  |  |                                                                                                                                                                                                                                              
|-------------------------------------- | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                       | 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 |  |  | 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).
|                                       | 21.1  |  |  | List of Subsidiaries (Incorporated by reference
	to Exhibit 21.1 of the Registrants Annual Report on
	Form 10-K for the year ended December 31, 2000).                                                                                      
|                                       | 23.1  |  |  | Consent of PricewaterhouseCoopers LLP,
	Independent Accountants.                                                                                                                                                                             
|                                       | 24.1  |  |  | Power of Attorney (see the signature page of this
	report).                                                                                                                                                                                  
|(d) Financial Statements and Schedules
|                                       |       |  |  | Please see Item 14(a)(2).                                                                                                                                                                                                                    

61



---



##### 



CRITICAL PATH, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                 |  |      |     | 
|------------------------------------------------ |  | ---- | --- | 
|                                                 |  | Page
|                                                 |  |     
|Report of Independent Accountants                |  |      | F-2 | 
|Consolidated Balance Sheet                       |  |      | F-3 | 
|Consolidated Statement of Operations             |  |      | F-4 | 
|Consolidated Statement of Shareholders
	Equity  |  |      | F-5 | 
|Consolidated Statement of Cash Flows             |  |      | F-6 | 
|Notes to Consolidated Financial Statements       |  |      | F-7 | 
|Schedule II  Valuation and
	Qualifying Accounts |  |      | S-1 | 

F-1



---



##### 



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 accompanying index present fairly, in
all material respects, the financial position of Critical Path,
Inc. and its subsidiaries at December 31, 2000 and 2001,
and the results of their operations and their cash flows for
each of the three years in the period ended December 31,
2001 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 accompanying
index 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.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, CA

February 5, 2002


F-2



---



##### 



CRITICAL PATH, INC.


CONSOLIDATED BALANCE SHEET

(In thousands, except per share
amounts)


|                                                 |                                                            |                                                  |                                            |            |           |         |        |            |           |         | 
|------------------------------------------------ | ---------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------ | ---------- | --------- | ------- | ------ | ---------- | --------- | ------- | 
|                                                 |                                                            | 2000                                             |                                            | 2001      
|December 31                                      |                                                            |                                                  |                                            |           
|ASSETS                                          
|Current assets                                   |                                                            |                                                  |                                            |            |           |         |        |           
|                                                 | Cash and cash equivalents                                  |                                                  | $                                          | 216,542    |           |         | $      | 59,463     |          
|                                                 | Short-term investments                                     |                                                  |                                            |           |           |         |        | 9,702      |          
|                                                 | Accounts receivable, net                                   |                                                  |                                            | 38,938     |           |         |        | 26,692     |          
|                                                 | Other current assets                                       |                                                  |                                            | 10,252     |           |         |        | 5,367      |          
|                                                 |                                                            |                                                  |                                            |            |           |         |        |           
|                                                 |                                                            |                                                  | Total current assets                       |            |           | 265,732 |        |            |           | 101,224 | 
|Investments                                      |                                                            |                                                  | 10,610                                     |            |           |         | 7,215  |           
|Property and equipment, net                      |                                                            |                                                  | 85,304                                     |            |           |         | 36,285 |           
|Intangible assets, net                           |                                                            |                                                  | 124,094                                    |            |           |         | 48,641 |           
|Restricted cash                                  |                                                            |                                                  | 215                                        |            |           |         | 2,674  |           
|Other assets                                     |                                                            |                                                  | 11,655                                     |            |           |         | 3,913  |           
|                                                 |                                                            |                                                  |                                            |            |           |         |        |           
|                                                 |                                                            |                                                  | Total assets                               |            | $         | 497,610 |        |            | $         | 199,952 | 
|                                                 |                                                            |                                                  |                                            |            |           |         |        |           
|LIABILITIES AND SHAREHOLDERS EQUITY            
|Current liabilities                              |                                                            |                                                  |                                            |            |           |         |        |           
|                                                 | Accounts payable                                           |                                                  | $                                          | 43,710     |           |         | $      | 25,955     |          
|                                                 | Accrued expenses                                           |                                                  |                                            | 10,377     |           |         |        | 6,232      |          
|                                                 | Deferred revenue                                           |                                                  |                                            | 15,720     |           |         |        | 10,297     |          
|                                                 | Capital lease and other obligations, current               |                                                  |                                            | 9,363      |           |         |        | 3,431      |          
|                                                 |                                                            |                                                  |                                            |            |           |         |        |           
|                                                 |                                                            |                                                  | Total current liabilities                  |            |           | 79,170  |        |            |           | 45,915  | 
|Convertible subordinated notes payable           |                                                            |                                                  | 300,000                                    |            |           |         | 38,360 |           
|Capital lease and other obligations, long-term   |                                                            |                                                  | 4,687                                      |            |           |         | 1,149  |           
|                                                 |                                                            |                                                  |                                            |            |           |         |        |           
|                                                 |                                                            |                                                  | Total liabilities                          |            |           | 383,857 |        |            |           | 85,424  | 
|                                                 |                                                            |                                                  |                                            |            |           |         |        |           
|Commitments and contingencies (Note 12)          |                                                            |                                                  |                                            |            |           |         |        |           
|Minority interest in consolidated subsidiary     |                                                            |                                                  | 649                                        |            |           |         |       |           
|Mandatorily redeemable preferred stock (Note 14) |                                                            |                                                  |                                           |            |           |         | 5,373  |           
|Shareholders equity                             |                                                            |                                                  |                                            |            |           |         |        |           
|                                                 | Preferred Stock and paid-in-capital, $0.001 par
	value     |                                                  |                                            |            |           |         |        |            |          
|                                                 |                                                            | Shares authorized: 5,000                         |                                            |            |           |         |        |            |           |        
|                                                 |                                                            | Shares issued and outstanding: none              |                                            |            |          |         |        |            |          |        
|                                                 | Common Stock and paid-in-capital, $0.001 par value         |                                                  |                                            |            |           |         |        |            |          
|                                                 |                                                            | Shares authorized: 150,000                       |                                            |            |           |         |        |            |           |        
|                                                 |                                                            | Shares issued and outstanding: 74,135 and 76,581 |                                            |            | 2,130,329 |         |        |            | 2,176,370 |        
|                                                 | Common stock warrants                                      |                                                  |                                            |           |           |         |        | 5,250      |          
|                                                 | Notes receivable from shareholders                         |                                                  |                                            | (1,205     | )         |         |        | (1,222     | )        
|                                                 | Unearned compensation                                      |                                                  |                                            | (34,005    | )         |         |        | (7,050     | )        
|                                                 | Accumulated deficit, including other
	comprehensive income |                                                  |                                            | (1,982,015 | )         |         |        | (2,064,193 | )        
|                                                 |                                                            |                                                  |                                            |            |           |         |        |           
|                                                 |                                                            |                                                  | Total shareholders equity                 |            |           | 113,104 |        |            |           | 109,155 | 
|                                                 |                                                            |                                                  |                                            |            |           |         |        |           
|                                                 |                                                            |                                                  | Total liabilities and shareholders equity |            | $         | 497,610 |        |            | $         | 199,952 | 
|                                                 |                                                            |                                                  |                                            |            |           |         |        |           

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

F-3



---



##### 



CRITICAL PATH, INC.




CONSOLIDATED STATEMENT OF OPERATIONS


(In thousands, except per share
amounts)


|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |        |         | 
|----------------------------------------------------------- | ------------------------------------------------- | -------------------------- | -------- | ------ | ------- | ---- | ---------- | --------- | --------- | - | -------- | ------ | ------- | 
|                                                            |                                                   | 1999                       |          | 2000   |         | 2001
|Year Ended December 31                                      |                                                   |                            |          |        |         |     
|Net revenues                                                |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|                                                            | Software license                                  |                            | $        |       |         |      | $          | 51,607    |           |   | $        | 30,960 |        
|                                                            | Hosted messaging                                  |                            |          | 16,157 |         |      |            | 58,553    |           |   |          | 43,821 |        
|                                                            | Professional services                             |                            |          |       |         |      |            | 14,527    |           |   |          | 12,573 |        
|                                                            | Maintenance and support                           |                            |          |       |         |      |            | 10,966    |           |   |          | 16,819 |        
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|                                                            |                                                   | Total net revenues         |          |        | 16,157  |      |            |           | 135,653   |   |          |        | 104,173 | 
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|Cost of net revenues                                        |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|                                                            | Software license                                  |                            |          |       |         |      |            | 2,731     |           |   |          | 1,533  |        
|                                                            | Hosted messaging                                  |                            |          | 16,505 |         |      |            | 59,104    |           |   |          | 59,124 |        
|                                                            | Professional services                             |                            |          |       |         |      |            | 5,945     |           |   |          | 10,315 |        
|                                                            | Maintenance and support                           |                            |          |       |         |      |            | 8,060     |           |   |          | 10,081 |        
|                                                            | Amortization of purchased technology              |                            |          |       |         |      |            | 18,140    |           |   |          | 21,284 |        
|                                                            | Acquisition-related retention bonuses             |                            |          | 520    |         |      |            | 1,040     |           |   |          |       |        
|                                                            | Stock-based expense  Hosted messaging            |                            |          | 4,532  |         |      |            | 1,586     |           |   |          | 1,520  |        
|                                                            | Stock-based expense  Professional
	services      |                            |          |       |         |      |            |          |           |   |          | 1,347  |        
|                                                            | Stock-based expense  Maintenance and
	support    |                            |          |       |         |      |            |          |           |   |          | 1,183  |        
|                                                            | Impairment of long-lived assets                   |                            |          |       |         |      |            | 25,315    |           |   |          | 16,654 |        
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|                                                            |                                                   | Total cost of net revenues |          |        | 21,557  |      |            |           | 121,921   |   |          |        | 123,041 | 
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|Gross profit (loss)                                         |                                                   |                            | (5,400   | )      |         |      | 13,732     |           |           |   | (18,868  | )     
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|Operating expenses                                          |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|                                                            | Sales and marketing                               |                            |          | 13,811 |         |      |            | 66,125    |           |   |          | 53,356 |        
|                                                            | Research and development                          |                            |          | 7,682  |         |      |            | 31,022    |           |   |          | 30,744 |        
|                                                            | General and administrative                        |                            |          | 14,051 |         |      |            | 30,444    |           |   |          | 42,260 |        
|                                                            | Amortization of intangible assets                 |                            |          | 32,259 |         |      |            | 355,868   |           |   |          | 13,216 |        
|                                                            | Acquisition-related retention bonuses             |                            |          | 3,587  |         |      |            | 8,294     |           |   |          | 1,381  |        
|                                                            | Stock-based expense  Sales and
	marketing        |                            |          | 37,521 |         |      |            | 30,948    |           |   |          | 24,704 |        
|                                                            | Stock-based expense  Research and
	development   |                            |          | 2,161  |         |      |            | 3,449     |           |   |          | 3,691  |        
|                                                            | Stock-based expense  General and
	administrative |                            |          | 6,778  |         |      |            | 12,754    |           |   |          | 25,220 |        
|                                                            | Stock-based expense  Restructuring               |                            |          |       |         |      |            | 3,447     |           |   |          |       |        
|                                                            | Acquired in-process research and development      |                            |          |       |         |      |            | 3,700     |           |   |          |       |        
|                                                            | Restructuring and other expenses                  |                            |          |       |         |      |            | 3,248     |           |   |          | 18,267 |        
|                                                            | Impairment of long-lived assets                   |                            |          |       |         |      |            | 1,282,150 |           |   |          | 9,991  |        
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|                                                            |                                                   | Total operating expenses   |          |        | 117,850 |      |            |           | 1,831,449 |   |          |        | 222,830 | 
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|Loss from operations                                        |                                                   |                            | (123,250 | )      |         |      | (1,817,717 | )         |           |   | (241,698 | )     
|Interest and other income (expense), net                    |                                                   |                            | 7,061    |        |         |      | 12,970     |           |           |   | 5,840    |       
|Interest expense                                            |                                                   |                            | (752     | )      |         |      | (15,948    | )         |           |   | (14,714  | )     
|Equity in net loss of joint venture                         |                                                   |                            |         |        |         |      | (1,019     | )         |           |   | (1,866   | )     
|Minority interest in net income of consolidated
	subsidiary |                                                   |                            |         |        |         |      | (649       | )         |           |   |         |       
|Loss on investments                                         |                                                   |                            |         |        |         |      | (23,589    | )         |           |   | (702     | )     
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|Loss before extraordinary item and income taxes             |                                                   |                            | (116,941 | )      |         |      | (1,845,952 | )         |           |   | (253,140 | )     
|Provision for income taxes                                  |                                                   |                            |         |        |         |      | (6,513     | )         |           |   | (5,606   | )     
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|Loss before extraordinary item                              |                                                   | $                          | (116,941 | )      |         | $    | (1,852,465 | )         |           | $ | (258,746 | )     
|Gain on retirement of convertible subordinated
	notes, net  |                                                   |                            |         |        |         |      |           |           |           |   | 179,282  |       
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|Net loss                                                    |                                                   | $                          | (116,941 | )      |         | $    | (1,852,465 | )         |           | $ | (79,464  | )     
|Accretion on redeemable convertible preferred
	shares       |                                                   |                            |         |        |         |      |           |           |           |   | (356     | )     
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|Net loss attributable to common shares                      |                                                   | $                          | (116,941 | )      |         | $    | (1,852,465 | )         |           | $ | (79,820  | )     
|                                                            |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|Net loss per common share  basic and
	diluted:             |                                                   |                            |          |        |         |      |            |           |           |   |          |       
|Net loss per common share                                   |                                                   | $                          | (3.93    | )      |         | $    | (30.67     | )         |           | $ | (1.08    | )     
|Weighted average shares  basic and
	diluted                |                                                   |                            | 29,770   |        |         |      | 60,399     |           |           |   | 73,981   |       

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

F-4



---



##### 



CRITICAL PATH, INC.




CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY


(In thousands)

|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |            |            |         |         | 
|---------------------------------------------------------- | ---------------------------------------------- | ---------------------------------------- | ------------------ | -------------------------- | -------- | -------- | ------- | ---------- | ---------- | ---------- | ------- | ---------- | ---------- | ------- | ------- | 
|                                                           |                                                | 1999                                     |                    | 2000                       |          | 2001    
|Year Ended December 31                                     |                                                |                                          |                    |                            |          |         
|Convertible Preferred Stock and paid-in-capital            |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           | Balance, beginning of year                     |                                          | $                  | 24,565                     |          |          | $       |           |            |            | $       |           |           
|                                                           | Issuance of Series A Preferred Stock, net      |                                          |                    |                           |          |          |         |           |            |            |         |           |           
|                                                           | Issuance of Series B Preferred Stock, net      |                                          |                    | 10,749                     |          |          |         |           |            |            |         |           |           
|                                                           | Exercise of stock purchase rights and warrants |                                          |                    | 1,747                      |          |          |         |           |            |            |         |           |           
|                                                           | Conversion of Preferred Stock, net             |                                          |                    | (37,061                    | )        |          |         |           |            |            |         |           |           
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           |                                                | Balance, end of year                     |                    |                            |         |          |         |            |           |            |         |            |           |        
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|Common Stock and paid-in-capital                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           | Balance, beginning of year                     |                                          |                    | 21,850                     |          |          |         | 864,699    |            |            |         | 2,130,329  |           
|                                                           | Issuance of Common Stock                       |                                          |                    | 645,828                    |          |          |         | 1,204,022  |            |            |         | 431        |           
|                                                           | Series D Preferred Stock conversion feature    |                                          |                    |                           |          |          |         |           |            |            |         | 41,428     |           
|                                                           | Exercise of stock options and warrants         |                                          |                    | 1,648                      |          |          |         | 32,246     |            |            |         | 2,138      |           
|                                                           | Issuance of warrants to purchase common stock  |                                          |                    |                           |          |          |         |           |            |            |         | 5,250      |           
|                                                           | Unearned compensation related to stock options |                                          |                    | 158,541                    |          |          |         | 29,608     |            |            |         | 3,632      |           
|                                                           | Conversion of Preferred Stock, net             |                                          |                    | 37,061                     |          |          |         |           |            |            |         |           |           
|                                                           | Purchase of Common Stock                       |                                          |                    | (229                       | )        |          |         | (246       | )          |            |         | (67        | )         
|                                                           | Purchase of remaining minority interest        |                                          |                    |                           |          |          |         |           |            |            |         | (1,521     | )         
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           |                                                | Balance, end of year                     |                    |                            | 864,699  |          |         |            | 2,130,329  |            |         |            | 2,181,620  |        
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|Notes receivable from shareholders                         |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           | Balance, beginning of year                     |                                          |                    | (1,151                     | )        |          |         | (1,154     | )          |            |         | (1,205     | )         
|                                                           | Issuance of Common Stock                       |                                          |                    |                           |          |          |         |           |            |            |         |           |           
|                                                           | Exercise of stock options                      |                                          |                    | (30                        | )        |          |         |           |            |            |         |           |           
|                                                           | Interest on shareholder notes                  |                                          |                    | (58                        | )        |          |         | (51        | )          |            |         | (50        | )         
|                                                           | Repayment of shareholder notes                 |                                          |                    | 85                         |          |          |         |           |            |            |         | 33         |           
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           |                                                | Balance, end of year                     |                    |                            | (1,154   | )        |         |            | (1,205     | )          |         |            | (1,222     | )      
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|Unearned compensation                                      |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           | Balance, beginning of year                     |                                          |                    | (17,371                    | )        |          |         | (19,658    | )          |            |         | (34,005    | )         
|                                                           | Unearned compensation related to stock options |                                          |                    | (24,393                    | )        |          |         | (39,630    | )          |            |         | (11,210    | )         
|                                                           | Amortization of unearned compensation          |                                          |                    | 22,106                     |          |          |         | 25,283     |            |            |         | 38,165     |           
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           |                                                | Balance, end of year                     |                    |                            | (19,658  | )        |         |            | (34,005    | )          |         |            | (7,050     | )      
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|Accumulated deficit, including other
	comprehensive income |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           | Balance, beginning of year                     |                                          |                    | (12,535                    | )        |          |         | (121,647   | )          |            |         | (1,982,015 | )         
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           | Net loss                                       |                                          |                    | (116,941                   | )        |          |         | (1,852,465 | )          |            |         | (79,464    | )         
|                                                           | Other comprehensive income:                    |                                          |                    |                            |          |          |         |            |            |            |         |            |           
|                                                           |                                                | Unrealized investment gains (losses)     |                    |                            | 7,926    |          |         |            | (7,926     | )          |         |            | (790       | )      
|                                                           |                                                | Foreign currency translation adjustments |                    |                            | (97      | )        |         |            | 23         |            |         |            | (1,924     | )      
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           |                                                |                                          | Comprehensive loss |                            |          | (109,112 | )       |            |            | (1,860,368 | )       |            |            | (82,178 | )      
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           |                                                | Balance, end of year                     |                    |                            | (121,647 | )        |         |            | (1,982,015 | )          |         |            | (2,064,193 | )      
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           
|                                                           |                                                |                                          |                    | Total shareholders equity |          | $        | 722,240 |            |            | $          | 113,104 |            |            | $       | 109,155 | 
|                                                           |                                                |                                          |                    |                            |          |          |         |            |            |            |         |           

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

F-5



---



##### 



CRITICAL PATH, INC.




CONSOLIDATED STATEMENT OF CASH FLOWS


(In thousands)


|                                                       |                                                                  |                                           |        |          |          |      |         |            |         |   |          |          |         |  
|------------------------------------------------------ | ---------------------------------------------------------------- | ----------------------------------------- | ------ | -------- | -------- | ---- | ------- | ---------- | ------- | - | -------- | -------- | ------- | -
|                                                       |                                                                  | 1999                                      |        | 2000     |          | 2001
|Year Ended December 31                                 |                                                                  |                                           |        |          |          |     
|Operating                                              |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|                                                       | Net loss                                                         |                                           | $      | (116,941 | )        |      | $       | (1,852,465 | )       |   | $        | (79,464  | )      
|                                                       | Provision for doubtful accounts                                  |                                           |        | 573      |          |      |         | 3,190      |         |   |          | 5,142    |        
|                                                       | Depreciation and amortization                                    |                                           |        | 8,063    |          |      |         | 35,980     |         |   |          | 44,897   |        
|                                                       | Amortization of intangible assets                                |                                           |        | 32,259   |          |      |         | 374,008    |         |   |          | 34,499   |        
|                                                       | Stock-based costs and expenses                                   |                                           |        | 51,162   |          |      |         | 52,184     |         |   |          | 57,665   |        
|                                                       | 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        |         |   |          | 33       |        
|                                                       | Equity in net loss of joint venture                              |                                           |        |         |          |      |         | 1,019      |         |   |          | 1,866    |        
|                                                       | Loss on investments                                              |                                           |        |         |          |      |         | 23,589     |         |   |          | 702      |        
|                                                       | Gain on retirement of convertible debt                           |                                           |        |         |          |      |         |           |         |   |          | (179,282 | )      
|                                                       | Provision for restructured operations                            |                                           |        |         |          |      |         |           |         |   |          | 7,905    |        
|                                                       | Accounts receivable                                              |                                           |        | (4,708   | )        |      |         | (14,422    | )       |   |          | 6,329    |        
|                                                       | Other assets                                                     |                                           |        | (25,612  | )        |      |         | (4,603     | )       |   |          | 3,522    |        
|                                                       | Accounts payable                                                 |                                           |        | 25,916   |          |      |         | (8,699     | )       |   |          | (12,557  | )      
|                                                       | Accrued expenses                                                 |                                           |        | 5,633    |          |      |         | (1,380     | )       |   |          | (3,793   | )      
|                                                       | Deferred revenue                                                 |                                           |        | (163     | )        |      |         | (711       | )       |   |          | (5,340   | )      
|                                                       |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|                                                       |                                                                  | Net cash used in operating activities     |        |          | (23,818  | )    |         |            | (80,496 | ) |          |          | (91,231 | )
|                                                       |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|Investing                                              |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|                                                       | Notes receivable from officers                                   |                                           |        | (169     | )        |      |         | (1,966     | )       |   |          | (1,699   | )      
|                                                       | Property and equipment purchases                                 |                                           |        | (41,819  | )        |      |         | (54,461    | )       |   |          | (11,189  | )      
|                                                       | Purchase of short-term investments, net                          |                                           |        |         |          |      |         |           |         |   |          | (9,702   | )      
|                                                       | Investments in unconsolidated entities, net                      |                                           |        | (10,500  | )        |      |         | (28,492    | )       |   |          | (4,212   | )      
|                                                       | Payments for acquisitions, net of cash acquired                  |                                           |        | (116,359 | )        |      |         | (15,618    | )       |   |          | (5,686   | )      
|                                                       | Promissory note receivable                                       |                                           |        | (15,000  | )        |      |         | 10,000     |         |   |          |         |        
|                                                       | Restricted cash                                                  |                                           |        |         |          |      |         | 110        |         |   |          | (2,459   | )      
|                                                       |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|                                                       |                                                                  | Net cash used in investing activities     |        |          | (183,847 | )    |         |            | (90,427 | ) |          |          | (34,947 | )
|                                                       |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|Financing                                              |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|                                                       | Proceeds from issuance of Preferred Stock, net                   |                                           |        | 12,496   |          |      |         |           |         |   |          | 26,786   |        
|                                                       | Proceeds from issuance of Common Stock, net                      |                                           |        | 259,803  |          |      |         | 35,368     |         |   |          | 2,569    |        
|                                                       | 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          |                                           |        | 26       |          |      |         |           |         |   |          | 21       |        
|                                                       | Principal payments on lease obligations                          |                                           |        | (3,193   | )        |      |         | (6,816     | )       |   |          | (10,899  | )      
|                                                       | Purchase of common stock                                         |                                           |        | (229     | )        |      |         | (246       | )       |   |          | (67      | )      
|                                                       |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|                                                       |                                                                  | Net cash provided by financing activities |        |          | 268,903  |      |         |            | 311,487 |   |          |          | (30,324 | )
|                                                       |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|Net change in cash and cash equivalents                |                                                                  |                                           | 61,238 |          |          |      | 140,564 |            |         |   | (156,502 | )       
|Effect of exchange rates on cash and cash
	equivalents |                                                                  |                                           | (97    | )        |          |      | 46      |            |         |   | (577     | )       
|Cash and cash equivalents at beginning of year         |                                                                  |                                           | 14,791 |          |          |      | 75,932  |            |         |   | 216,542  |         
|                                                       |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|Cash and cash equivalents at end of year               |                                                                  | $                                         | 75,932 |          |          | $    | 216,542 |            |         | $ | 59,463   |         
|                                                       |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|Supplemental cash flow disclosure:                     |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|                                                       | Cash paid for interest                                           |                                           | $      | 688      |          |      | $       | 11,598     |         |   | $        | 17,633   |        
|                                                       | Cash paid for foreign income taxes                               |                                           | $      |         |          |      | $       | 335        |         |   | $        | 6,914    |        
|Non-cash investing and financing activities:           |                                                                  |                                           |        |          |          |      |         |            |         |   |          |         
|                                                       | Property and equipment leases                                    |                                           | $      | 5,863    |          |      | $       |           |         |   | $        | 1,413    |        
|                                                       | Property and equipment purchases payable                         |                                           | $      | 9,796    |          |      | $       | 1,470      |         |   | $        |         |        
|                                                       | Common Stock issued for notes receivable                         |                                           | $      | 29       |          |      | $       |           |         |   | $        |         |        
|                                                       | Retirement of notes payable through issuance of
	Preferred Stock |                                           | $      |         |          |      | $       |           |         |   | $        | 64,630   |        
|                                                       | Unrealized gain (loss) on investments                            |                                           | $      | 7,926    |          |      | $       | (7,926     | )       |   | $        | (790     | )      
|                                                       | Common Stock and options issued for acquisitions                 |                                           | $      | 387,651  |          |      | $       | 1,229,728  |         |   | $        |         |        

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

F-6



---



##### 



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. Management intends to
solicit shareholder approval at its 2002 Annual Meeting to
reincorporate in Delaware. Assuming receipt of shareholder
approval, management intends to complete the re-incorporation
process during 2002. Critical Path, along with its subsidiaries
(collectively referred to herein as the Company),
provides messaging and collaboration solutions, from wireless,
secure and unified messaging to basic email and personal
information management, as well as identity management solutions
that simplify user profile management and strengthen information
security. The Companys customers are corporate
enterprises, carriers and service providers, postal authorities
and government agencies.

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.

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. Net assets 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 net
assets acquired is included in intangible assets in the
accompanying consolidated balance sheet. 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 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. The Company currently holds short-term
investments of approxi-

F-7



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

mately $9.7 million 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 other comprehensive income, a
separate component of stockholders equity. At the time of
sale, any gains or losses will be recognized as a component of
operating results.

Marketable securities are classified as
available-for-sale as of each balance sheet date and are
reported at fair value, with unrealized gains and losses, net of
tax, recorded in shareholders equity. 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. During 1999
one of the Companys customers individually comprised 15%
of net revenue. This customer has comprised an insignificant
portion of the Companys net revenues during 2000 and 2001.

Fair
Value of Financial Instruments

The Companys financial instruments,
including cash and cash equivalents, restricted cash,
investments, accounts and notes receivable and accounts payable,
are carried at cost, which approximates fair value due to the
short maturity of these instruments.

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 133 and
SFAS 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 133.
Currently the Company has a non-hedged derivative and
accordingly, changes in its fair value are adjusted through the
statement of operations. The Company issued derivative financial
instruments during the fourth quarter of 2001 in connection with
its issuance of Series D Convertible Preferred Shares. See
also Note 14  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, generally three to five years, or the lease
term, if applicable. 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.

F-8



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 the
amortization of these costs is included in general and
administrative expenses. During 2000 and 2001, approximately
$2.1 million and $1.5 million of cost, respectively,
related to internal use software was capitalized, and
amortization of $283,000 and $1.0 million, respectively,
was charged to expense. There were no amounts capitalized or
charged to amortization expense during 1999.

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 2001. There were no amounts capitalized
during 1999 and 2001 and there was no amortization expense
during 1999 and 2000.

Intangible
Assets

Identifiable intangible assets result from the
application of the purchase method of accounting for the
Companys acquisitions and are composed of the amounts
allocated as of the acquisition date based on the fair value of
assembled workforce, customer base and acquired technology. The
excess of the purchase price paid over the fair value of
tangible and identifiable intangible net assets acquired is
recorded as goodwill. The Company also capitalizes, as
intangible assets, the value of deferred advertising costs
incurred in connection with warrants to purchase stock issued to
strategic partners. Intangible assets are stated net of
accumulated amortization and were amortized on a straight-line
basis over their expected useful lives ranging from two to eight
years. The Company periodically evaluates the reasonableness of
the remaining useful lives of intangible assets based upon an
analysis of current operating contributions and business plans.

Valuation
of Long-Lived Assets

The Company periodically evaluates the carrying
value of long-lived assets and certain identifiable intangibles
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. The Company measures an impairment loss based
upon a projected discounted cash flow method using a discount
rate primarily based upon its weighted average cost of capital
and that of comparable companies. See also
Note 7  Property and Equipment,
Note 8  Intangible Assets and
Note 16  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.

F-9



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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
require that revenue recognized from software arrangements be
allocated to each element of the arrangement based on the fair
values of the elements, such as software products, upgrades and
enhancements, 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 each component 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.

F-10



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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
$414,000, $1,300,000 and $648,000 during 1999, 2000 and 2001,
respectively.

Research
and Development

Research and development costs include expenses
incurred by the Company to develop and enhance its portfolio of
messaging, collaboration and identity management solutions.
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 EITF 096-18. The shares underlying
warrants for which vesting is considered probable 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.

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 A,

F-11



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Series B and Series D Preferred Shares,
Mandatorily Redeemable Preferred Shares and the
5 3/4% Convertible Subordinated Notes.

Comprehensive
Income

The Company accounts for and reports
comprehensive income or loss and its components in its financial
statements. Comprehensive income or 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.

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. Revenue 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. Gains and
losses on foreign currency transactions are included in
non-operating income and expense.

Segment
and Geographic Information

The Company does not currently manage its
business in a manner that requires it to report financial
results on a segment basis. The Company currently operates in
one segment: Internet messaging and communication products and
services and management uses one measure of profitability. See
also Note 19  Product and Geographic Information.

Reclassifications

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

Liquidity

Since inception, the Company has incurred
aggregate consolidated net losses of approximately
$2.1 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 $163.5 million related to non-cash
stock-based compensation expenses. During 2001, the Company
completed a three-part restructuring plan that included
(i) the termination of non-core products and services;
(ii) a reduction in headcount; and (iii) a
consolidation of facilities. In addition, 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 our 5 3/4
Convertible Subordinated Notes. Also, during 2001 the Company
retired an additional $197 million of face value of our
5 3/4 Convertible Subordinated Notes.

The Companys 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. Accordingly, our cash flow from
operations may continue to be negatively impacted. We believe
that our cash, cash equivalents and anticipated cash from
operations will be sufficient to maintain current and planned
operations for at least the next twelve months. 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.

Recent
accounting pronouncements

In October 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.

F-12



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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. The Company does not expect the adoption
of this Statement to have a significant impact on its financial
statements.

In June 2001, the FASB also issued SFAS
No. 142, Goodwill and Other Intangible Assets. This
Statement addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other
assets (but not those acquired in a business combination) at
acquisition and goodwill and other intangible assets subsequent
to their acquisition. This Statement supersedes APB Opinion
No. 17, Intangible Assets. Under the provisions of this
Statement, if an intangible asset is determined to have an
indefinite useful life, it shall not be amortized until its
useful life is determined to be no longer indefinite. An
intangible asset that is not subject to amortization shall be
tested for impairment annually, or more frequently if events or
changes in circumstances indicate that the asset might be
impaired. Goodwill shall not be amortized. Goodwill shall be
tested for impairment on an annual basis and between annual
tests in certain circumstances at a level of reporting referred
to as a reporting unit. This Statement is required to be applied
starting with fiscal years beginning after December 15,
2001. Goodwill and intangible assets acquired after
June 30, 2001 will be subject immediately to the
nonamortization and amortization provisions of this Statement.
Upon adoption, approximately $5.5 million related to
acquired workforce and goodwill will no longer be amortized,
however we will annually test them for impairment, if not on a
more frequent basis.

In June 2001, the FASB issued SFAS No. 141,
Business Combinations. This Statement addresses financial
accounting and reporting for business combinations and
supersedes Accounting Principles Board (APB) Opinion
No. 16, Business Combinations, and SFAS No. 38,
Accounting for Preacquisition Contingencies of Purchased
Enterprises. All business combinations in the scope of this
Statement are to be accounted for using one method, the purchase
method. The provisions of this Statement apply to all business
combinations initiated after June 30, 2001 and all business
combinations accounted for under the purchase method for which
the date of acquisition is July 1, 2001, or later. We have
engaged in significant acquisition activity in the past,
including business combinations. The provisions of this
Statement would require all future business combinations to be
accounted for using the purchase method.

In May 2000, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 00-14, Accounting
for Certain Sales Incentives. EITF Issue No. 00-14
addresses the recognition, measurement, and income statement
classification for sales incentives that a vendor voluntarily
offers to customers, without charge, which the customer can use
in, or exercise as a result of, a single exchange transaction.
The EITF changed the transition date for Issue 00-14,
concluding that a company should apply this consensus no later
than the companys annual or interim financial statements
for the periods beginning after December 15, 2001. In June
2001, the EITF issued EITF Issue No. 00-25, Vendor Income
Statement Characterization of Consideration Paid to a Reseller
of the Vendors Products, effective for periods beginning
after December 15, 2001. EITF Issue No. 00-25
addresses whether consideration from a vendor to a reseller is
an adjustment to the selling prices of the vendors
products and, therefore, should be deducted from revenue when
recognized in the vendors results of operations, or, a
cost incurred by the vendor for assets or services received from
the reseller and, therefore, should be included as a cost of
expense when recognized in the vendors results of
operations. In September of 2001, the EITF issued EITF Issue
No. 01-09, Accounting for Consideration Given by a

F-13



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Vendor to a Customer or a Reseller of the
Vendors Products, which is a codification of EITF Issues
No. 00-14, No. 00-25 and No. 00-22, Accounting
for Points and Certain Other Time-or Volume-Based Sales
Incentive Offers and Offers for Free Products or Services to be
Delivered in the Future. The Company does not expect the
adoption of these issues to have a significant impact on its
financial statements.

Note 2  Acquisitions

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.                                                        

|                           |                      |                  |         |        |  |           |         |        |  |        |         |         |  |          |          |        |  |             |         |           |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |        |  |   |         |         | 
|-------------------------- | -------------------- | ---------------- | ------- | ------ |  | --------- | ------- | ------ |  | ------ | ------- | ------- |  | -------- | -------- | ------ |  | ----------- | ------- | --------- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------ |  | - | ------- | ------- | 
|                           |                      |                 
|                           |                      | 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  |        
|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 | 
|                           |                      |                  |         |        |  |           |         |        |  |        |         |         |  |          |          |        |  |             |         |           |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |        |  |   |         |        

F-14



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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,
2001, 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 resulting from
acquired in-process research and development during 1999 or 2001.

Pro
Forma Results (Unaudited)

The following unaudited pro forma summary
presents the Companys consolidated results of operations
for 1999 and 2000 as if the acquisitions had been consummated at
January 1, 1999. 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.

|                                         |                   |      |          |        |   |   |            |        |  
|---------------------------------------- | ----------------- | ---- | -------- | ------ | - | - | ---------- | ------ | -
|                                         |                   | 1999 |          | 2000  
|                                         |                   |      |          |       
|Year Ended December 31                   |                   |      |          |        |   |   |            |       
|(in thousands, except per share amounts) |                   |      |          |        |   |   |            |       
|Net revenues                             |                   | $    | 97,466   |        |   | $ | 154,382    |       
|Net loss                                 |                   | $    | (705,114 | )      |   | $ | (1,532,958 | )     
|Net loss per share:                      |                   |      |          |        |   |   |            |       
|                                         | Basic and diluted |      | $        | (14.79 | ) |   | $          | (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, the Company
established a retention bonus program in the aggregate amount of
$20.7 million to provide incentives for certain former
employees of these companies to continue their employment with
the Company. Payments of bonuses to designated employees 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.

As of December 31, 1999, the aggregate,
adjusted eligible bonus amount was $11.6 million and the
ratable charge to compensation expense for the year then ended
was $4.1 million. Based on the functions of the employees
scheduled to receive acquisition bonuses in 1999, $520,000 of
the compensation charge was allocated to cost of net revenues
and the remaining $3.6 million was allocated to operating
expenses. No bonuses were paid in 1999.

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

F-15



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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.

Note 4  Strategic Restructuring and
Employee Severance

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,
composed 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 three part
strategic restructuring plan that involved reorganizing Critical
Paths product and service offerings around a group of core
communication solutions. The three elements of the plan include:
(i) focusing on core communication solutions;
(ii) workforce reduction; and (iii) facilities and
operations consolidation. Additionally, the Company has
implemented an aggressive expense management plan to further
reduce operating costs while maintaining strong customer service
for its core solutions. The Company completed its restructuring
plan in 2001, including the divestiture of all of its non-core
products and services, a 44% reduction in headcount, a 65%
reduction in 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. These products and
services will be an insignificant part of the Companys
revenue stream going forward.

Refocusing on
Core Communications Solutions

The Company considers its core communication
solutions to be its messaging, collaboration and identity
management solutions, including mail, calendar, address book,
file storage, secure delivery, directory and meta-directory, and
access services supporting wireline and wireless users.
Restructuring charges associated with this refocusing of our
products and services consisted primarily of contract
termination fees, gains and losses related to asset sales and
dispositions, and lease termination fees. During 2001, the
Company sold or discontinued all of its non-core products and
services. As a result of these transactions a net gain of
$1.0 million was recorded for the year ended
December 31, 2001.

Reduction of
Workforce, Facility and Other Expenses

The Company reduced its headcount from 1,011
employees at March 31, 2001 to 562 employees at
December 31, 2001, and consolidated our facilities from 77
at December 31, 2001 to 27 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. Included in this
charge was approximately $1.5 million related to the
forgiveness of a note receivable from one of the Companys
former executives. 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.

F-16



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Summary of
Fiscal Year 2001 Restructuring Costs

|                                                         |       |               |      |         |  |            |     |                |  |   |      |     |  |   |     |     | 
|-------------------------------------------------------- | ----- | ------------- | ---- | ------- |  | ---------- | --- | -------------- |  | - | ---- | --- |  | - | --- | --- | 
|                                                         |       |               |      |         |  | Cash       |     | Liabilities at
|                                                         |       | Total         |      | Noncash |  | Payments   |     | December 31,  
|                                                         |       | Charge        |      | Charges |  | (Receipts) |     | 2001(1)       
|                                                         |       |               |      |         |  |            |     |               
|                                                         |       |              
|                                                         |       | (in millions)
|Workforce reduction                                      |       | $             | 10.3 |         |  | $          | 1.3 |                |  | $ | 8.9  |     |  | $ | 0.1 |    
|Facility and operations consolidation and other
	charges |       |               | 9.0  |         |  |            | 5.5 |                |  |   | 1.6  |     |  |   | 1.9 |    
|Non-core product and service sales and
	divestitures     |       |               | (1.0 | )       |  |            | 1.1 |                |  |   | (2.3 | )   |  |   | 0.2 |    
|                                                         |       |               |      |         |  |            |     |                |  |   |      |     |  |   |     |    
|                                                         | Total |               | $    | 18.3    |  |            | $   | 7.9            |  |   | $    | 8.2 |  |   | $   | 2.2 | 




|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | These restructuring obligations are expected to
	be paid during the first quarter of 2002

Note 5  Accounts
Receivable

|                                |                          |                |        |        |  |   |        |        | 
|------------------------------- | ------------------------ | -------------- | ------ | ------ |  | - | ------ | ------ | 
|December 31                     |                          | 2000           |        | 2001  
|                                |                          |                |        |       
|                                |                          |               
|                                |                          | (in thousands)
|Accounts receivable             |                          | $              | 42,463 |        |  | $ | 27,874 |       
|Allowance for doubtful accounts |                          |                | (3,525 | )      |  |   | (1,182 | )     
|                                |                          |                |        |        |  |   |        |       
|                                | Accounts receivable, net |                | $      | 38,938 |  |   | $      | 26,692 | 
|                                |                          |                |        |        |  |   |        |       

The provision for doubtful accounts was $446,000,
$3.2 million and $5.1 million in 1999, 2000 and 2001,
respectively.

Note 6  Investments

|                      |                                                    |       |        |             |  |            |   |            |  |   |         |         |   |   |        |       | 
|--------------------- | -------------------------------------------------- | ----- | ------ | ----------- |  | ---------- | - | ---------- |  | - | ------- | ------- | - | - | ------ | ----- | 
|                      |                                                    |       |        | Net         |  | (1)Net     |   |           
|                      |                                                    | Cost  |        | Unrealized  |  | Realized   |   | Estimated 
|December 31, 2000     |                                                    | Basis |        | Gain (Loss) |  | Gain(Loss) |   | Fair Value
|                      |                                                    |       |        |             |  |            |   |           
|(in thousands)        |                                                    |       |        |             |  |            |   |           
|Long-term investments |                                                    |       |        |             |  |            |   |            |  |   |         |         |   |   |        |      
|                      | Marketable securities                              |       | $      | 3,510       |  |            | $ |           |  |   | $       | (2,601  | ) |   | $      | 909   | 
|                      | Non-marketable securities                          |       |        | 24,200      |  |            |   |           |  |   |         | (20,988 | ) |   |        | 3,212 | 
|                      | Investment in Critical Path Pacific, equity method |       |        | 7,508       |  |            |   |           |  |   |         | (1,019  | ) |   |        | 6,489 | 
|                      |                                                    |       |        |             |  |            |   |            |  |   |         |         |   |   |        |      
|                      |                                                    | $     | 35,218 |             |  | $          |  |            |  | $ | (24,608 | )       |   | $ | 10,610 |      
|                      |                                                    |       |        |             |  |            |   |            |  |   |         |         |   |   |        |      

|                       |                                                    |   |        |       |  |   |      |      |   |   |        |        |   |   |       |       | 
|---------------------- | -------------------------------------------------- | - | ------ | ----- |  | - | ---- | ---- | - | - | ------ | ------ | - | - | ----- | ----- | 
|December 31, 2001      |                                                    |   |        |       |  |   |      |     
|                       |                                                    |   |        |       |  |   |      |     
|(in thousands)         |                                                    |   |        |       |  |   |      |     
|Short-term investments |                                                    |   |        |       |  |   |      |      |   |   |        |        |   |   |       |      
|                       | Marketable securities                              |   | $      | 9,702 |  |   | $    | 96   |   |   | $      |       |   |   | $     | 9,798 | 
|                       |                                                    |   |        |       |  |   |      |      |   |   |        |        |   |   |       |      
|Long-term investments  |                                                    |   |        |       |  |   |      |      |   |   |        |        |   |   |       |      
|                       | Marketable securities                              |   | $      | 1,883 |  |   | $    | (790 | ) |   | $      |       |   |   | $     | 1,093 | 
|                       | Non-marketable securities                          |   |        | 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 |      
|                       |                                                    |   |        |       |  |   |      |      |   |   |        |        |   |   |       |      




|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes write-downs related to
	other-than-temporary impairment of $23.6 million and
	$702,000 during 2000 and 2001, respectively.

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.

F-17



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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.

In June 2000, the Company established a joint
venture, Critical Path Pacific, Inc. (CP Pacific),
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 and holds a 40% ownership interest in the
joint venture. This investment is being accounted for using the
equity method. During 2000 and 2001, the Company recorded equity
in net loss of joint venture of approximately $1.0 million
and $1.9 million, respectively.

During 2000, the Company determined that the
impairment of certain of these investments was deemed to be
other-than-temporary and recorded a write down of
$23.6 million, consisting of $2.6 million in
investments in marketable securities and $21.0 million in
investments in non-marketable securities. Additionally, during
2001 the Company recorded write-downs of $702,000 related to
additional other-than-temporary impairments of certain
non-marketable securities.

Note 7  Property and
Equipment

|                                |  |                |         |      |  |   |         |  
|------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|December 31                     |  | 2000           |         | 2001
|                                |  |                |         |     
|                                |  |               
|                                |  | (in thousands)
|Computer equipment and software |  | $              | 124,413 |      |  | $ | 109,543 |  
|Furniture and fixtures          |  |                | 6,245   |      |  |   | 9,822   |  
|Leasehold improvements          |  |                | 4,002   |      |  |   | 2,180   |  
|                                |  |                |         |      |  |   |         |  
|                                |  |                | 134,660 |      |  |   | 121,545 |  
|Less: Accumulated depreciation  |  |                | (49,356 | )    |  |   | (85,260 | )
|                                |  |                |         |      |  |   |         |  
|                                |  | $              | 85,304  |      |  | $ | 36,285  |  
|                                |  |                |         |      |  |   |         |  

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

Depreciation expense totaled $8.1 million,
$34.4 million and $43.0 million during 1999, 2000, and
2001, respectively.

Note 8  Intangible Assets

|                                   |  |                |         |      |  |   |         |  
|---------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|December 31                        |  | 2000           |         | 2001
|                                   |  |                |         |     
|                                   |  |               
|                                   |  | (in thousands)
|Strategic Relationships  Warrants |  | $              | 46,755  |      |  | $ | 38,660  |  
|Existing technology                |  |                | 45,372  |      |  |   | 39,748  |  
|Customer base                      |  |                | 20,971  |      |  |   | 12,493  |  
|Assembled workforce                |  |                | 10,270  |      |  |   | 8,930   |  
|Patent license                     |  |                | 726     |      |  |   | 726     |  
|Goodwill                           |  |                |        |      |  |   | 1,983   |  
|                                   |  |                |         |      |  |   |         |  
|                                   |  |                | 124,094 |      |  |   | 102,540 |  
|Less: Accumulated amortization     |  |                |        |      |  |   | (53,899 | )
|                                   |  |                |         |      |  |   |         |  
|                                   |  | $              | 124,094 |      |  | $ | 48,641  |  
|                                   |  |                |         |      |  |   |         |  

F-18



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Amortization expense was $32.3 million,
$374.0 million and $34.5 million in 1999, 2000 and
2001. Based on the types of identifiable intangibles acquired,
during 2000 and 2001 amortization expense of $18.1 million
and $21.3 million was allocated to cost of net revenues,
respectively, and during 1999, 2000 and 2001 amortization
expense of $32.3 million, $355.9 million and
$13.2 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.
Additionally, a $1.3 billion impairment charge to reduce
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 amounted to approximately
$124.1 million and $48.6 million as of
December 31, 2000 and 2001, respectively. Intangible assets
are expected to be fully amortized by the end of the fourth
quarter of 2002. See also Note 16  Impairment of
Long-Lived Assets.

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 $27.4 million,
$19.5 million and $14.7 million were recorded during
1999, 2000 and 2001, respectively, related to these warrants.
During the fourth quarter of 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 16  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

F-19



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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
1999, 2000 and 2001, $1.5 million, $7.4 million and
$4.6 million, respectively, was charged to stock-based
expense related to the vested warrants. During the fourth
quarter of 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
and will be fully amortized by the end of the fourth quarter of
2002.

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. The Company believes that this agreement could
have a significant current and potential future impact on the
Companys results of operations. However, 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 is being
amortized to general and administrative expenses using the
straight-line method over ten years beginning January 2000.
During 2000 and 2001, approximately $200,000 was charged to
stock-based expense related to the vested warrants, respectively.

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.

F-20



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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, 2001, none of the vesting
milestones of the original agreement had been attained and none
of the milestones are considered probable of issuance.
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 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 is
terminable at any time. During the term of the agreement, we
paid Vectis Group an aggregate of approximately
$1.1 million in monthly retainer fees and expenses and
approximately $3.1 million in transactional fees, including
approximately $2.75 million in connection with our recent
preferred stock financing transaction, in which Vectis Group
participated as one of several investors in this transaction led
by General Atlantic Partners and its affiliates. See also Note
14  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, 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 have become 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
recent financing transaction 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.

F-21



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Notes receivable from
officers

During 1998, the Company issued a note receivable
to a shareholder and former Chief Executive Officer, Douglas
Hickey, equal to $500,000. Mr. Hickeys non-recourse
note accrues interest at the rate of 4.51% per annum. In
February 2001, Mr. Hickey terminated his employment with
the Company. In connection with the termination, the repayment
of the $500,000 note receivable and accrued interest was
extended to March 9, 2002. As of December 31, 2000 and
2001, accrued interest totaled $51,000 and $73,000,
respectively. Mr. Hickey repaid this note in full with
interest in March 2002.

During 2000, the Company issued a note receivable
to a former Chief Financial Officer, Lawrence Reinhold, equal to
$1.7 million. 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. 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 of $1.5 million was forgiven by the Company.

During 2001 and in connection with each of their
respective employment agreements, the Company made loans and
held notes receivable from David C. Hayden, Executive
Chairman, and Pierre Van Beneden, President, totaling
$1.5 million and $350,000, respectively. Haydens full
recourse note accrues interest at the rate of 6.75% per annum
and shall be repaid by the achievement of performance-based
milestones described in Mr. Haydens employment
agreement and performance loan agreement. Mr. Van
Benedens loan is interest free for the first year and will
be 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. In the event of Mr. Van Benedens
departure prior to one year from the date of employment, the
note shall be repayable and interest due in accordance with the
terms of his employment agreement. Mr. Van Benedens
employment agreement and loan was not effective until
October 8, 2001. As of December 31, 2001, accrued
interest totaled $40,000 related to the note to Mr. Hayden.

In December 2001, the Board approved a full
recourse loan to William E. McGlashan, Jr. Board of up to
$4.0 million in connection with the purchase of a principal
residence in the San Francisco Bay Area. The loan is to be
secured by the residence, and to the extent necessary should an
appraisal of the property equal less than 120% of the
loans value, by Mr. McGlashans personal
shareholdings pledged to the Company, such that the amount
outstanding shall be at all times secured by at least 120% of
the principal outstanding. Interest on the loan is Applicable
Prime Rate deferred until principal is due, over a 10 year
term. The loan shall be forgiven upon a defined Change of
Control event. In the event Mr. McGlashan terminates
employment either by voluntary resignation or for Cause, the
loan shall be due and payable, with interest, no later than
12 months following such termination. In the event
Mr. McGlashan is terminated for any reason other than
Cause, the loan shall remain outstanding for the remainder of
its terms. The Company has not yet funded the loan and as such
no accrued interest was outstanding as of December 31, 2001.

F-22



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##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Revenues

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

|                       |  |                |       |             |  |      |       |      |  |      |       |      |  |   |       |  |  |   |     |  |  |   |       | 
|---------------------- |  | -------------- | ----- | ----------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | --- |  |  | - | ----- | 
|                       |  |                |       |            
|                       |  | Revenues       |       | Receivables
|                       |  |                |       |            
|Year Ended December 31 |  | 1999           |       | 2000        |  | 2001 |       | 1999 |  | 2000 |       | 2001
|                       |  |                |       |             |  |      |       |      |  |      |       |     
|                       |  |               
|                       |  | (In thousands)
|E*TRADE                |  | $              | 2,423 |             |  | $    | 395   |      |  | $    | 1,724 |      |  | $ | 1,055 |  |  | $ | 42  |  |  | $ | 1,591 | 
|US West                |  |                | 460   |             |  |      | 5,806 |      |  |      | 2,647 |      |  |   | 426   |  |  |   | 460 |  |  |   | 21    | 
|ICQ                    |  |                | 267   |             |  |      | 240   |      |  |      | 237   |      |  |   | 267   |  |  |   | 105 |  |  |   | 60    | 
|                       |  |                |       |             |  |      |       |      |  |      |       |      |  |   |       |  |  |   |     |  |  |   |       | 
|                       |  | $              | 3,150 |             |  | $    | 6,441 |      |  | $    | 4,608 |      |  | $ | 1,748 |  |  | $ | 607 |  |  | $ | 1,672 | 
|                       |  |                |       |             |  |      |       |      |  |      |       |      |  |   |       |  |  |   |     |  |  |   |       | 

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 amounts in 1999 and 2001.

Note 10  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 and 2001, the Company recorded
interest expense related to these debt issuance costs of
$1.6 million and $1.5 million, respectively.

Interest is payable on April 1 and October 1 of
each year. As of December 31, 2000 and 2001, there was
approximately $4.3 million and $600,000 in interest
payable, respectively. During 2000 and 2001, the Company
recorded interest expense related to the Notes of
$13.0 million and $12.1 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

F-23



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

approximately $4.4 million in accrued
interest. See also Note 14  Financing
Transaction. As of December 31, 2000 and 2001 the total
balance outstanding was $300.0 million and
$38.4 million, respectively. These Notes are carried at
cost and had an approximate fair value at December 31, 2001
of $21.5 million.

Note 11  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 the deferred
net tax asset, consisting primarily of net operating loss
carryforwards, because of uncertainty regarding its
realizability.

The Company experienced extraordinary gains of
$179.3 million relating to the retirement of the
Companys convertible subordinated notes. These gains are
reported net of any tax consequences. The extraordinary gain
recognition gave rise to alternative minimum tax of
$1.6 million for federal and state purposes.

At December 31, 2001, the Company had
approximately $239 million of federal and $107 million
state net operating loss carryforwards available to offset
future taxable income. Federal and state net operating loss
carryforwards expire in varying amounts through 2021 for federal
and 2008 for state purposes. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of
net operating losses that the Company may utilize in any one
year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
These carryforwards will begin to expire at various times
starting in 2013 and 2006 for federal and state tax purposes,
respectively.

Since inception, the Company has incurred several
ownership changes which 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 billion per year. The
Company believes the limitation should not have a material
effect on the future utilization of the losses.

At December 31, 2001, the Company also had
research and development credit carryforwards of approximately
$7.2 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.

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

|            |                               |      |       |       |  |  |       |       | 
|----------- | ----------------------------- | ---- | ----- | ----- |  |  | ----- | ----- | 
|December 31 |                               | 2000 |       | 2001 
|            |                               |      |       |      
|Current:    |                               |      |       |       |  |  |       |      
|            | Federal                       |      |       |      |  |  |       |      | 
|            | State                         |      |       |      |  |  |       |      | 
|            | Foreign                       |      |       | 6,513 |  |  |       | 5,606 | 
|            | Extraordinary Item Income Tax |      |       |      |  |  |       | 1,600 | 
|            |                               |      |       |       |  |  |       |      
|            |                               |      | 6,513 |       |  |  | 7,206 |      
|            |                               |      |       |       |  |  |       |      

F-24



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##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

|                         |                                  |                           |         |         |         |  |          |        |         | 
|------------------------ | -------------------------------- | ------------------------- | ------- | ------- | ------- |  | -------- | ------ | ------- | 
|December 31              |                                  | 2000                      |         | 2001   
|                         |                                  |                           |         |        
|Deferred Tax Assets      |                                  |                           |         |         |         |  |          |       
|                         | Net Operating Loss Carryforwards |                           |         | 98,254  |         |  |          | 87,381 |        
|                         | Tax Credits                      |                           |         | 6,442   |         |  |          | 13,321 |        
|                         | Fixed Assets                     |                           |         | 1,085   |         |  |          | 7,043  |        
|                         | Accrued Liabilities              |                           |         | 15,490  |         |  |          | 4,828  |        
|                         |                                  |                           |         |         |         |  |          |       
|                         |                                  | Total Deferred Tax Assets |         |         | 121,271 |  |          |        | 112,573 | 
|Deferred Tax Liability   |                                  |                           |         |         |         |  |          |       
|                         | Intangible Assets                |                           |         | (26,917 | )       |  |          | (8,758 | )      
|                         |                                  |                           |         |         |         |  |          |       
|                         |                                  |                           | (26,917 | )       |         |  | (8,758   | )     
|                         |                                  |                           |         |         |         |  |          |       
|Gross Deferred Tax Asset |                                  |                           | 94,354  |         |         |  | 103,815  |       
|                         |                                  |                           |         |         |         |  |          |       
|Valuation Allowance      |                                  |                           | (94,354 | )       |         |  | (103,815 | )     
|                         |                                  |                           |         |         |         |  |          |       
|Net Deferred Tax Assets  |                                  |                           |        |         |         |  |         |       
|                         |                                  |                           |         |         |         |  |          |       

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

|                                 |  |      |     |      |  |  |     |   
|-------------------------------- |  | ---- | --- | ---- |  |  | --- | --
|December 31                      |  | 2000 |     | 2001
|                                 |  |      |     |     
|Tax at federal statutory rate    |  |      | (34 | )%   |  |  | (34 | )%
|State, net of federal benefit    |  |      | (1  | )%   |  |  | (2  | )%
|Stock based expenses             |  |      |    | %    |  |  | 17  | % 
|Goodwill amortization            |  |      | 7   | %    |  |  |    | % 
|Intangible asset write off       |  |      | 24  | %    |  |  |    | % 
|Research and development credits |  |      |    | %    |  |  | (2  | )%
|Change in valuation allowance    |  |      | 4   | %    |  |  | 16  | % 
|Foreign Taxes                    |  |      |    | %    |  |  | 5   | % 
|Warrant Amortization             |  |      |    | %    |  |  | 9   | % 
|                                 |  |      |     |      |  |  |     |   
|Provision for Taxes              |  |      |    | %    |  |  | 9   | % 
|                                 |  |      |     |      |  |  |     |   

Note 12  Commitments and
Contingencies

Leases

The Company leases office space and equipment
under noncancelable operating and capital leases with various
expiration dates through 2011. Rent expense during 1999, 2000
and 2001, totaled $1.3 million, $5.8 million and
$5.4 million, respectively.

F-25



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##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Future minimum lease payments under noncancelable
operating and capital leases are as follows:

|                        |                                                |                |   |           |   |  |   |        | 
|----------------------- | ---------------------------------------------- | -------------- | - | --------- | - |  | - | ------ | 
|                        |                                                | Capital        |   | Operating
|                        |                                                | Leases         |   | Leases   
|                        |                                                |                |   |          
|                        |                                                |               
|                        |                                                | (In thousands)
|Year Ending December 31 |                                                |                |   |           |   |  |   |       
|                        | 2002                                           |                | $ | 1,232     |   |  | $ | 5,819  | 
|                        | 2003                                           |                |   | 536       |   |  |   | 5,290  | 
|                        | 2004                                           |                |   | 313       |   |  |   | 5,028  | 
|                        | 2005                                           |                |   |          |   |  |   | 4,514  | 
|                        | 2006 and beyond                                |                |   |          |   |  |   | 21,541 | 
|                        |                                                |                |   |           |   |  |   |       
|                        | Total minimum lease payments                   |                | $ | 2,081     |   |  | $ | 42,192 | 
|                        |                                                |                |   |           |   |  |   |       
|                        | Less: Amount representing interest             |                |   | (224      | ) |  |   |        | 
|                        | Unamortized discount                           |                |   |          |   |  |   |        | 
|                        |                                                |                |   |           |   |  |   |       
|                        | Present value of capital lease obligations     |                | $ | 1,857     |   |  |   |        | 
|                        | Less: Current portion                          |                |   | (1,043    | ) |  |   |        | 
|                        |                                                |                |   |           |   |  |   |       
|                        | Long-term portion of capital lease obligations |                | $ | 814       |   |  |   |        | 
|                        |                                                |                |   |           |   |  |   |       

Equipment Lease Lines

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

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

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

Securities Class Actions in Northern
District of California.Beginning on
February 2, 2001, a number of securities class action
complaints were filed against the Company, and certain of our
current and former officers and directors in the United States
District Court for the Northern District of California. The

F-26



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##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

complaints were filed as purported class actions
by individuals who allege that they purchased the Companys
common stock during a purported class period and sought an
unspecified amount in damages; the alleged class periods vary
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, the Company
and certain of its former officers made false or misleading
statements of material fact about the Companys financial
statements, including its 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,
Critical Path announced that it had reached an agreement in
principle to settle these cases. In February 2002, the Court
gave preliminary approval to the settlement of the class action
litigation. The Court also set the hearing date for final
approval of the settlement agreement for May 23, 2002.

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

Securities and Exchange Commission
Investigation.In February 2001, the
Securities and Exchange Commission (the SEC) issued
a formal order of investigation of the Company and certain of
the Companys current and former officers and directors
associated with the Company with respect to non-specified
accounting matters, financial reports, other public disclosures
and trading activity in the Companys securities. The
Company fully cooperated with the SEC in its investigation. The
SECs investigation was concluded against the Company in
January 2002 with no imposition of fines or penalties against
the Company. The Company consented without admitting or denying
liability, to an administrative order that the Company violated
certain non-fraud provisions of the federal securities laws and
to a cease and desist order.

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

Breach of Contract Action.On January 18, 2001, we entered
into a non-exclusive licensing agreement with Comverse Network
Systems, Inc. (Comverse) with respect to our CP
Messaging and Directory software, with rights of distribution to
Comverses customers, both in the form of
standalone licenses, and bundled with
Comverses unified messaging products. On October 9,
2001, we notified Comverse that we

F-27



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

were terminating the Software License Agreement
based on our belief that Comverse materially breached the
contract. On or about October 15, 2001, Comverse filed a
complaint in the United States District Court for the Southern
District of New York against the Company, challenging the
Companys right to terminate the agreement entered into by
Comverse. Comverse asserted causes of action for specific
performance, requesting that the Company be required to perform
and to recognize Comverses alleged rights under the
Agreement, and injunctive relief, prohibiting the Company from
taking action to suspend, terminate or interfere with
Comverses alleged rights, remedies or privileges.
Concurrently with the filing of the Complaint, Comverse also
filed a Demand for Arbitration with the American Arbitration
Association, seeking a determination that Critical Path did not
have the right to terminate the agreement. Comverse does not
seek money damages in either the Complaint or the Demand for
Arbitration. In December 2001, the District Court issued a
preliminary injunction against Critical Path prohibiting us from
taking various actions in connection with the termination,
including demanding the return of the licensed software or
publicly announcing that Comverses rights under the
license agreement were terminated. The Company has appealed the
preliminary injunction and has also succeeded in having the
arbitration moved to San Francisco. While it is difficult to
determine what the eventual outcome of this matter will be, the
Company intends to defend its rights vigorously.

Securities Class Action in Northern
District of California.Beginning on
February 1, 2002, a number of securities class action
complaints were filed against the Company, and certain of our
former officers. The purported class action complaints allege
that during a period from April 21, 2000 through
September 25, 2000 and in same cases April 31 (sic),
2000 through October 19, 2000, the Company reported
materially misleading financial statements and made materially
misleading statements about the Companys ability to
collect on recognized revenue from our customers based on the
current economic climate and uncertainty about continued
viability of many Internet based businesses as well as in
recognition of changes in accounting regulations. The suit
further alleges that the Company knew these issues would
severely impair future revenue growth and the ability to make
future stock sales and extract future bonuses tied to the
Companys performance. The complaints seek an unspecified
amount in damages. The Company believes that these suits are
without merit and intends to vigorously defend such allegations.

The uncertainty associated with these and other
unresolved or threatened lawsuits could seriously harm the
Companys business and financial condition. In particular,
the lawsuits or the continued effects of the investigation could
harm its relationships with existing customers and its ability
to obtain new customers. The continued defense of the lawsuits
and conduct of the SEC investigation could also result in the
diversion of managements time and attention away from
business operations, which could harm the Companys
business. Although some of the named lawsuits are in the final
stages of settlement, there can be no assurance that the
applicable courts will accept the final settlement as executed,
or at all. Negative developments with respect to the settlements
or the lawsuits could cause the Companys stock price to
decline significantly. In addition, although the Company is
unable to determine the amount, if any, that it may be required
to pay in connection with the resolution of these lawsuits or
the investigation by settlement or otherwise, the size of any
such payments could seriously harm the Companys financial
condition.

Note 13  Minority Interest in
Subsidiary

As of December 31, 2000, the Company owned a
72.87% interest in CP Italia, a consolidated subsidiary, which
was acquired in connection with the acquisition of ISOCOR. In
March 2001, the outstanding 27.13% interest in CP Italia
was acquired for approximately $4.2 million. For the year
ended December 31, 2000, the minority interest in net
income of CP Italia amounted to $649,000. Minority interest
in net income of CP Italia was insignificant during 2001.

F-28



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##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 14  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 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.

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. 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,

F-29



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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.

The carrying value of the Series D Preferred
Stock at December 31, 2001 was determined as follows:

|                                                                                                        |                               |   |        |         |  
|------------------------------------------------------------------------------------------------------- | ----------------------------- | - | ------ | ------- | -
|Series D Preferred Stock                                                                                |                               | $ | 55,000 |        
|Less: Issuance costs                                                                                    |                               |   | (2,950 | )      
|                                                                                                        |                               |   |        |        
|Series D Preferred Stock, net of issuance costs                                                         |                               |   | 52,050 |        
|Less amounts allocated to:                                                                              |                               |   |        |        
|                                                                                                        | Common stock warrants         |   |        | (5,250  | )
|                                                                                                        | Beneficial conversion feature |   |        | (41,800 | )
|Add amortization and accretion                                                                          |                               |   | 373    |        
|Carrying value of Series D Preferred Stock
	and embedded change-in-control feature at December 31, 2001 |                               | $ | 5,373  |        
|                                                                                                        |                               |   |        |        

Note 15  Shareholders
Equity

Changes in equity security shares outstanding
were:

|                       |                                        |                                 |  |        |        |      |  |        |        |  |  |        |        | 
|---------------------- | -------------------------------------- | ------------------------------- |  | ------ | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ | 
|Year Ended December 31 |                                        | 1999                            |  | 2000   |        | 2001
|                       |                                        |                                 |  |        |        |     
|                       |                                        |                                
|                       |                                        | (In thousands)                 
|Common Stock           |                                        |                                 |  |        |        |      |  |        |        |  |  |       
|                       | Shares outstanding, beginning of year  |                                 |  | 8,294  |        |      |  | 46,937 |        |  |  | 74,135 |       
|                       | Issuance of Common Stock               |                                 |  | 17,285 |        |      |  | 19,958 |        |  |  | 514    |       
|                       | Exercise of stock options and warrants |                                 |  | 1,580  |        |      |  | 7,313  |        |  |  | 1,967  |       
|                       | Conversion of Preferred Stock          |                                 |  | 19,912 |        |      |  |       |        |  |  |       |       
|                       | Purchase of Common Stock               |                                 |  | (134   | )      |      |  | (73    | )      |  |  | (35    | )     
|                       |                                        |                                 |  |        |        |      |  |        |        |  |  |       
|                       |                                        | Shares outstanding, end of year |  |        | 46,937 |      |  |        | 74,135 |  |  |        | 76,581 | 
|                       |                                        |                                 |  |        |        |      |  |        |        |  |  |       

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.

Preferred Stock

In January 1999, the Company completed the second
round of the Series B Preferred Stock financing through the
issuance of 2,772,708 shares at $4.26 per share for net proceeds
of approximately $10,749,000. In connection with this financing,
the Company issued warrants to purchase 51,364 shares of
Series B Preferred Stock at $4.26 per share to the
placement agent. Prior to the closing of the Companys
initial public offering, the Series B Preferred Stock
placement agent sold back to the Company at $4.26 per share an
aggregate of 53,293 shares held by the placement agent or
its affiliates. As of the closing of the Companys initial
public offering, all of the Series B Preferred Stock
outstanding was converted into an aggregate of 19,912,000 shares
of Common Stock at a conversion ratio of 1:1.

F-30



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Common Stock

In January 1999, the Company sold 1,090,909
shares of Common Stock at a price of $2.20 per share to a
customer that also agreed to provide marketing related services.
In connection with the transactions, the Company recognized a
charge totaling $2.2 million that was attributed to sales
and marketing expense over the one-year term of the agreement.

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

On June 2, 1999, the Company completed a
follow-on public offering of 3,000,000 shares of Common Stock
and realized net proceeds of $140.7 million.

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, 2000 and 2001, 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 1999, 2000 and 2001 $428,000, $428,000 and $106,000,
respectively, were recognized related compensation expense.

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 purchase 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, 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 has authorized
600,000 shares for issuance. 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

F-31



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 1999, 2000 and 2001 were 42,495, 112,665 and
489,096, respectively, at a price of $20.40 in 1999, $20.40 and
$40.27 per share in 2000 and $1.28 and $0.78 per share in 2001.
As of December 31, 2001, 955,763 shares were available
under the ESPP for future issuance.

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
30,788,741 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
Companys issued and outstanding common stock, and the 1999
Plan provides for the granting of up to 28,000,000 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,
2001 the total number of shares of common stock available for
option grants was 2,548,817 and 9,650,469 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, 2000 and 2001, a
total of 1,598,793 and 481,229 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.

F-32



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of the status of the Companys
stock option plans as of December 31, 2000, and 2001, and
changes during the periods ending on those dates is presented
below:

|                                       |                                                                   |        |            |            |   |        |       |          |  |  |            |             |   |   |       |       | 
|-------------------------------------- | ----------------------------------------------------------------- | ------ | ---------- | ---------- | - | ------ | ----- | -------- |  |  | ---------- | ----------- | - | - | ----- | ----- | 
|                                       |                                                                   |        |            |           
|                                       |                                                                   | 2000   |            | 2001      
|                                       |                                                                   |        |            |           
|                                       |                                                                   |        |            | Weighted   |   |        |       | Weighted
|                                       |                                                                   |        |            | Average    |   |        |       | Average 
|                                       |                                                                   |        |            | Exercise   |   |        |       | Exercise
|Year Ended December 31                 |                                                                   | Shares |            | Price      |   | Shares |       | Price   
|                                       |                                                                   |        |            |            |   |        |       |         
|Options outstanding, beginning of year |                                                                   |        | 13,787,959 |            |   | $      | 15.12 |          |  |  | 22,107,213 |             |   | $ | 42.03 |      
|                                       | Granted and assumed                                               |        |            | 20,634,167 |   |        | $     | 51.30    |  |  |            | 40,542,946  |   |   | $     | 0.93  | 
|                                       | Exercised                                                         |        |            | (5,001,418 | ) |        | $     | 6.44     |  |  |            | (1,967,350  | ) |   | $     | 1.07  | 
|                                       | Canceled                                                          |        |            | (7,313,495 | ) |        | $     | 41.78    |  |  |            | (22,309,880 | ) |   | $     | 27.93 | 
|                                       |                                                                   |        |            |            |   |        |       |          |  |  |            |             |   |   |       |      
|                                       | Options outstanding, end of year                                  |        |            | 22,107,213 |   |        | $     | 42.03    |  |  |            | 38,372,929  |   |   | $     | 9.17  | 
|At December 31                         |                                                                   |        |            |            |   |        |       |          |  |  |            |             |   |   |       |      
|                                       | Options exercisable                                               |        |            | 3,587,894  |   |        | $     | 28.93    |  |  |            | 6,423,461   |   |   | $     | 22.64 | 
|                                       | Weighted-average fair value of options granted
	during the period |        |            |            |   |        | $     | 56.65    |  |  |            |             |   |   | $     | 1.49  | 

The following table summarizes information about
stock options outstanding at December 31, 2001:

|                 |  |                     |               |                     |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 
|---------------- |  | ------------------- | ------------- | ------------------- |  | -------------- | ---- | ----------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                 |  |                     |               |                     |  |               
|                 |  | 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
|                 |  |                     |               |                     |  |                |      |             |  |               
|$ 0.020  $ 0.3  |  |                     | 50 882,852    |                     |  |                | 9.38 |             |  |                | 0.30  |  |  |  | 272,295   |  |  |   | 0.27  | 
|$ 0.360  $ 0.   |  |                     | 530 9,130,219 |                     |  |                | 9.59 |             |  |                | 0.37  |  |  |  | 185,635   |  |  |   | 0.36  | 
|$ 0.550  $ 0.   |  |                     | 980 3,397,271 |                     |  |                | 9.74 |             |  |                | 0.71  |  |  |  | 151,824   |  |  |   | 0.94  | 
|$ 1.000  $ 1.   |  |                     | 120 8,046,654 |                     |  |                | 8.96 |             |  |                | 1.01  |  |  |  | 2,647,368 |  |  |   | 1.01  | 
|$ 1.130  $ 1.   |  |                     | 740 9,003,261 |                     |  |                | 9.80 |             |  |                | 1.17  |  |  |  | 222,496   |  |  |   | 1.34  | 
|$ 2.030  $ 9.   |  |                     | 450 2,174,853 |                     |  |                | 9.26 |             |  |                | 2.77  |  |  |  | 363,968   |  |  |   | 3.56  | 
|$10.060  $49.94 |  |                     | 0 2,310,122   |                     |  |                | 8.23 |             |  |                | 40.73 |  |  |  | 1,120,044 |  |  |   | 39.65 | 
|$50.500  $75.00 |  |                     | 0 3,402,704   |                     |  |                | 8.38 |             |  |                | 66.07 |  |  |  | 1,450,974 |  |  |   | 65.98 | 
|$77.250  $87.00 |  |                     | 0 24,993      |                     |  |                | 7.72 |             |  |                | 82.46 |  |  |  | 8,857     |  |  |   | 80.74 | 
|                 |  |                     |               |                     |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 
|                 |  |                     | 38,372,929    |                     |  |                | 9.17 |             |  | $              | 42.03 |  |  |  | 6,423,461 |  |  | $ | 22.64 | 
|                 |  |                     |               |                     |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 

The compensation cost associated with the
Companys stock-based compensation plans, determined using
the minimum value method prescribed by SFAS No. 123,
resulted in a material difference from the reported net loss
during the three years ended 2001. Had compensation cost been
recognized based on the fair value at the date of grant for
options granted during 1999, 2000 and 2001, the pro forma
amounts of the Companys net loss and net loss per share
would have been as follows:

|                                                      |  |                                          |          |      |  |      |            |   |  |   |          |  
|----------------------------------------------------- |  | ---------------------------------------- | -------- | ---- |  | ---- | ---------- | - |  | - | -------- | -
|Year Ended December 31                                |  | 1999                                     |          | 2000 |  | 2001
|                                                      |  |                                          |          |      |  |     
|                                                      |  |                                         
|                                                      |  | (In thousands, except per share amounts)
|Net loss attributable to common
	shares  as reported |  | $                                        | (116,941 | )    |  | $    | (1,852,232 | ) |  | $ | (79,820  | )
|Net loss attributable to common
	shares  pro forma   |  |                                          | (118,947 | )    |  |      | (2,198,973 | ) |  |   | (395,187 | )
|Basic and diluted net loss per share 
	as reported   |  |                                          | (3.93    | )    |  |      | (30.67     | ) |  |   | (1.08    | )
|Basic and diluted net loss per share 
	pro forma     |  |                                          | (4.00    | )    |  |      | (36.41     | ) |  |   | (5.34    | )

F-33



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company calculated the minimum value and the
fair value of each option grant on the date of grant during
1999, 2000 and 2001 using the Black-Scholes option pricing model
as prescribed by SFAS No. 123 using the following
assumptions:

|                          |  |      |      |      |  |      |       |   |  |  |       |  
|------------------------- |  | ---- | ---- | ---- |  | ---- | ----- | - |  |  | ----- | -
|Year Ended December 31    |  | 1999 |      | 2000 |  | 2001
|                          |  |      |      |      |  |     
|Risk-free interest rate   |  |      | 6.0  | %    |  |      | 6.0   | % |  |  | 4.0   | %
|Expected lives (in years) |  |      | 4.0  |      |  |      | 4.0   |   |  |  | 4.0   |  
|Dividend yield            |  |      | 0.0  | %    |  |      | 0.0   | % |  |  | 0.0   | %
|Expected volatility       |  |      | 90.0 | %    |  |      | 128.0 | % |  |  | 250.0 | %

Preferred Stock Rights
Agreement

On March 19, 2001 pursuant to a Preferred
Stock Rights Agreement (the Rights Agreement)
between the Company and Computershare Trust Company, Inc., as
Rights Agent (the Rights Agent), the Companys
Board of Directors (i) declared a dividend of one right (a
Right) to purchase one one-thousandth share of the
Companys Series C Participating Preferred Stock
(Series C Preferred) for each outstanding share
of Common Stock, par value $0.001 per share (Common
Shares), of the Company, and (ii) authorized the
issuance to each holder of Exchangeable Shares (as defined
below) of one Right for each exchangeable Share held. An
Exchangeable Share is a share of Class A
Non-Voting Preferred Shares of Critical Path Messaging Co., an
unlimited liability company existing under the laws of the
Province of Nova Scotia and a wholly-owned subsidiary of the
Company. Each Exchangeable Share is exchangeable for one Common
Share. The Rights shall be 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 by approximately $8.2 million.
Amortization expense recognized during 1999, 2000 and 2001
totaled approximately $19.4 million, $19.0 million and
$35.6 million, respectively. The Company periodically
assesses unearned compensation and adjusts the remaining
unamortized balance for employee terminations and resignations.

Additionally, during 1999, the Company incurred a
stock-based charge of approximately $2.0 million in
connection with a severance agreement for a terminated employee.
This charge was included in cost of net

F-34



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

revenues based on the function of the related
employee. 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. See also
Note 4  Strategic Restructuring and Employee
Severance. During 2001, we incurred stock-based charges of
approximately $1.7 million 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.

Other
Comprehensive Income( Loss)

|                                         |  |                |       |      |  |      |     |   |  |   |        |  
|---------------------------------------- |  | -------------- | ----- | ---- |  | ---- | --- | - |  | - | ------ | -
|December 31                              |  | 1999           |       | 2000 |  | 2001
|                                         |  |                |       |      |  |     
|                                         |  |               
|                                         |  | (in thousands)
|Unrealized investment gains(losses)      |  | $              | 7,926 |      |  | $    |    |   |  | $ | (790   | )
|Foreign currency translation adjustments |  |                | (97   | )    |  |      | (74 | ) |  |   | (1,998 | )
|                                         |  |                |       |      |  |      |     |   |  |   |        |  
|Other comprehensive income (loss)        |  | $              | 7,829 |      |  | $    | (74 | ) |  | $ | (2,788 | )
|                                         |  |                |       |      |  |      |     |   |  |   |        |  

There were no tax effects allocated to any
components of other comprehensive income during 1999, 2000 or
2001. See also Note 11  Income Taxes.

Note 16  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 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 17  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.

F-35



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 18  Loss Per
Share

Net loss per share is calculated as follows:

|                                     |                                                                     |                                          |   |          |   |      |   |            |   |  |   |          |  
|------------------------------------ | ------------------------------------------------------------------- | ---------------------------------------- | - | -------- | - | ---- | - | ---------- | - |  | - | -------- | -
|                                     |                                                                     | 1999                                     |   | 2000     |   | 2001
|Year Ended December 31               |                                                                     |                                          |   |          |   |     
|                                     |                                                                     |                                         
|                                     |                                                                     | (in thousands, except per share amounts)
|Net loss                             |                                                                     |                                          |   |          |   |      |   |            |   |  |   |         
|                                     | Net loss before extraordinary item                                  |                                          | $ | (116,941 | ) |      | $ | (1,855,232 | ) |  | $ | (258,746 | )
|                                     | Gain on retirement of convertible subordinated
	notes               |                                          |   |         |   |      |   |           |   |  |   | 179,282  |  
|                                     |                                                                     |                                          |   |          |   |      |   |            |   |  |   |         
|                                     | Net loss                                                            |                                          | $ | (116,941 | ) |      | $ | (1,855,232 | ) |  | $ | (79,464  | )
|                                     | Accretion on redeemable convertible preferred
	shares               |                                          |   |         |   |      |   |           |   |  |   | (356     | )
|                                     |                                                                     |                                          |   |          |   |      |   |            |   |  |   |         
|                                     | Net loss attributable to common shares                              |                                          | $ | (116,941 | ) |      | $ | (1,855,232 | ) |  | $ | (79,820  | )
|Weighted average shares outstanding  |                                                                     |                                          |   |          |   |      |   |            |   |  |   |         
|                                     | Weighted average shares outstanding                                 |                                          |   | 32,860   |   |      |   | 63,379     |   |  |   | 75,148   |  
|                                     | Weighted average shares subject to repurchase
	agreements           |                                          |   | (2,830   | ) |      |   | (1,493     | ) |  |   | (188     | )
|                                     | Weighted average shares held in escrow related to
	acquisitions     |                                          |   | (260     | ) |      |   | (1,487     | ) |  |   | (979     | )
|                                     |                                                                     |                                          |   |          |   |      |   |            |   |  |   |         
|                                     | Shares used in computation of basic and diluted
	net loss per share |                                          |   | 29,770   |   |      |   | 60,399     |   |  |   | 73,981   |  
|Basic and diluted net loss per share |                                                                     |                                          |   |          |   |      |   |            |   |  |   |         
|                                     | Net loss before extraordinary item                                  |                                          | $ | (3.93    | ) |      | $ | (30.72     | ) |  | $ | (3.49    | )
|                                     | Gain on retirement of convertible subordinated
	notes               |                                          |   |         |   |      |   |           |   |  |   | 2.42     |  
|                                     |                                                                     |                                          |   |          |   |      |   |            |   |  |   |         
|                                     | Net loss                                                            |                                          | $ | (3.93    | ) |      | $ | (30.72     | ) |  | $ | (1.07    | )
|                                     | Accretion on redeemable convertible preferred
	shares               |                                          |   |         |   |      |   |           |   |  |   | (0.01    | )
|                                     |                                                                     |                                          |   |          |   |      |   |            |   |  |   |         
|                                     | Net loss attributable to common shares                              |                                          | $ | (3.93    | ) |      | $ | (30.72     | ) |  | $ | (1.08    | )

During 1999, 2000 and 2001, there were
19,164,493, 7,907,018 and 89,206,120, respectively, potential
common shares that were excluded from the determination of
diluted net loss per share, as the effect of such shares on a
weighted average basis is anti-dilutive.

Note 19  Product and Geographic
Information

Revenue information on a product basis is as
follows:

|                       |         |                               |        |      |        |      |         |   |        |   |         |   |        | 
|---------------------- | ------- | ----------------------------- | ------ | ---- | ------ | ---- | ------- | - | ------ | - | ------- | - | ------ | 
|                       |         | 1999                          |        | 2000 |        | 2001
|Year Ended December 31 |         |                               |        |      |        |     
|                       |         |                              
|                       |         | (in thousands)               
|Net revenues           |         |                               |        |      |        |      |         |   |        |   |         |  
|                       | License |                               |        |      |        |      |         |   |        |   |         |   |       
|                       |         | Messaging solutions           |        | $    |       |      |         | $ | 27,853 |   |         | $ | 11,822 | 
|                       |         | Identity management solutions |        |      |       |      |         |   | 7,060  |   |         |   | 9,822  | 
|                       |         | Other                         |        |      |       |      |         |   | 16,694 |   |         |   | 9,316  | 
|                       | Service |                               |        |      |        |      |         |   |        |   |         |   |       
|                       |         | Hosted messaging              |        |      | 15,057 |      |         |   | 44,666 |   |         |   | 37,467 | 
|                       |         | Fax messaging(1)              |        |      | 1,100  |      |         |   | 13,887 |   |         |   | 6,354  | 
|                       |         | Maintenance                   |        |      |       |      |         |   | 10,966 |   |         |   | 16,819 | 
|                       |         | Professional services         |        |      |       |      |         |   | 14,527 |   |         |   | 12,573 | 
|                       |         |                               |        |      |        |      |         |   |        |   |         |  
|                       |         | $                             | 16,157 |      |        | $    | 135,653 |   |        | $ | 104,173 |  
|                       |         |                               |        |      |        |      |         |   |        |   |         |  




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

F-36



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

|                       |               |                |        |        |  |      |         |        |  |   |         |        | 
|---------------------- | ------------- | -------------- | ------ | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                       |               | 1999           |        | 2000   |  | 2001
|Year Ended December 31 |               |                |        |        |  |     
|                       |               |               
|                       |               | (in thousands)
|Net revenues           |               |                |        |        |  |      |         |        |  |   |         |       
|                       | United States |                | $      | 16,157 |  |      | $       | 83,864 |  |   | $       | 62,928 | 
|                       | Europe        |                |        |       |  |      |         | 47,974 |  |   |         | 37,415 | 
|                       | Other         |                |        |       |  |      |         | 3,815  |  |   |         | 3,830  | 
|                       |               |                |        |        |  |      |         |        |  |   |         |       
|                       |               | $              | 16,157 |        |  | $    | 135,653 |        |  | $ | 104,173 |       
|                       |               |                |        |        |  |      |         |        |  |   |         |       

|                  |               |      |         |         |  |      |         |         |  |   |        |        | 
|----------------- | ------------- | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------ | ------ | 
|                  |               | 1999 |         | 2000    |  | 2001
|December 31       |               |      |         |         |  |     
|Long-lived assets |               |      |         |         |  |      |         |         |  |   |        |       
|                  | United States |      | $       | 522,973 |  |      | $       | 202,897 |  |   | $      | 79,255 | 
|                  | Other         |      |         | 3,841   |  |      |         | 6,501   |  |   |        | 5,671  | 
|                  |               |      |         |         |  |      |         |         |  |   |        |       
|                  |               | $    | 526,814 |         |  | $    | 209,398 |         |  | $ | 84,926 |       
|                  |               |      |         |         |  |      |         |         |  |   |        |       

Note 20  Quarterly Financial
Data (Unaudited)

Quarterly Results of Operations

(in thousands)


|                                       |  |       |         |        |  |               |          |           |  |   |          |   |  |   |            |  
|-------------------------------------- |  | ----- | ------- | ------ |  | ------------- | -------- | --------- |  | - | -------- | - |  | - | ---------- | -
|                                       |  | First |         | Second |  | Third(1)      |          | Fourth(2)
|                                       |  |       |         |        |  |               |          |          
|2000                                   |  |       |         |        |  | (As Restated) |          |          
|Net revenues                           |  | $     | 24,553  |        |  | $             | 33,495   |           |  | $ | 35,342   |   |  | $ | 42,263     |  
|Gross profit                           |  |       | 6,209   |        |  |               | 10,826   |           |  |   | 10,557   |   |  |   | 11,455     |  
|Loss from operations                   |  |       | (77,566 | )      |  |               | (127,682 | )         |  |   | (135,763 | ) |  |   | (1,479,468 | )
|Net Loss                               |  |       | (76,942 | )      |  |               | (130,009 | )         |  |   | (139,447 | ) |  |   | (1,508,834 | )
|Net loss per share  basic and diluted |  |       | (2.51   | )      |  |               | (2.22    | )         |  |   | (2.26    | ) |  |   | (21.31     | )

|                                                                  |  |       |         |           |  |          |         |           |  |   |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ----- | ------- | --------- |  | -------- | ------- | --------- |  | - | ------- | - |  | - | ------- | -
|                                                                  |  | First |         | Second(3) |  | Third(4) |         | Fourth(5)
|2001                                                              |  |       |         |           |  |          |         |          
|Net revenues                                                      |  | $     | 27,143  |           |  | $        | 27,085  |           |  | $ | 26,787  |   |  | $ | 23,158  |  
|Gross profit (loss)                                               |  |       | (3,613  | )         |  |          | (6,837  | )         |  |   | 1,285   |   |  |   | (9,703  | )
|Loss from operations                                              |  |       | (66,285 | )         |  |          | (80,230 | )         |  |   | (44,144 | ) |  |   | (51,039 | )
|Net loss before extraordinary item                                |  |       | (70,046 | )         |  |          | (84,899 | )         |  |   | (50,321 | ) |  |   | (53,480 | )
|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 loss before extraordinary item per
	share  basic and diluted |  |       | (0.97   | )         |  |          | (1.15   | )         |  |   | (0.68   | ) |  |   | (0.71   | )
|Net income (loss) per share  basic and
	diluted                  |  |       | (0.97   | )         |  |          | (1.10   | )         |  |   | 1.17    |   |  |   | (0.21   | )




|    |                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a $6.7 million charge related
	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 16  Impairment of Long-Lived Assets.

F-37



---



##### 



CRITICAL PATH, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)



|    |                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 16  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 16  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 and
	Note 16  Impairment of Long-Lived Assets.

F-38



---



##### 



SCHEDULE II

CRITICAL PATH, INC.



VALUATION AND QUALIFYING ACCOUNTS

(in thousands)


|                        |  |              |       |            |  |             |       |           |  |   |        |   |  |   |       | 
|----------------------- |  | ------------ | ----- | ---------- |  | ----------- | ----- | --------- |  | - | ------ | - |  | - | ----- | 
|                        |  |              |       | Additions  |  |             |       |          
|                        |  | Balance at   |       | Charged to |  |             |       | Balance  
|                        |  | Beginning of |       | Costs and  |  | Deductions- |       | at End of
|Year Ended December 31, |  | Period       |       | Expenses   |  | Write-offs  |       | Period   
|                        |  |              |       |            |  |             |       |          
|2001                    |  | $            | 3,525 |            |  | $           | 5,242 |           |  | $ | (7,585 | ) |  | $ | 1,182 | 
|2000                    |  | $            | 623   |            |  | $           | 5,492 |           |  | $ | (2,590 | ) |  | $ | 3,525 | 
|1999                    |  | $            | 50    |            |  | $           | 817   |           |  | $ | (244   | ) |  | $ | 623   | 

The above balances include the Companys
allowance for doubtful accounts.

S-1



---



##### 



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 29th day of March,
2002.



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



| |     |                    
| | --- | -------------------
| | By: | /s/ LAUREEN DEBUONO

| |                             
| | ----------------------------
| |                             
| | Laureen DeBuono             
| | Executive Vice President and
| | Chief Financial Officer     

Each person whose signature appears below
constitutes and appoints William E. McGlashan, Jr. and
Laureen DeBuono 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/ DAVID C. HAYDENDavid C. Hayden                     |  | Executive Chairman of the Board                                                                      |  | March 29, 2002
|                                                      
|/s/ WILLIAM E. MCGLASHAN, JR.William E. McGlashan, Jr. |  | Vice Chairman of the Board and
	Chief Executive Officer
	(Principal Executive Officer)               |  | March 29, 2002
|                                                      
|/s/ LAUREEN DEBUONOLaureen DeBuono                     |  | Executive Vice President and
	Chief Financial Officer
	(Principal Financial and
	Accounting Officer) |  | March 29, 2002
|                                                      
|/s/ RAUL J. FERNANDEZRaul J. Fernandez                 |  | Director                                                                                             |  | March 29, 2002
|                                                      
|/s/ WILLIAM E. FORDWilliam E. Ford                     |  | Director                                                                                             |  | March 29, 2002
|                                                      
|/s/ JEFFREY WEBBERJeffrey Webber                       |  | Director                                                                                             |  | March 29, 2002



---



##### 



EXHIBIT INDEX

|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                                                
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 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 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.                                                                                                                                                                                                     
|        | 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 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).
|        | 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.                                                                                                                                                                                                                                           
|        | 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.                                                                                                                                                                                                                                                
|        | 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.                                                                                                        
|        | 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.                                                                                                                                
|        | 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.                                                                                                                         
|        | 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.                                                                                                                                      
|        | 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)).                                                                                                                                                                                        



---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                             
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 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)).                
|        | 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.                                                                                                                                      
|        | 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.                                                                                                                                               
|        | 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
	August 1, 2001 by and between Registrant and
	William E. McGlashan, Jr.                                                                                                                                       
|        | 10.12 |             |  | Nonstatutory Stock Option Agreement dated as of
	November 8, 2001 by and between Registrant and
	William E. McGlashan, Jr.                                                                                                                                  
|        | 10.13 |             |  | First Amended and Restated Employment Agreement
	dated as of January 7, 2002 by and between Registrant and
	William E. McGlashan, Jr.                                                                                                                       
|        | 10.14 |             |  | Nonstatutory Stock Option Agreement dated as of
	December 21, 2001 by and between Registrant and William E.
	McGlashan, Jr.                                                                                                                                 
|        | 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.                                                                                                                                         
|        | 10.17 |             |  | Nonstatutory Stock Option Agreement dated as of
	November 8, 2001 by and between Registrant and Pierre Van
	Beneden.                                                                                                                                        
|        | 10.18 |             |  | Consulting Agreement dated as of August 16,
	2001 by and between Registrant and Laureen DeBuono.                                                                                                                                                            



---



##### 



|        |       |             |  |                                                                                                                                                                                                                                              
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.19 |             |  | Nonstatutory Stock Option Agreement dated as of
	September 5, 2001 by and between Registrant and Laureen
	DeBuono.                                                                                                                           
|        | 10.20 |             |  | Addendum to Consulting Agreement dated as of
	October 31, 2001 by and between Registrant and Laureen
	DeBuono.                                                                                                                               
|        | 10.21 |             |  | Nonstatutory Stock Option Agreement dated as of
	October 31, 2001 by and between Registrant and Laureen
	DeBuono.                                                                                                                            
|        | 10.22 |             |  | Nonstatutory Stock Option Agreement dated as of
	November 8, 2001 by and between Registrant and Laureen
	DeBuono.                                                                                                                            
|        | 10.23 |             |  | Employment Agreement dated as of January 14,
	2002 by and between Registrant and Bernard Harguindeguy.                                                                                                                                       
|        | 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 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 |             |  | 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).
|        | 21.1  |             |  | List of Subsidiaries (Incorporated by reference
	to Exhibit 21.1 of the Registrants Annual Report on
	Form 10-K for the year ended December 31, 2000).                                                                                      
|        | 23.1  |             |  | Consent of PricewaterhouseCoopers LLP,
	Independent Accountants.                                                                                                                                                                             
|        | 24.1  |             |  | Power of Attorney (see the signature page of this
	report).