10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2004

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

For the transition period from              to             .

Commission File Number: 000-25331

Critical Path, Inc.

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

350 The Embarcadero

San Francisco, California 94105

415-541-2500

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

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

As of April 30, 2004, the Company had outstanding 21,388,848 shares of common stock, $0.001 par value per share.

CRITICAL PATH, INC.

INDEX

		Page
PART I
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47
PART II
Item 1.	Legal Proceedings	48
Item 2.	Changes in Securities and Issuer Purchases of Securities	50
Item 5.	Other Information	51
Item 6.	Exhibits and Reports on Form 8-K	53
	Signature	55
	Certifications

PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited)

CRITICAL PATH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2003			March 31, 2004
	(Unaudited) (In thousands, except per share amounts)
ASSETS
Current assets
Cash and cash equivalents	$	18,984		$	37,131
Accounts receivable, net		16,880			16,704
Prepaid and other current assets		4,664			5,355
Total current assets		40,528			59,190
Property and equipment, net		14,821			13,304
Goodwill		6,613			6,613
Other assets		5,763			7,751
Total assets	$	67,725		$	86,858
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT
Current liabilities
Accounts payable	$	5,022		$	4,102
Accrued liabilities		20,755			22,280
Deferred revenue		8,856			9,966
Line of credit facility		2,298			—
Capital lease and other obligations, current		1,721			1,587
Total current liabilities		38,652			37,935
Deferred revenue		1,343			1,360
Convertible notes payable		48,376			81,921
Capital lease and other obligations, long-term		1,295			1,009
Total liabilities		89,666			122,225
Commitments and contingencies
Mandatorily redeemable Series D preferred stock, par value $0.001 Shares authorized: 5,000 Shares issued and outstanding: 4,000 Liquidation value at March 31, 2004: $68,831		55,301			55,288
Shareholders’ deficit
Common stock and paid-in-capital, par value $0.001 Shares authorized: 125,000,000 Shares issued and outstanding: 20,037 and 21,182		2,154,295			2,153,182
Common stock warrants		5,947			5,947
Notes receivable from shareholders		(870	)		(1,015	)
Unearned compensation		—			(1,484	)
Accumulated deficit		(2,238,728	)		(2,248,714	)
Accumulated other comprehensive income		2,114			1,429
Total shareholders’ deficit		(77,242	)		(90,655	)
Total liabilities, mandatorily redeemable preferred stock and shareholders’ deficit	$	67,725		$	86,858

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

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CRITICAL PATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended
	March 31, 2003			March 31, 2004
	(Unaudited) (In thousands, except per share amounts)
Net revenues
Software license	$	5,047		$	4,251
Hosted messaging		5,386			4,343
Professional services		3,220			2,659
Maintenance and support		4,381			5,825
Total net revenues		18,034			17,078
Cost of net revenues
Software license		1,797			911
Hosted messaging		6,263			6,381
Professional services		3,450			3,094
Maintenance and support		1,929			1,449
Stock-based expense — Hosted messaging		8			5
Stock-based expense — Professional services		3			—
Stock-based expense — Maintenance and support		6			—
Total cost of net revenues		13,456			11,840
Gross profit		4,578			5,238
Operating expenses
Sales and marketing		9,309			6,939
Research and development		4,623			5,779
General and administrative		3,226			3,122
Stock-based expense — Sales and marketing		18			14
Stock-based expense — Research and development		15			18
Stock-based expense — General and administrative		9			9
Restructuring and other expenses		3,189			1,065
Total operating expenses		20,389			16,946
Loss from operations		(15,811	)		(11,708	)
Interest and other income (expense), net		(6,427	)		3,667
Interest expense		(769	)		(1,580	)
Loss before income taxes		(23,007	)		(9,621	)
Provision for income taxes		(194	)		(366	)
Net loss		(23,201	)		(9,987	)
Accretion on mandatorily redeemable preferred stock		(3,665	)		(3,147	)
Net loss attributable to common shares	$	(26,866	)	$	(13,134	)
Net loss per share attributable to common shares — basic and diluted	$	(1.37	)	$	(0.63	)
Weighted average shares — basic and diluted		19,666			21,014

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

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CRITICAL PATH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31, 2003			March 31, 2004
	(Unaudited) (In thousands)
Operating
Net loss	$	(23,201	)	$	(9,987	)
Recovery of doubtful accounts		(165	)		(93	)
Depreciation and amortization		4,624			2,658
Stock-based costs and expenses		59			46
Change in fair value of preferred stock instrument		6,200			(3,160	)
Amortization of non-cash interest expense		—			60
Restructuring charges — non-cash		142			—
Accounts receivable		3,144			(448	)
Other assets		(3,321	)		(362	)
Accounts payable		(1,296	)		(798	)
Accrued liabilities		96			1,475
Deferred revenue		(1,292	)		1,295
Net cash used in operating activities		(15,010	)		(9,314	)
Investing
Notes receivable from officers		7			3
Property and equipment purchases		(4,319	)		(1,090	)
Sale of marketable securities		9,573			—
Restricted cash		2,729			—
Net cash provided by (used in) investing activities		7,990			(1,087	)
Financing
Proceeds from issuance of convertible notes, net		—			31,156
Proceeds from issuance of common stock, net		5			163
Proceeds from (payments on) line of credit facility		4,900			(2,298	)
Principal payments on note and lease obligations		(307	)		(287	)
Net cash provided by financing activities		4,598			28,734
Net change in cash and cash equivalents		(2,422	)		18,333
Effect of exchange rates on cash and cash equivalents		333			(186	)
Cash and cash equivalents at beginning of period		33,498			18,984
Cash and cash equivalents at end of period	$	31,409		$	37,131

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

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CRITICAL PATH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The Company

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

The unaudited condensed consolidated financial statements (“Financial Statements”) of the Company furnished herein reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for each interim period presented. All adjustments are normal recurring adjustments. The Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, presented in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003. The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the entire year.

Liquidity

Since inception, the Company has incurred aggregate consolidated net losses of approximately $2.2 billion, which includes $1.3 billion related to the impairment of long-lived assets, $445 million related to non-cash charges associated with the Company’s ten acquisitions and $172 million related to non-cash stock-based employee compensation expenses. With the Company’s history of losses, revenue generated from the sale of its products and services may not increase to a level that exceeds its operating expenses or could fluctuate significantly as a result of changes in customer demand or acceptance of future products. Accordingly, the Company’s cash flow from operations may continue to be negatively impacted.

Cash and cash equivalents totaled $37.1 million at March 31, 2004. Of the Company’s cash and cash equivalents at March 31, 2004, $2.7 million is expected to support its outstanding obligations to Silicon Valley Bank (See Note 7 - Credit Facility) and $7.6 million is located in accounts outside the United States, which may not be available to the Company’s domestic operations. Accordingly, the Company’s readily available cash resources in the United States as of March 31, 2004 were $26.8 million. At December 31, 2003, the Company’s readily available cash resources in the United States totaled $6.4 million. During 2003 and the first quarter of 2004, the Company used an average of approximately $8.8 million of cash per quarter to fund the Company’s operating activities. Historically, the Company has suffered recurring losses from operations and negative cash flow from operations. Given this factor, in combination with the Company’s financial position in the fourth quarter of 2003, the Company has recently consummated several financing transactions in order to secure sufficient funding to meet the Company’s expected cash requirements through at least December 31, 2004.

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Recent Financing Transactions

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

In November 2003, the Company announced its intention to make a rights offering to public shareholders of record to purchase up to approximately $21 million of newly issued Series E convertible preferred shares at a purchase price of $1.50 per share. Shareholders of record on the record date of April 30, 2004 will receive 0.65 subscription rights for each share of the Company’s common stock held on the record date. Each subscription right entitles the holder to purchase one share of the Company’s Series E preferred stock at the subscription price of $1.50 per share. Each share of Series E preferred stock is convertible into the number of shares of common stock obtained by dividing $1.50 plus the amount of dividends accreted to the Series E preferred stock from the date of issuance through the most recent semi-annual dividend accrual date by $1.50. The Company filed a registration statement for the Series E preferred stock to be issued pursuant to the rights offering. The Securities and Exchange Commission declared this registration statement effective on May 5, 2004. If shareholders approve, among other things, the issuance of the Series E preferred stock at a meeting to be held on June 11, 2004, the Company intends to consummate the rights offering on or around June 25, 2004.

In January 2004, the Company issued $15 million in principal amount of 10% Senior Convertible Notes to Permal U.S. Opportunities Limited, Zaxis Equity Neutral, L.P., Zaxis Institutional Partners, L.P., Zaxis Offshore Limited, Zaxis Partners, L.P. and Passport Master Fund, L.P. These notes are convertible into approximately 10 million shares of Series E Preferred Stock at $1.50 per share only if the Company receives shareholder approval at a special meeting to be held on June 11, 2004. As a result, interest expense of approximately $1.5 million will be recognized as of the date of conversion resulting from the beneficial conversion feature included in the Series E Preferred Stock. If the Company does not obtain shareholder approval, these notes will be convertible, at the option of each note holder, into shares of the Company’s Common Stock at $1.65 per share, provided the note holder will not be able to convert its notes into shares of Common Stock to the extent the note holder, together with its affiliates, would own 9.9% or more of the Company’s Common Stock after conversion. If these notes do not convert into Series E Preferred Stock or Common Stock, they become due and payable on the fourth anniversary of their issuance.

In March 2004, the Company issued $18.5 million in principal amount of 10% Senior Convertible Notes to investment entities affiliated with Crosslink Capital, Criterion Capital Management, Heights Capital Management and Apex Capital. These notes are convertible into approximately 12.3 million shares of Series E Preferred Stock at $1.50 per share only if the Company receives shareholder approval at a special meeting to be held on June 11, 2004. If the Company does not obtain shareholder approval, these notes will be convertible, at the option of each note holder, into shares of the Company’s Common Stock at $2.18 per share, provided the note holder will not be able to convert its notes into shares of Common Stock to the extent the note holder, together with its affiliates, would own 9.9% or more of the Company’s Common Stock after conversion. As a result, interest expense of approximately $8.4 million will be recognized as of the date of conversion resulting from the beneficial conversion feature included in the Series E Preferred Stock. If these notes do not convert into Series E Preferred Stock or Common Stock, they become due and payable on the fourth anniversary of their issuance.

Upon shareholder approval of the matters being presented at a special meeting on June 11, 2004, the $43.5 million in principal amount of 10% Senior Convertible Notes, plus interest, will automatically convert into approximately 29 million shares of Series E Preferred Stock at $1.50 per share. Additionally upon such approval, the $32.8 million in face value of its 5 ³/4% convertible subordinated notes due in April 2005 held by the Cheung Kong Investors will automatically be converted into approximately 21.9 million shares of its Series E Preferred Stock. The Series E Preferred Stock will be issued to these investors only if Critical Path receives shareholder approval and will rank senior in preference to all of the Company’s existing equity. These preferred shares will accrue dividends at an annual rate of 5 ³/4% of the purchase price of $1.50 per share.

- 5 -

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

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

On January 30, 2004, the Company executed an amendment with Silicon Valley Bank, which reduced the size of the credit line to a maximum of $5.0 million and extended the maturity date to October 31, 2004. Subsequently, on March 12, 2004, the Company executed an additional amendment with Silicon Valley Bank, which increased the size of the credit line to a maximum of $6.0 million and extended the maturity date to June 30, 2005. The credit facility continues to be collateralized by certain of the Company’s assets and borrowings under the current agreement bear a variable interest rate of between Prime plus 1.5% and Prime plus 3.0%, which has historically ranged from 5.25% to 6.25%, and is subject to certain covenants. See Note 7 – Credit Facility.

The 10% Senior Convertible Notes and related interest become due and payable on the fourth anniversary of their issuance. In addition, the notes also become due and payable upon the consummation of a qualified asset sale, a change of control or any financing or series of financings that in the aggregate raises at least $40 million. There are also certain other circumstances that cause these notes to become due and payable which have been disclosed in Note 4 - Convertible Notes.

With the Company’s history of operating losses, its primary sources of capital have come from both debt and equity financings that it has completed over the past several years. With the proceeds from the recent financing transactions discussed above, it believes that its cash, cash equivalents and available line of credit as of the date of this filing will be sufficient to maintain current and planned operations through at least December 31, 2004.

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

Basis of Presentation

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

Segment Information

The Company does not currently manage its business in a manner that requires it to report financial results on a segment basis. The Company currently operates in one segment, digital communications software and services, and management uses one measure of profitability. Revenue information on a product and service basis has been disclosed in the Company’s statement of operations.

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Reclassifications

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

Stock-Based Compensation

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

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

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

Had compensation cost been recognized based on the fair value at the date of grant for options granted, during the first quarters of 2003 and 2004, the pro forma amounts of the Company’s net loss and net loss per share would have been as follows:

	Three Months Ended March 31,
	2003			2004
	(In thousands, except per share amounts)
Net loss attributable to common shares — as reported	$	(26,866	)	$	(13,134	)
Add:
Stock-based employee compensation expense included in reported net loss attributable to common shares, net of related tax effects		59			46
Deduct:
Total stock-based employee compensation (expense) income determined under a fair value based method for all grants, net of related tax effects		515			(2,426	)
Net loss attributable to common shares — pro forma		(26,292	)		(15,514	)
Basic and diluted net loss per share attributable to common shares — as reported		(1.37	)		(0.63	)
Basic and diluted net loss per share attributable to common shares — pro forma	$	(1.34	)	$	(0.74	)

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

	Three Months Ended March 31,
	2003		2004
Risk-free interest rate	2.6	%	3.0	%
Expected lives (in years)	4.0		4.0
Dividend yield	0.0	%	0.0	%
Expected volatility	111.0	%	146.0	%

Recent accounting pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective for all new variable interest entities created or acquired after January 31, 2003. In December 2003, the FASB issued FIN 46R which supercedes FIN 46. FIN 46R is applicable in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. The adoption of this standard did not have a material impact on the Company’s results of operations or financial condition.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06, or EITF 03-06, “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share”. EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The Company is still evaluating the impact of the adoption of EITF 03-06 on its results of operations and financial position.

Note 2 — Strategic Restructuring and Employee Severance (in millions)

Three months ended March 31, 2004:

	Liability at December 31, 2003		Adjustments		Restructuring Charges		Noncash Charges		Cash Payments			Liability at March 31, 2004
Workforce reduction	$	0.2	$	—	$	1.0	$	—	$	(0.8	)	$	0.4
Facility and operations consolidation and other charges		0.6		—		0.1		—		(0.1	)		0.6
Total	$	0.8	$	—	$	1.1	$	—	$	(0.9	)	$	1.0

Three months ended March 31, 2003:

	Liability at December 31, 2002		Adjustments			Restructuring Charges		Noncash Charges			Cash Payments			Liability at March 31, 2003
Workforce reduction	$	1.2	$	(0.6	)	$	3.7	$	(0.1	)	$	(3.0	)	$	1.2
Facility and operations consolidation and other charges		1.1		(0.3	)		0.4		—			(0.3	)		0.9
Non-core product and service sales and divestitures		0.3		(0.3	)		0.3		—			(0.3	)		—
Total	$	2.6	$	(1.2	)	$	4.4	$	(0.1	)	$	(3.6	)	$	2.1

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

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

In November 2003, the Company announced that it was restructuring certain of its facility lease obligations in an effort to reduce its long-term cash obligations. In addition, the Company identified an additional 16 positions, primarily held by management-level employees, which were to be eliminated. Costs totaling $1.9 million were recognized during the fourth quarter of 2003 associated with these initiatives, including $1.4 million in lease restructuring and termination costs and $0.5 million in severance and related headcount reduction costs. Additionally, costs totaling $1.1 million were recognized during the first quarter of 2004 associated with these initiatives, including $0.1 million in lease restructuring and termination costs and $1.0 million in severance and related headcount reduction costs. During the fourth quarter of 2003 and first quarter of 2004, cash payments totaling $1.3 million and $0.9 million, respectively, were made associated with these restructuring activities. The remaining accrual of $0.6 million associated with this restructuring is expected to be utilized by the end of the second quarter of 2004.

Note 3 — Goodwill

At December 31, 2003 and March 31, 2004, the Company was had $6.6 million of goodwill, which ceased being amortized from January 1, 2002, in accordance with SFAS No. 142.

Note 4 — Convertible Notes

5 ³/4% Convertible Subordinated Notes

During the three months ended March 31, 2003 and 2004, the Company recognized interest expense related to the 5 ³/4% convertible subordinated notes due in April 2005 of $547,000 in each respective period. As of March 31, 2004, the total balance outstanding was $38.4 million. There was approximately $1.1 million in accrued interest payable related to these notes at March 31, 2004. These 5 ³/4% Notes are carried at cost and had an approximate fair value at March 31, 2004 of $34.7 million.

In November 2003, the Company executed an agreement to exchange approximately $32.8 million in face value of its 5 ³/4% Notes, which were held by a group of investors led by Cheung Kong Investors, for approximately 21.9 million shares of Series E Preferred Stock. Upon shareholder approval at a special meeting to be held on June 11, 2004, approximately $32.8 million face value of 5 ³/4% Convertible Subordinated Notes held by the Cheung Kong Investors will be exchanged for approximately 21.9 million shares of Series E Preferred Stock. As a result, a charge equal to the fair value of the Series E Preferred Stock less the carrying value of the related Notes, net of unamortized issuance costs, will be recorded to arrive at net loss and net loss attributable to common shareholders as of the date of the exchange.

In March 2004, the Company executed an amendment with the Cheung Kong Investors, which would extend the maturity of the $32.8 million in face value of 5 ³/4% Notes held by the Cheung Kong Investors from April 1, 2005 to April 1, 2006. The extension will only take place in the event the Company’s shareholders do not approve, at the

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special meeting to be held on June 11, 2004, the exchange of the 5 ³/4% Notes held by the Cheung Kong Investors for approximately 21.9 million shares of the Company’s Series E Preferred Stock. In addition, in the event the maturity date is extended to April 1, 2006, the interest rate on the 5 ³/4% Notes held by the Cheung Kong Investors will increase to 7 ¹/2% for the period beginning April 1, 2005 and ending April 1, 2006, and the Company will be required to pay fees totaling $1.5 million.

10% Senior Convertible Notes

	March 31, 2004
10% Senior Convertible Notes	$	42,750
Amount allocated to derivative instrument		750
Accretion on 10% Senior Convertible Notes		61
Carrying value of 10% Senior Convertible Notes	$	43,561

In November 2003, the Company issued in a private placement $10 million in 10% senior convertible notes to General Atlantic Partners 74, L.P., GAP Coinvestment Partners II, L.P., GapStar, LLC and GAPCO GmbH & Co. K.G. (referred to collectively as the General Atlantic Investors).

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

Upon shareholder approval at a special meeting to be held on June 11, 2004, the $10 million in principal amount of senior convertible notes held by the General Atlantic Partners, plus interest, will convert into 7.3 million shares of Series E convertible preferred stock at $1.50 per share. As a result, interest expense of approximately $5.7 million will be recognized as of the date of conversion resulting from the beneficial conversion feature included in the Series E convertible preferred stock. Interest expense of $253,000 was recognized on the debt during the three months ended March 31, 2004 and $353,000 was payable as of March 31, 2004.

In January 2004, the Company issued $15 million in principal amount of 10% Senior Convertible Notes to Permal U.S. Opportunities Limited, Zaxis Equity Neutral, L.P., Zaxis Institutional Partners, L.P., Zaxis Offshore Limited, Zaxis Partners, L.P. and Passport Master Fund, L.P. These notes are convertible into approximately 10 million shares of Series E Preferred Stock at $1.50 per share only if the Company receives shareholder approval on June 11, 2004. As a result, interest expense of approximately $1.5 million will be recognized as of the date of conversion resulting from the beneficial conversion feature included in the Series E Preferred Stock. If the Company does not obtain shareholder approval, these notes will be convertible, at the option of each note holder, into shares of the Company’s Common Stock at $1.65 per share, provided the note holder will not be able to convert its notes into shares of Common Stock to the extent the note holder, together with its affiliates, would own 9.9% or more of the Company’s Common Stock after conversion. If these notes do not convert into Series E Preferred Stock or Common Stock, they become due and payable on the fourth anniversary of their issuance. Interest expense of $317,000 was recognized on the debt during the three months ended March 31, 2004 and remained payable as of March 31, 2004.

In March 2004, the Company issued $18.5 million in principal amount of 10% Senior Convertible Notes to investment entities affiliated with Crosslink Capital, Criterion Capital Management, Heights Capital Management and Apex Capital. These notes are convertible into approximately 12.3 million shares of Series E Preferred Stock at $1.50 per share only if the Company receives shareholder approval on June 11, 2004. If the Company does not obtain shareholder approval, these notes will be convertible, at the option of each note holder, into shares of the Company’s Common Stock at $2.18 per share, provided the note holder will not be able to convert its notes into shares of Common Stock to the extent the note holder, together with its affiliates, would own 9.9% or more of the Company’s Common Stock after conversion. As a result, interest expense of approximately $8.4 million will be recognized as of the date of conversion resulting from the beneficial conversion feature included in the Series E Preferred Stock. If these notes do not convert into Series E Preferred Stock or Common Stock, they become due and payable on the fourth anniversary of their issuance. Interest expense of $115,000 was recognized on the debt during the three months ended March 31, 2004 and remained payable as of March 31, 2004.

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

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

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

Note 5 — Comprehensive Loss

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

	Three Months Ended March 31,
	2003			2004
	(unaudited)
Net loss attributable to common shares	$	(26,866	)	$	(13,134	)
Unrealized investment losses		(2	)		—
Foreign currency translation adjustments		587			(685	)
Total comprehensive loss	$	(26,281	)	$	(13,819	)

There were no tax effects allocated to any components of other comprehensive loss during the three months ended March 31, 2003 or 2004.

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Note 6 — Loss Per Share Attributed to Common Shares

Net loss per share is calculated as follows:

	Three Months Ended March 31,
	2003			2004
	(In thousands, except per share amounts)
Net loss attributed to common shares
Net loss	$	(23,201	)	$	(9,987	)
Accretion on mandatorily redeemable preferred stock		(3,665	)		(3,147	)
Net loss attributable to common shares	$	(26,866	)	$	(13,134	)
Weighted average shares outstanding
Weighted average shares outstanding		19,752			21,127
Weighted average shares subject to repurchase agreements		—			(113	)
Weighted average shares held in escrow related to acquisitions		(86	)		—
Shares used in computation of basic and diluted net loss per share		19,666			21,014
Basic and diluted net loss per share attributed to common shares
Net loss attributable to common shares	$	(1.37	)	$	(0.63	)

As of March 31, 2003 and 2004, there were 28,776,051 and 76,244,444 potential common shares, respectively, 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 7 — Credit Facility

In September 2002, the Company entered into a $15.0 million one-year line of credit with Silicon Valley Bank, to be utilized for working capital and general corporate operations. The credit facility was amended on March 25, 2003 and again on July 18, 2003, as a result of non-compliance with the financial covenants of the facility. The Company regained compliance with the covenants in the credit facility upon execution of the line of credit agreement on July 18, 2003 and extended the maturity of the credit facility to January 30, 2004. In December 2003, the Company did not comply with a certain financial covenant and it subsequently received a letter from Silicon Valley Bank on December 17, 2003 waiving such covenant violation. The credit facility is collateralized by all of the Company’s personal property, including intellectual property, and borrowings under the current agreement bear a variable interest rate of Prime plus 2.0%, which has ranged from 5.25% to 6.25%, and is subject to certain covenants. Interest is paid each month with principal due at maturity. Commitment fees related to the credit facility included an initial commitment fee of 0.50%, or $75,000, and additional commitment fees of $35,000 for each amendment. The facility carries an additional fee based on unused credit of 0.45% payable at the end of each quarterly period in arrears and an early termination fee of 1.0% of the total credit facility through maturity. As of March 31, 2004, there was no balance outstanding but there were letters of credit held under the credit facility totaling $2.7 million..

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

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shares of its Common Stock to Silicon Valley Bank. These warrants were fully exercisable upon grant, had an exercise price of $2.07 per share and have an expiration date of March 12, 2011. The warrants were valued using the Black-Scholes option pricing model, assuming volatility of 146%, a risk-free interest rate of 3% and a four-year term. In connection with the issuance of this warrant, the Company recorded a charge of $197,000 to interest expense during the first quarter of 2004.

In April 2004, the Company entered into an amendment to its credit facility with Silicon Valley Bank pursuant to which Silicon Valley Bank agreed to (i) waive the Company’s failure to comply with a certain financial covenant for the quarter ended March 31, 2004 and (ii) modify the Company’s financial covenant with respect to its minimum consolidated revenues. The amendment also added a covenant that the receipt of a going concern qualification in an audit report during the period commencing April 15, 2004 through the credit facility’s maturity date constitutes an event of default under the facility.

Note 8 — Financing Transaction and Preferred Stock

Series D Preferred Stock

The carrying value of the Series D Preferred Stock at December 31, 2003 and March 31, 2004 was determined as follows:

	December 31, 2003			March 31, 2004
	(In thousands)
Series D Preferred Stock — 2001 Transaction	$	55,000		$	55,000
Series D Preferred Stock — MBCP PeerLogic		3,755			3,755
Less: Issuance costs		(3,075	)		(3,075	)
Series D Preferred Stock, net of issuance costs		55,680			55,680
Less amounts allocated to:
Common stock warrants		(5,250	)		(5,250	)
Beneficial conversion feature		(41,475	)		(41,475	)
Add liquidation preference		19,640			16,480
Add amortization and accretion		26,706			29,853
Carrying value of Series D Preferred Stock and embedded change-in-control feature	$	55,301		$	55,288

In connection with the Series D Preferred Stock financing transaction, which closed in December 2001, the Series D Preferred Stock was deemed to have an embedded derivative instrument. In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments, the Company is required to adjust the carrying value of the instrument to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of Interest and Other Income (Expense). At December 31, 2003 and March 31, 2004, the estimated fair value of the liquidation preference was $24.8 million and $21.7 million, respectively. During the three months ended March 31, 2003 and 2004, net charges (credits) of $6.2 million and $(3.2) million, respectively, were recorded as a result of the increase (decrease) in the fair value of the liquidation preference.

During the three months ended March 31, 2003 and 2004, the accretion on redeemable convertible preferred shares totaled $3.7 million and $3.1 million, respectively, comprised of accrued dividends of $711,000 and $1.3 million, respectively, and accretion of the beneficial conversion feature of $3.0 million and $1.8 million, respectively.

Note 9 — Restricted Stock

In March 2004, the Company issued 707,368 shares of restricted common stock to Mark Ferrer, the Company’s new chief executive officer, in connection with Mr. Ferrer’s employment agreement. As a result of the issuance of these shares of restricted stock, during the first quarter, the Company recorded unearned compensation of $1.5 million, which will be charged to operating expense over the vesting term of four years of the restricted stock grant. During the quarter ended March 31, 2004, the Company recorded a charge of $9,000.

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Note 10 — Commitments and Contingencies

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

Action in the Superior Court of San Diego. On December 24, 2003, the Company was named in a lawsuit filed by former shareholders of Remedy Corporation against current and former officers and directors of Peregrine Systems, Inc., Peregrine’s former accountants, some of Peregrine’s customers, including the Company, and various other unnamed defendants. The second amended complaint alleges that the Company, as Peregrine’s customer, engaged in a series of fraudulent transactions with Peregrine that were not accounted for by Peregrine in conformity with GAAP and that this substantially inflated the value of Peregrine securities issued as consideration in Remedy’s merger with Peregrine in August 2001. The complaint alleges causes of action for fraud and deceit, negligent misrepresentation, violations of California Corporations Code provisions regarding sales of securities by means of false statements or omissions, violations of California Corporations Code provisions regarding securities sales made on the basis of undisclosed, material inside information, common law conspiracy to commit fraud, and common law aiding and abetting the commission of fraud. The complaint seeks an unspecified amount of compensatory and punitive damages, along with rescission of the Peregrine securities purchased in the Remedy merger, interest and attorneys fees. The Company believes the claims are without merit and intends to defend itself vigorously. Litigation in this matter is ongoing.

Securities Class Action in Southern District of New York. Beginning on July 18, 2001, a number of securities class action complaints were filed against the Company, and certain of its former officers and directors and underwriters connected with the Company’s initial public offering of common stock in the U.S. District Court for the Southern District of New York (In re Initial Public Offering Sec. Litig.). The purported class action complaints were filed by individuals who allege that they purchased the Company’s common stock at the initial and secondary public offerings between March 29, 1999 and December 6, 2000. The complaints allege generally that the prospectus under which such securities were sold contained false and misleading statements with respect to discounts and excess commissions received by the underwriters as well as allegations of “laddering” whereby underwriters required their customers to purchase additional shares in the aftermarket in exchange for an allocation of IPO shares. The complaints seek an unspecified amount in damages on behalf of persons who purchased the Company’s stock during the specified period. Similar complaints have been filed against 55 underwriters and more than 300 other companies and other individuals. The over 1,000 complaints have been consolidated into a single action. The Company has reached an agreement in principle with the plaintiffs to resolve the cases. The proposed settlement involves no monetary payment by the Company and no admission of liability. However, it is subject to approval by the Court.

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

Lease Dispute. In July 2000, PeerLogic, Inc. signed a lease for office space in San Francisco, California. In December 2000, the Company acquired PeerLogic as a wholly owned subsidiary. After review, the Company determined that local zoning laws likely prohibited a business such as it or PeerLogic from occupying the leased premises, and promptly sought a zoning determination from the San Francisco Zoning Administrator to resolve the matter. The Zoning Administrator determined that the Company’s proposed use of the leased premises was not permitted, but the landlord appealed this determination and prevailed before the San Francisco Board of Appeals. In July 2002, the Company filed a Petition for Writ of Mandamus with the San Francisco Superior Court, seeking

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reversal of the San Francisco Board of Appeals’ decision. In June 2003, the Court granted the Company’s petition and subsequently entered a judgment and writ remanding the matter to the San Francisco Board of Appeals and directing the Board of Appeals to make a new determination consistent with its judgment. The landlord subsequently appealed the Superior Court’s ruling.

In April 2002, the landlord filed suit in San Francisco Superior Court against the Company alleging, among other things, breach of the lease and tort claims related to the lease transaction. In its complaint, the landlord sought unspecified damages for back rent, attorneys’ fees, treble damages under certain statutes, and unspecified punitive damages. Between April 2002 and July 2003, the Company succeeded through several motions filed with the Court in having a number of the landlord’s claims dismissed and some of its requests for damages stricken, including treble damages. The landlord has chosen not to further amend its complaint. In August 2003, the Company filed its answer to the second amended complaint and a cross-complaint against the landlord, under which the Company sought compensatory damages and unspecified punitive damages for the landlord’s failure to disclose the zoning restrictions on the leased premises before the lease was signed. In early February, the Company reached an agreement in principle with the landlord to fully and finally settle this litigation in exchange for $100,000 in cash and a warrant to purchase 100,000 shares of common stock at a purchase price equal to current fair market value as of the date of settlement. A final written settlement agreement was executed by the parties on May 4, 2004. However, the cases have not yet been dismissed.

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

Other Contractual Obligations The Company entered into other contractual obligations which total $10.8 million at March 31, 2004. These obligations are primarily associated with the maintenance of hardware and software products being utilized within engineering and hosted operations, and the management of data center operations and network infrastructure storage for the Company’s hosted operations. These obligations are expected to be completed over the next 4 years, including $8.3 million in 2004.

Indemnifications. The Company provides general indemnification provisions in its license agreements. In these agreements, the Company generally states that it will defend or settle, at its own expense, any claim against the customer by a third party asserting a patent, copyright, trademark, trade secret or proprietary right violation related to any products that the Company has licensed to the customer. The Company agrees to indemnify its customers against any loss, expense or liability, including reasonable attorney’s fees, from any damages alleged against the customer by a third party in its course of using products sold by the Company. The Company has not received any claims under this indemnification and does not know of any instances in which such a claim may be brought against the Company in the future.

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

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CRITICAL PATH, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

This report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended and in effect from time to time. The words “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. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, difficulties of forecasting future results due to our limited operating history, failure to meet sales and revenue 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 continuing SEC investigation against former executives and directors, turnover within and integration of senior management, board of directors members and other key personnel, difficulties in our strategic plans to exit certain products and services offerings, failure to expand our sales and marketing activities, potential difficulties associated with strategic relationships, investments and uncollected bills, general economic conditions in markets in which 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 Quarterly Report on Form 10-Q includes numerous trademarks and registered trademarks of Critical Path. Products or service names of other companies mentioned in this Quarterly Report on Form 10-Q may be trademarks or registered trademarks of their respective owners.

Overview

Critical Path, Inc. was incorporated in California on February 19, 1997. Critical Path, along with its subsidiaries (collectively referred to herein as the “Company”), provides digital communications software and services that enable enterprises, government agencies, wireless carriers, and service providers to rapidly deploy scalable solutions for messaging and identity management. Built upon an open, extensible software platform, these solutions help organizations expand the range of digital communications services they provide, while helping to reduce overall costs. Critical Path’s messaging solutions — which are available both as licensed software or hosted services — provide integrated access to a broad range of communication and collaboration applications from wireless devices,

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Web browsers, desktop clients, and voice systems. This provides new revenue opportunities for carriers and service providers and helps enable them to attract new subscribers, drive more usage, and retain subscribers longer. For enterprises and governments, Critical Path’s solutions help to reduce burdens on helpdesks, simplify the deployment of key security infrastructure, enable easier compliance with new regulatory mandates, and reduce the cost and effort of deploying modern messaging services to distributed organizations, mobile users, deskless workers, suppliers and customers.

Critical Path generates revenues from four primary sources:

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

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

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

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

We generate most of our revenues from telecommunications operators and from large enterprises. Wireless carriers, internet service providers and fixed-line service providers purchase our products and services primarily when they are looking to offer new services to their subscribers. While they also purchase our products and services to lower their cost of operating existing services or infrastructure, their spending is often tied to the level of investment they are willing to make on new revenue-generating services.

Restructuring Initiatives

Since our inception, we have incurred significant losses, and as of March 31, 2004, we had an accumulated deficit of approximately $2.2 billion, inclusive of a $1.3 billion charge for impairment of long-lived assets recorded in the fourth quarter of 2000. We intend to continue to invest in sales and marketing, development of our technology and solution offerings, and related enhancements. We may continue to incur operating losses. See the further discussion on our financial position in the Liquidity and Capital Resources section of Management Discussion and Analysis of Financial Condition and Results of Operations.

During 2001 we evaluated our various products, services, facilities and the business plan under which we were operating. In connection with this review, we implemented and substantially completed a strategic restructuring plan that involved reorganizing and refocusing Critical Path’s product and service offerings, a reduction in workforce and a facilities and operations consolidation. Additionally, we implemented an aggressive expense management plan to

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further reduce operating costs. At the end of 2001, we had divested all of the products and services deemed to be non-core to our continued operations, reduced headcount by 44%, reduced the number of facilities by 65% and implemented other cost cutting measures, resulting in a significant reduction in overall operating expenses.

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

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

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

In addition to these formal restructuring initiatives, we have sought to aggressively manage our cost structure, identifying incremental savings where possible. We intend to continue to aggressively manage our expenses in 2004, while maintaining strong service levels to our customers.

In recent months, management has focused on capital financing initiatives in order to maintain our current and planned operations. Our history of losses from operations and cash flow deficits, in combination with our cash balances, raised concerns about our short-term ability to fund operations from our existing cash at the time. Consequently, we have secured additional funds through several rounds of financing that involved the sale of senior secured notes convertible into a new series of preferred stock, subject to the approval of our shareholders at a special meeting on June 11, 2004. Owing to the financing activities we undertook in the fourth quarter of 2003 and first quarter of 2004, management believes that our cash, cash equivalents and available line of credit as of the date of this filing will be sufficient to maintain current and planned operations through at least December 31, 2004.

In view of the rapidly evolving nature of our business, organizational restructuring and limited operating history, we believe that period-to-period comparisons of revenues and operating results, including gross profit margin and operating expenses as a percentage of total net revenues, are not meaningful and should not be relied upon as indications of future performance. At March 31, 2004, we had 410 employees as compared to 418 employees at December 31, 2003, 577 employees at December 31, 2002 and 562 employees at December 31, 2001. We do not believe that our historical trends for revenues, expenses or personnel are indicative of future results.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates as disclosed in our annual report on Form 10-K/A for the year ended December 31, 2003.

Results of Operations

In view of the rapidly evolving nature of our business, prior acquisitions, organizational restructuring, and limited operating history, we believe that period-over-period comparisons of revenues and operating results, including gross profit margin and operating expenses as a percentage of total net revenues, are not meaningful and should not be relied upon as indications of future performance. At March 31, 2004, we had 410 employees as compared to 418 employees at December 31, 2003 and 438 employees at March 31, 2003. We do not believe that our historical fluctuations in revenues, expenses, or personnel are indicative of future results.

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Net Revenues

We derive most of our revenues through the sale of our messaging and identity management communications solutions. These solutions include both licensed software products and hosted messaging services. In addition, we recognize revenues from professional services and maintenance and support services. Software license revenues are derived from perpetual and term licenses for our messaging, identity management, collaborative and enterprise application integration technologies. Software license revenues are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software to the customer has occurred and the collection of a fixed or determinable license fee is considered probable. Our revenue recognition policies require that revenues recognized from software arrangements be allocated to each undelivered element of the arrangement based on the fair values of the elements, such as post contract customer support, installation, training or other services. Hosted messaging revenues relate to fees for our hosted messaging and collaboration services. These fees are primarily based upon monthly contractual per unit rates for the services involved and are recognized as revenue on a ratable monthly basis over the term of the contract. Professional services revenues are derived from fees primarily related to training, installation and configuration services and revenue is recognized as services are performed. Maintenance and support revenues are derived from fees related to post-contract customer support agreements associated with software product licenses. Maintenance and support revenues are recognized ratably over the term of the agreement.

Software License. We recognized $4.3 million in software license revenues during the first quarter of 2004 as compared to $5.0 million during the same quarter in 2003, a decrease of $795,000. We believe this decrease in software license revenues was primarily attributable to customer concern regarding our viability, which has since improved given our recent financings, as well as unfavorable worldwide macroeconomic conditions and an uncertain political climate that resulted in delayed customer information technology spending during the quarter, primarily in our Central European, Asian and domestic markets.

Hosted Messaging. We recognized $4.3 million in hosted messaging revenues during the first quarter of 2004 as compared to $5.4 million during the first quarter of 2003, a decrease of $1.0 million. This decrease in hosted messaging revenues was primarily due to the loss of customers and reduced volume.

Professional Services. We recognized $2.7 million in professional services revenues during the first quarter of 2004 as compared to $3.2 million during the same quarter in 2003, a decrease of $561,000. This decrease in professional services revenues was primarily attributable to fewer professional service projects in Europe during the quarter.

Maintenance and Support. We recognized $5.8 million in maintenance and support revenues during the first quarter of 2004 as compared to $4.4 million during the first quarter of 2003, an increase of $1.4 million. This increase in maintenance and support revenues was primarily due to the continued high-rate of existing customers renewing their maintenance and support contracts, the execution of new maintenance and support contracts in recent quarters in connection with license sales and successful renewal of maintenance services with customers whose contracts had earlier expired, particularly in Europe.

Critical Path’s international operations accounted for approximately 63% of net revenues in the first quarter of 2004 as compared to 64% in the first quarter of 2003.

Cost of Net Revenues

Software License. Cost of net software license revenues consists primarily of product media duplication, manuals and packaging materials, personnel and facility costs and third-party royalties. The cost of net software license revenues was $911,000 during the first quarter of 2004 as compared to $1.8 million during the same quarter in 2003, a decrease of $886,000. This decrease in software license costs was primarily attributable to a higher mix of third party product costs in the first quarter of 2003.

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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. The cost of net hosted messaging revenues was $6.4 million during the first quarter of 2004 as compared to $6.3 million during the first quarter of 2003, an increase of $118,000. This increase in hosted messaging costs was primarily due to a $1.6 million increase in outsourced data center service costs as well as an increase in personnel costs of $173,000 and consulting costs of $49,000. These increases were partially offset by decreased depreciation expense included in hosted messaging costs. Depreciation expense included in hosted messaging cost of net revenues decreased $1.4 million from $2.6 million in the first quarter of 2003 to $1.2 million in the first quarter of 2004.

Professional Services. Cost of net professional services revenues consist primarily of personnel costs including custom engineering, installation and training services for both our hosted and licensed solutions, and other direct and allocated indirect costs. The cost of net professional services revenues was $3.1 million during the first quarter of 2004 as compared to $3.5 million during the same quarter in 2003, a decrease of $356,000. This decrease in professional services costs was primarily attributable to the decrease in professional services revenues over the same period.

Maintenance and Support. Cost of net maintenance and support revenues consists primarily of personnel costs related to the customer support functions for both hosted and licensed solutions, and other direct and allocated indirect costs. The cost of net maintenance and support revenues was $1.4 million during the first quarter of 2004 as compared to $1.9 million during the first quarter of 2003, a decrease of $480,000. This decrease in maintenance and support costs was primarily due to cost savings generated through our 2002 and 2003 restructuring initiatives, including the termination of employees, resulting in a reduction in related personnel expenses of $386,000 and the consolidation of facilities of $169,000, partially offset by an increase in certain outside consulting arrangements of $116,000. Depreciation expenses included in maintenance and support costs totaled $25,000 in the first quarter of 2004 as compared to $62,000 in the first quarter of 2003, a decrease of $38,000.

Operations, customer support, and professional services staff increased to 133 employees at March 31, 2004 from 129 employees at March 31, 2003.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of compensation for sales and marketing personnel, advertising, public relations, other promotional costs, and, to a lesser extent, related overhead. Sales and marketing expenses were $6.9 million during the first quarter of 2004 as compared to $9.3 million during the same quarter in 2003, a decrease of $2.4 million. This decrease in sales and marketing expenses was primarily attributable to cost savings generated through our 2002 and 2003 restructuring initiatives, including the termination of employees, from 110 at March 31, 2003 to 82 at March 31, 2004, resulting in a reduction in related personnel expenses of approximately $1.9 million, the consolidation of facilities of $180,000, and the reduction in certain marketing program costs of $47,000. This decrease was partially offset by an increase in certain outside consulting arrangements of $153,000. Depreciation expenses included in sales and marketing expenses totaled $271,000 in the first quarter of 2004 as compared to $703,000 in the first quarter of 2003, a decrease of $432,000.

Research and Development. Research and development expenses consist primarily of compensation for technical staff, payments to outside contractors, depreciation of capital equipment associated with research and development activities, and, to a lesser extent, related overhead. Research and development expenses were $5.8 million during the first quarter of 2004 as compared to $4.6 million during the first quarter of 2003, an increase of $1.2 million. This increase in research and development expenses was primarily due to increased software development expenses of $408,000 (historically these costs had been capitalized), employee additions, from 129 at March 31, 2003 to 137 at March 31, 2004, resulting in an increase in related personnel expenses of $154,000, increased localization expenses of $111,000, increased allocated facilities costs associated with employee additions of $109,000 and increased consulting expenses of $104,000. Depreciation expenses included in research and development expenses totaled $929,000 in the first quarter of 2004 as compared to $653,000 in the first quarter of 2003, an increase of $276,000.

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General and Administrative. General and administrative expenses consist primarily of compensation for personnel, fees for outside professional services, occupancy costs and, to a lesser extent, related overhead. General and administrative expenses were $3.1 million during the first quarter of 2004 as compared to $3.2 million during the same quarter in 2003, a decrease of $104,000. This decrease in general and administrative expenses was primarily attributable to cost savings generated through our 2002 and 2003 restructuring initiatives, including the reduction of employees, from 70 at March 31, 2003 to 58 at March 31, 2004, resulting in a reduction in related personnel costs of $412,000, partially offset by increased bad debt expenses of $162,000, increased professional service fees (including accounting and legal services) of $189,000.

Stock-Based Expenses

Stock-based expenses are comprised of stock-based charges related to stock options and warrants granted to employees and consultants. Stock-based expenses were approximately $46,000 during the first quarter of 2004 as compared to $59,000 during the first quarter of 2003, a decrease of $13,000. Based on the functions of the employees and consultants participating in the related option grants, $5,000 was allocated to cost of net revenues and $41,000 was allocated to operating expenses in the first quarter of 2004 and $17,000 was allocated to cost of net revenues and $42,000 was allocated to operating expenses in the first quarter of 2003.

Restructuring and other expenses (in millions)

Three months ended March 31, 2004:

	Liability at December 31, 2003		Adjustments		Restructuring Charges		Noncash Charges		Cash Payments			Liability at March 31, 2004
Workforce reduction	$	0.2	$	—	$	1.0	$	—	$	(0.8	)	$	0.4
Facility and operations consolidation and other charges		0.6		—		0.1		—		(0.1	)		0.6
Total	$	0.8	$	—	$	1.1	$	—	$	(0.9	)	$	1.0

Three months ended March 31, 2003:

	Liability at December 31, 2002		Adjustments			Restructuring Charges		Noncash Charges			Cash Payments			Liability at March 31, 2003
Workforce reduction	$	1.2	$	(0.6	)	$	3.7	$	(0.1	)	$	(3.0	)	$	1.2
Facility and operations consolidation and other charges		1.1		(0.3	)		0.4		—			(0.3	)		0.9
Non-core product and service sales and divestitures		0.3		(0.3	)		0.3		—			(0.3	)		—
Total	$	2.6	$	(1.2	)	$	4.4	$	(0.1	)	$	(3.6	)	$	2.1

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

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

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In November 2003, we announced that we were restructuring certain facility lease obligations in an effort to reduce our long-term cash obligations. In addition, we identified an additional 16 positions, primarily held by management-level employees, which were to be eliminated. Costs totaling $1.9 million were recognized during the fourth quarter of 2003 associated with these initiatives, including $1.4 million in lease restructuring and termination costs and $0.5 million in severance and related headcount reduction costs. Additionally, costs totaling $1.1 million were recognized during the first quarter of 2004 associated with these initiatives, including $0.1 million in lease restructuring and termination costs and $1.0 million in severance and related headcount reduction costs. During the fourth quarter of 2003 and first quarter of 2004, cash payments totaling $1.3 million and $0.9 million, respectively, were made associated with these restructuring activities. The remaining accrual of $0.6 million associated with this restructuring is expected to be utilized by the end of the first quarter of 2004.

Interest and Other Income (Expense), Net

Interest and other income (expense), net consists primarily of interest earnings on cash, cash equivalents and short-term investments as well as net gains (losses) on foreign exchange transactions and changes in the fair value of the liquidation preference on the Series D preferred stock. Interest income was $150,000 during the first quarter of 2004 as compared to $116,000 during the first quarter of 2003, an increase of $34,000. This increase was due to higher cash balances available for investing. Cash balances increased during the three months ended March 31, 2004 due primarily to certain financing activities completed during the quarter and in the fourth quarter of 2003. We recognized a net gain from foreign currency transactions associated with our international operations of $362,000 during the first quarter of 2004 as compared to a net loss of $177,000 during the first quarter of 2003. Based on the current international markets, we expect that fluctuations in foreign currencies could have a significant impact on our operating results during the remainder of 2004.

In connection with the financing transaction closed in December 2001, the Series D Preferred Stock was deemed to have an embedded derivative instrument. In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments, we are required to adjust the carrying value of the preference to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other income or expense. At March 31, 2003 and 2004, the estimated fair value of the liquidation preference was $18.8 million and $21.7 million, respectively, resulting in a net charge to other expense during the first quarter of 2003 of $6.2 million and other income in the first quarter of 2004 of $3.2 million.

Interest Expense

Interest expense consists primarily of the interest expense and amortization of issuance costs related to our 10% Senior Convertible Notes issued in November 2003, January, 2004, and March 2004, 5 ³/4% Convertible Subordinated Notes issued in March 2000, interest and fees on our line of credit facility with Silicon Valley Bank, and interest on certain capital leases. During the first quarter of 2004, we incurred approximately $1.6 million in interest expense, of which $818,000 related to our 10% Senior Convertible Notes, $547,000 related to our 5 ³/4% Convertible Subordinated Notes. During the first quarter of 2003, we incurred approximately $769,000 in interest expense, of which $547,000 related to our 5 ³/4% Convertible Subordinated Notes and $89,000 related to our line of credit facility. Interest expense increased $811,000 period over period due primarily to interest on our 10% Senior Convertible Notes.

Provision for Income Taxes

We recognized a provision for income taxes of $366,000 in the first quarter of 2004 as compared to $194,000 in the first quarter of 2003, as certain of our European operations generated income taxable in certain European jurisdictions. 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.

Credit Facility

In September 2002, we entered into a $15.0 million one-year line of credit with Silicon Valley Bank, to be utilized for working capital and general corporate operations. The credit facility was amended on March 25, 2003

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and again on July 18, 2003, as a result of non-compliance with the financial covenants of the facility. We regained compliance with the covenants in the credit facility upon execution of the line of credit agreement on July 18, 2003 and extended the maturity of the credit facility to January 30, 2004. In December 2003 we did not comply with a certain financial covenant and it subsequently received a letter from Silicon Valley Bank on December 17, 2003 waiving such covenant violation. The credit facility is collateralized by all of our personal property, including intellectual property and borrowings under the current agreement bear a variable interest rate of Prime plus 2.0%, which has ranged from 5.25% to 6.25%, and is subject to certain covenants. Interest is paid each month with principal due at maturity. Commitment fees related to the credit facility included an initial commitment fee of 0.50%, or $75,000, and additional commitment fees of $35,000 for each amendment. The facility carries an additional fee based on unused credit of 0.45% payable at the end of each quarterly period in arrears and an early termination fee of 1.0% of the total credit facility through maturity. During the first quarter of 2003, we drew down $4.9 million against the line of credit and repaid $2.6 million during the fourth quarter of 2003 and $2.3 million during the first quarter of 2004. As of March 31, 2004, there was no balance outstanding. At March 31, 2004 there were letters of credit held under the credit facility totaling $2.7 million. All associated interest and fees are included as a component of interest expense.

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

In April 2004, the Company entered into an amendment to its credit facility with Silicon Valley Bank pursuant to which Silicon Valley Bank agreed to (i) waive the Company’s failure to comply with a certain financial covenant for the quarter ended March 31, 2004 and (ii) modify the Company’s financial covenant with respect to its minimum consolidated revenues. The amendment also added a covenant that the receipt of a going concern qualification in an audit report during the period commencing April 15, 2004 through the credit facility’s maturity date constitutes an event of default under the facility.

5 ³/4% Convertible Subordinated Notes

As of March 31, 2004, the total balance outstanding was $38.4 million. There was approximately $1.1 in accrued interest payable related to these notes at March 31, 2004. All related interest is included in interest expense.

In March 2004, we executed an amendment with a group of investors led by Cheung Kong Group and its Whampoa Limited affiliates including Campina Enterprises Limited, Cenwell Limited, Great Affluent Limited, Dragonfield Limited and Lion Cosmos Limited (referred to collectively as the Cheung Kong Investors) which would extend the maturity of the $32.8 million in face value of 5 ³/4% convertible subordinated notes held by the Cheung Kong Investors from April 1, 2005 to April 1, 2006. The extension will only take place in the event our shareholders do not approve the exchange of the 5 ³/4% convertible subordinated notes held by the Cheung Kong Investors for approximately 21.9 million shares of our Series E preferred stock. In addition, in the event the maturity date is extended to April 1, 2006, the interest rate on the 5 ³/4% convertible subordinated notes held by the Cheung Kong Investors will increase to 7 ¹/2% for the period beginning April 1, 2005 and ending April 1, 2006, and we will be required to pay fees totaling $1.5 million. These 5 ³/4% Notes are carried at cost and had an approximate fair value at March 31, 2004 of $34.7 million.

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10% Senior Convertible Notes

	March 31, 2004
10% Senior Convertible Notes	$	42,750
Amount allocated to derivative instrument		750
Accretion on 10% Senior Convertible Notes		61
Carrying value of 10% Senior Convertible Notes	$	43,561

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

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

As part of our November 2003 private placement of 10% Senior Convertible Notes, we agreed to seek shareholder approval to amend the terms of the Series D preferred stock to, among other things, amend the Series D preferred stock liquidation preference upon a liquidation and change of control, to eliminate the participation feature, to reduce the conversion price from $4.20 to $1.50 and to reduce the amount of dividends to which the holders of Series D preferred stock are entitled. See also the 10% Senior Convertible Notes discussion below.

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

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

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

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At March 31, 2004, the carrying value of the 10% Convertible Notes was $43.5 million and accrued interest totaled $784,000.

Accretion on redeemable convertible preferred shares and valuation of liquidation preference

In connection with the financing transaction completed during December 2001, we received gross cash proceeds of approximately $30 million and retired approximately $65 million in face value of our outstanding convertible subordinated notes in exchange for shares of our Series D Cumulative Redeemable Convertible Participating Preferred Stock. The preferred stock includes an automatic redemption on November 8, 2006 and cumulative dividends at a rate of 8% per year, compounded on a semi-annual basis. 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. During the first quarter of 2004, the accretion on redeemable convertible preferred shares totaled $3.1 million, comprised of $1.3 million in accrued dividends, accretion of $1.8 million, and amortization of $17,000. During the first quarter of 2003, the accretion on redeemable convertible preferred shares totaled $3.7 million, comprised of $711,000 in accrued dividends and accretion of $3.0 million.

Liquidity and Capital Resources

We have operated at a loss since our inception. With our history of operating losses, our primary sources of capital have come from both debt and equity financings that we have completed over the past several years. Cash and cash equivalents totaled $37.1 million at March 31, 2004. Of our cash and cash equivalents at March 31, 2004, $2.7 million is expected to support our outstanding obligations to Silicon Valley Bank and $7.6 million is located in accounts outside the United States, which may not be available to our domestic operations. Accordingly, our readily available cash resources in the United States as of March 31, 2004 were $26.8 million. At December 31, 2003, our readily available cash resources in the United States totaled $6.4 million.

During 2003 and the first quarter of 2004, we used an average of approximately $8.8 million of cash per quarter to fund our operating activities. Faced with a cash shortfall caused by lower than budgeted revenues and higher than expected expenses in 2003, we looked to the cash held by our foreign subsidiaries. However, we determined that restrictions on cash held outside the United States, including requirements in some jurisdictions that cash held by foreign subsidiaries must be sufficient to fund the operation of such foreign subsidiary, limited our ability to access and utilize this cash for domestic operations. As a result, the actual cash available to us to fund our domestic operations is less than the actual cash balance maintained by the Company.

We also attempted to raise additional funds through financing transactions. However, because of the approaching maturity date of the approximately $38 million in face value of our 5 ³/4% Convertible Subordinated Notes due in 2005 and the uncertainty regarding our ability to remain in compliance with the covenants of the Silicon Valley Bank line of credit due to the lower than expected operating results, we found that investors were reluctant to invest cash which might be used solely to repay these debt obligations. Although we were able to raise $10 million in November 2003, due to our rate of cash usage, the amount of cash available to us and the need to dedicate a portion of the proceeds to pay down a portion of the Silicon Valley Bank line of credit, our management determined that we had sufficient cash to continue our operations only through the first quarter of 2004. As a result of this disclosure, which appeared in our registration statement on Form S-3 filed with the SEC on December 24, 2003, as well as our results of operations and our revised projections, our independent accountants updated their report as of December 22, 2003 to add a going concern qualification.

Subsequent to the updated report from our independent accountants, during the period covered by this report, we were able to raise $33.5 million from new investors as described in more detail under the heading “Recent Financing Transactions” below. In addition, we extended the maturity date of the Silicon Valley Bank line of credit to June 2005, negotiated with the holders of approximately $33 million in face value of our 5 ³/4% Convertible Notes to extend their maturity dates until April 2006 if they are not converted to Series E Preferred Stock. As a result, we believe that cash flow projections prepared in March 2004 support our view that we have sufficient cash and expected cash flows to fund our operations through at least December 31, 2004. The report of our independent accountants that was incorporated into our Annual Report on Form 10-K for the year ended December 31, 2003 is unqualified as to our ability to continue as a going concern.

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We have recently announced that the Securities and Exchange Commission has declared effective our registration statement for a rights offering of up to 14,000,000 shares of Series E preferred stock. The consummation of the rights offering is subject to the satisfaction of conditions, one of which is the approval of the matters being submitted to a vote of our shareholders at a special meeting to be held on June 11, 2004. Provided shareholder approval, we could raise up to $21.0 million of gross proceeds, if fully subscribed, from such offering which would substantially enhance our liquidity and longer-term viability.

Recent Financing Transactions

In January 2004, we issued $15 million in principal amount of 10% senior convertible notes to Permal U.S. Opportunities Limited, Zaxis Equity Neutral, L.P., Zaxis Institutional Partners, L.P., Zaxis Offshore Limited, Zaxis Partners, L.P. and Passport Master Fund, L.P. These notes are convertible into approximately 10 million shares of Series E preferred stock at $1.50 per share only if we receive shareholder approval at a special meeting on June 11, 2004. As a result, interest expense of approximately $1.5 million will be recognized as of the date of conversion resulting from the beneficial conversion feature included in the Series E preferred stock. If we do not obtain shareholder approval, these notes will be convertible, at the option of each note holder, into shares of our common stock at $1.65 per share, provided the note holder will not be able to convert its notes into shares of common stock to the extent the note holder, together with its affiliates, would own 9.9% or more of our common stock after conversion. If these notes do not convert into Series E preferred stock or common stock, they become due and payable on the fourth anniversary of their issuance.

In March 2004, we issued $18.5 million in principal amount of 10% senior convertible notes to investment entities affiliated with Crosslink Capital, Criterion Capital Management, Heights Capital Management and Apex Capital. These notes are convertible into approximately 12.3 million shares of Series E preferred stock at $1.50 per share only if we receive shareholder approval. If we do not obtain shareholder approval at a special meeting on June 11, 2004, these notes will be convertible, at the option of each note holder, into shares of our common stock at $2.18 per share, provided the note holder will not be able to convert its notes into shares of common stock to the extent the note holder, together with its affiliates, would own 9.9% or more of our common stock after conversion. As a result, interest expense of approximately $8.4 million will be recognized as of the date of conversion resulting from the beneficial conversion feature included in the Series E preferred stock. If these notes do not convert into Series E preferred stock or common stock, they become due and payable on the fourth anniversary of their issuance.

Upon shareholder approval of the matters being presented at a special meeting on June 11, 2004, the $43.5 million in principal amount of 10% senior convertible notes, plus interest, will automatically convert into approximately 29 million shares of Series E preferred stock at $1.50 per share. Additionally upon such approval, the $32.8 million in face value of its 5 ³/4% convertible subordinated notes due in April 2005 held by the Cheung Kong Investors will automatically be converted into approximately 21.9 million shares of Series E preferred stock. The Series E preferred stock will be issued to these investors only if Critical Path receives shareholder approval and will rank senior in preference to all of our existing equity. These preferred shares will accrue dividends at an annual rate of 5 ³/4% of the purchase price of $1.50 per share.

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

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

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

In April 2004, we entered into the Fourth Amendment to Amended and Restated Loan and Security Agreement with Silicon Valley Bank (the April 2004 Amendment). As part of the April 2004 Amendment, Silicon Valley Bank (i) waived our failure to comply with the financial covenant for the quarter ended March 31, 2004, (ii) modified the minimum consolidated revenue covenant, and (iii) added a covenant that our receipt of a going concern qualification in an audit report commencing from the date of the April 2004 Amendment through the credit facility’s maturity date constitutes an event of default.

Debt covenants and restrictions

10% senior convertible notes

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

Additionally, the notes become due and payable when declared due and payable by a holder upon the occurrence of an event of default, which include, subject to some exceptions: (1) our failure to pay any amounts due under notes when they are due and payable, (2) our default on any indebtedness with a principal amount of at least $500,000, (3) our voluntary or involuntary bankruptcy, (4) any judgment for the payment of money of more than $500,000, (5) the attachment by our lenders of any of our assets, or (6) the occurrence of any event having a material adverse effect on our business, operations, assets, properties or condition.

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

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

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Silicon Valley Bank credit facility

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

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

5 ³/4% convertible subordinated notes

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

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

Ability to incur additional indebtedness

Subject to certain exceptions for, among others, indebtedness for accounts payable incurred in the ordinary course of business or indebtedness to acquire any equipment or similar property, holders of: (1) a majority of the 10% senior convertible notes issued in November, (2) a majority of the 10% senior convertible notes issued in January and (3) a majority of the 10% senior convertible notes issued in March, must consent to our incurrence of any additional indebtedness. Under the terms of our line of credit with Silicon Valley Bank, we are not permitted to incur additional indebtedness without the approval, by Silicon Valley Bank in its sole discretion, that the terms of the debt are adequately subordinated to the obligations due under the Silicon Valley Bank credit facility. In addition, we must seek the consent of the holders of a majority of our Series D preferred stock in order to incur any additional indebtedness.

Liquidity Discussion

Operating Activities. Cash and cash equivalents increased by $18.1 million during the first quarter of 2004, from $19.0 million at December 31, 2003 to $37.1 million at March 31, 2004, and decreased by $2.1 million during the first quarter of 2003, from $33.5 million at December 31, 2002 to $31.4 million at March 31, 2003. We used cash to fund operating activities of $9.3 million during the first quarter of 2004 and $15.0 million during the first quarter of 2003. This use of cash was primarily due to our net losses during those quarters, adjusted for non-cash charges, as operating costs, primarily employee and employee related costs, exceeded the related revenues from the sale of our software products and services. Additionally, we made cash payments related to our 2002 and 2003 strategic restructuring initiatives of $907,000 during the first quarter of 2004 and $3.6 million during the first quarter of 2003. These cash outflows for operating activities were partially offset by improved accounts receivable collections of $3.1 million during the first quarter of 2003 and partially offset by the increase of our accrued liabilities and deferred revenue during the first quarter of 2004. A more detailed discussion of our operating results can be found in the Results of Operations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, contracts with vendors, and working capital, as a significant portion or our worldwide operations have a functional currency other than the United States dollar. The impact of future exchange rate fluctuations cannot be predicted adequately. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates.

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

Our primary source of operating cash flow is the collection of accounts receivable from our customers and the timing of payments to our vendors and service providers. We measure the effectiveness of our collections efforts by an analysis of the average number of days our accounts receivable are outstanding. At March 31, 2004, our days sales outstanding were 88 days, down from 99 days at March 31 2003. Collections of accounts receivable and related days outstanding will fluctuate in future periods due to the timing, amount of our future revenues, payment terms on customer contracts and the effectiveness of our collection efforts.

A number of non-cash items have been charged to expense and increased our net losses during the first quarters of 2004 and 2003. These items include depreciation and amortization of property and equipment and intangible assets, amortization of unearned stock-based compensation and other stock-based compensation charges and provisions for doubtful accounts. To the extent these non-cash items increase or decrease in amount and increase or decrease our future operating results, there will be no corresponding impact on our cash flows.

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

Investing Activities. We used cash in investing activities of $1.1 million during the first quarter of 2004 and received cash from investing activities of $8.0 million during the first quarter of 2003. Cash used in investing activities related to the purchase of property and equipment, primarily for the acquisition of additional network infrastructure equipment, strategic investments in private entities and short-term investments in high-grade, low risk instruments. Cash proceeds are comprised of the sale of investments and marketable securities and the release of restricted cash and funds held in escrow.

Investments in property and equipment totaled $1.1 million during the first quarter of 2004 and $4.3 million during the first quarter of 2003. These cash outflows for investing activities were partially offset by $9.6 million received from the sale of marketable securities and unrestricting $2.7 million in previously restricted cash during the first quarter of 2003.

Financing Activities. We received net cash from financing activities of $31.1 million during the first quarter of 2004 and $4.6 million during the first quarter of 2003. During the first quarter of 2004, we raised cash of $15.0 million through the issuance of 10% Senior Convertible Notes to Permal U.S. Opportunities Limited, Zaxis Equity Neutral, L.P., Zaxis Institutional Partners, L.P., Zaxis Offshore Limited, Zaxis Partners, L.P. and Passport Master Fund, L.P and $18.5 million through the issuance of 10% Senior Convertible Notes to investment entities affiliated with Crosslink Capital, Criterion Capital Management, Heights Capital Management and Apex Capital. Additionally, we raised $163,000 from the issuance of common stock during the first quarter of 2004. These cash

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inflows from financing activities were partially offset by payments of $2.3 million to payoff our line of credit facility and $287,000 to payoff capital lease obligations. During the first quarter of 2003, we borrowed $4.9 million in cash against our line of credit facility with Silicon Valley Bank. This cash inflow from financing activities was partially offset by principal payments of $307,000 on note and capital lease obligations.

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

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

The table below sets forth our significant obligations and commitments as of March 31, 2004.

Contractual Obligations and Commitments

	Fiscal Year
	Total		2004		2005		2006		2007		2008 and Beyond
	(In thousands)
Contractual Cash Obligations:
Convertible notes, including interest (1)	$	105,468	$	6,809	$	7,059	$	43,429	$	14,250	$	33,921
Line of credit facility		—		—		—		—		—		—
Operating lease obligations		20,872		5,038		4,725		4,532		1,443		5,134
Capital lease obligations		1,827		742		650		435		—		—
Other purchase obligations (2)		10,772		8,254		1,342		1,061		115
Total Contractual Cash Obligations	$	138,939	$	20,843	$	13,776	$	49,457	$	15,808	$	39,055

(1) Includes the Critical Path 5 ³/4% Convertible Subordinated Notes due March 2006 and 10% Senior Notes due in November 2007, January 2008 and March 2008.

(2) Represent certain contractual obligations related to licensed software, maintenance contracts and network infrastructure storage costs.

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

In March 2004, we executed an agreement that extends the maturity of $32.8 million in face value of the 5 ³/4% convertible subordinated notes due in April 2005 to April 2006, if our shareholders do not approve the conversion of these notes into new Series E preferred stock. In the event the maturity is extended, $32.8 million currently due in April 2005 will be extended to April 2006. In addition, under the agreement we would be required to increase the

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interest rate for the extended one-year period to 7.5% and pay a fee for such extension of $1.5 million. Under the amended agreement for the $32.8 million in notes, $100,000 in fees would be due in 2004, $2.6 million in fees and interest would be due in 2005 and $34 million in principal and interest would be due in 2006.

Recent accounting pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective for all new variable interest entities created or acquired after January 31, 2003. In December 2003, the FASB issued FIN 46R which supercedes FIN 46. FIN 46R is applicable in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. The adoption of this standard did not have a material impact on our results of operations or financial condition.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06, or EITF 03-06, “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share”. EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. We are currently evaluating the impact of the adoption of EITF 03-06 on our results of operations and financial position.

Subsequent Event

In April 2004, the Company entered into a Separation Agreement and Mutual Release with William McGlashan (the Executive) the Company’s former Chief Executive Officer. The Company expects to record a charge related to the agreement during the three month period ending June 30, 2004. The Company and the Executive have mutually agreed to treat the termination of employment as eligible for payment of certain of the separation benefits provided under the Employment Agreement with additional provisions as set forth below. (i) the Executive will forfeit his eligibility to receive a loan from the Company, (ii) the Executive will continue to serve as a nonemployee Chairman of the Board of Directors, (iii) the Change of Control Severance Agreement between the Company and the Executive is amended to provide that its applicability shall be extended and that any payout to the Executive first be reduced by $405,000, (iv) the Executives outstanding stock options shall cease vesting but remain exercisable for a period of three years, (v) the Executive outstanding stock loan shall be retired and the Loan Agreement between the Company and the Executive be terminated.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

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

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

In past quarters, we have spent heavily on technology and infrastructure development. We may continue to spend substantial financial and other resources to further develop and introduce new messaging and identity management solutions, and to improve our sales and marketing organizations, strategic relationships and operating infrastructure. We expect that our cost of revenues, sales and marketing expenses, general and administrative

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expenses, operations, research and customer support expenses and depreciation and amortization expenses could continue to increase in absolute dollars and may increase as a percent of revenues. In addition, in future periods we may incur significant non-cash charges related to stock-based compensation. If revenues do not correspondingly increase, our operating results could decline. If we continue to incur net losses in future periods, we may not be able to retain employees, or fund investments in capital equipment, sales and marketing programs, and research and development to successfully compete against our competitors. We also may never obtain sufficient revenues to exceed our cost structure and achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability in the future. This may also, in turn, cause the price of our common stock to demonstrate volatility and/or continue to decline.

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

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

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

As of April 28, 2004, there were 4,188,587 shares of Series D preferred stock outstanding, which were convertible, at the option of the holders, into approximately 16.5 million shares of common stock. If we obtain shareholder approval, we will also amend the terms of the Series D preferred stock, including the conversion ratio, to increase the number of shares of common stock initially issuable upon conversion of the Series D preferred stock to approximately 45.4 million. In addition, if we obtain shareholder approval, we will be issuing approximately 52.8 million shares of Series E preferred stock that are initially convertible, at the option of the holders, into an equal number of shares of common stock. In addition, if all the subscription rights being offered in the proposed rights offering are exercised, the shares of Series E preferred stock issued in the rights offering will initially convert into up to approximately 14.0 million shares of common stock. Accordingly, if we obtain shareholder approval and we sell all the shares of preferred stock offered in the proposed rights offering, our preferred stock will initially be convertible into approximately 112.2 million shares of common stock. Even if we do not obtain shareholder approval, in addition to the approximately 16.5 million shares of common stock currently issuable upon conversion of the outstanding Series D preferred stock, approximately $33.5 million in principal amount of 10% convertible notes plus accrued dividends will be convertible, at the option of each note holder, into approximately 52.8 million shares of common stock. Increasing the number of additional shares of common stock that may be sold into the market by this amount could substantially decrease the price of our common stock.

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

Currently, shares of Series D preferred stock accrue dividends at a compounded annual rate of 8%. If the maximum amount of dividends were to accrue to the Series D preferred stock prior to the automatic call for redemption date, a total of approximately 20.3 million shares of common stock, or an additional 3.8 million shares, would be issuable upon conversion. If our shareholders approve the amendment to the terms of the Series D preferred stock and we issue approximately 66.8 million shares of Series E preferred stock, all of which will accrue dividends at a rate of 5 ³/4% per year, and the maximum amount of dividends accrue prior to the automatic call for redemption date, the number of shares of common stock issuable upon conversion will increase by approximately 25.9 million shares to approximately 138.1 million shares.

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

In the event of liquidation, dissolution, winding up or change of control of Critical Path, if we issue shares of Series E preferred stock, the holders of Series E preferred stock would be entitled to receive $1.50 per share of Series E preferred stock plus all accrued dividends on such share before any proceeds from the liquidation, dissolution or winding up is paid with respect to any other series or class of our capital stock. Accordingly, if we obtain stockholder approval for the transactions contemplated by the convertible note purchase and exchange agreement and the January 2004 and March 2004 private placements, the approximately 52.8 million shares of Series E preferred stock that will be outstanding will initially have an aggregate liquidation preference of approximately $79.2 million. If all 14 million additional shares of Series E preferred stock are purchased pursuant to the proposed rights offering, the initial aggregate liquidation preference of the Series E preferred stock will increase to approximately $100.2 million. The aggregate amount of the preference will increase as the shares of Series E preferred stock accrue dividends based on simple interest at an annual rate of 5 ³/4%. After all of the then outstanding shares of Series E preferred stock have received payment of their liquidation preference, the holders of Series D preferred stock would be entitled to receive, at a minimum, $13.75 per share of Series D preferred stock plus all accrued dividends on such share before any proceeds from the liquidation, dissolution or winding up is paid to holders of our common stock. As of April 28, 2004, the shares of Series D preferred stock have an aggregate initial liquidation preference of approximately $69.2 million, which, as amended, will increase on a daily basis at an annual rate of 5 ³/4%. As amended, the shares of Series D preferred stock have a maximum aggregate initial liquidation preference of approximately $91 million. If we are acquired before the fourth anniversary of the date the shares of Series E preferred stock are first issued, the holders of Series D preferred stock will be entitled to receive an initial preference payment equal to approximately $91 million, regardless of the amount of dividends accrued at the time of the acquisition. Holders of our common stock will not receive any proceeds from a liquidation, winding up or dissolution, including from a change of control, until after the liquidation preferences of the our Series E preferred stock and our Series D preferred stock are paid in full. Consequently, the sale of all or substantially all of the shares of Critical Path may likely result in all or substantially all of the proceeds of such transaction being distributed to the holders of our Series E preferred stock and Series D preferred stock.

From time to time we engage in discussions with or receive proposals from third parties relating to potential acquisitions or strategic transactions that could constitute a change of control. While we have not engaged in any transaction of this type in the past, we will in the future continue to evaluate potential business combinations or strategic transactions which, if consummated, may constitute a change of control and trigger the liquidation preferences described above.

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

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

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Our cash resources are not readily available for our operations.

We face restrictions on our ability to use cash that we currently hold outside of the United States for purposes other than the operation of each of our respective foreign subsidiaries that hold such cash. For example, our ability to use cash held in our German subsidiary for any reason other than the operation of this subsidiary may result in certain tax liabilities and are subject to local laws that could prevent the transfer of cash from Germany to any other foreign or domestic account. At March 31, 2004, approximately $7.6 million was held outside of the United States. Our inability to utilize this cash could slow our ability to grow our business and reach our business objectives. We may also be forced to incur certain costs, such as tax liabilities, to be able to use this cash for domestic operations, which could cause our expenses to increase and our operating results to decline. In addition, a portion of our cash must be available to support our line of credit with Silicon Valley Bank and related letters of credit by the line of credit.

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

We cannot accurately forecast our revenues as a result of our evolving business strategy and the emerging nature of the Internet messaging infrastructure market. Forecasting is further complicated by recent strategic and operational restructurings, as well as fluctuations in license revenues as a percentage of total revenues from 30% in 2001 to 40% in 2002 and 31% in 2003. Our revenues in some past quarters fell and could continue to fall short of expectations if we experience delays or cancellations of even a small number of orders. We often offer volume-based pricing, which may affect our operating margins. A number of factors are likely to cause fluctuations in operating results, including, but not limited to:

• the demand for licensed solutions for messaging, and identity management products;

• the demand for outsourced messaging services generally and the use of messaging and identity management infrastructure products and services in particular;

• our ability to attract and retain customers and maintain customer satisfaction;

• our ability to attract and retain qualified personnel with industry expertise, particularly sales personnel;

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

• the budgeting and payment cycles of our customers and potential customers;

• the amount and timing of operating costs and capital expenditures relating to expansion of business and infrastructure;

• our ability to quickly handle and alleviate technical difficulties or system outages;

• the announcement or introduction of new or enhanced services by competitors;

• general economic and market conditions and their affect on our operations and the operations of our customers; and

• the effect of war, terrorism and any related conflicts or similar events worldwide.

In addition to the factors set forth above, operating results have been and will continue to be impacted by the extent to which we incur non-cash charges associated with stock-based arrangements with employees and non-employees. In particular, during the three months ended March 31, 2003 and 2004, we incurred stock-based compensation expense of $59,000 and $46,000, respectively, relating to the issuance of common stock and the grant of options and warrants to employees and non-employees. Grants of options and warrants also may be dilutive to existing shareholders.

Our revenues and operating results have declined and could continue to decline as a result of the elimination of product or service offerings through termination, sale or other disposition. Future decisions to eliminate, revise or limit any other offerings of a product or service would involve other factors that could cause our revenues to decline and our expenses to increase, including the expenditure of capital, the realization of losses, further reductions in our workforce, facility consolidation or the elimination of revenues along with the associated costs.

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

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

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

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

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

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

We depend on strategic relationships to expand distribution channels and opportunities and to undertake joint product development and marketing efforts. Our ability to increase revenues depends upon aggressively marketing our services through new and existing strategic relationships. In the third quarter of 2002, we entered into certain

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

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

We expect that sales of our products and services to a limited number of customers will continue to account for a high percentage of our revenue for the foreseeable future. For example, for the first quarter, our top ten customers accounted for approximately 26% of our total revenues and for the years ended December 31, 2003, 2002 and 2001, our top 10 customers accounted for approximately 27%, 31% and 20%, respectively, of our total revenues. Our future success depends on our ability to retain our current customers, and to attract new customers, in our target markets. The loss of one or several major customers, whether through termination of agreements, acquisitions or bankruptcy, could significantly reduce our revenues. Our agreements with our customers typically have terms of one to three years often with automatic one-year renewals and can be terminated without cause upon certain notice periods that vary among our agreements and range from a period of 30 to 120 days notice.

In addition, a number of our customers, particularly for our hosted services business and in the technology industry, have also suffered from falling revenue. Especially in the telecommunications industry, which, during the three months ended March 31, 2004, accounted for approximately 40% of the revenues from our top ten customers and for the fiscal years ended December 31, 2003, 2002 and 2001 accounted for approximately 53%, 44% and 55%, respectively, of the revenues from our top ten customers. The relative financial performance of our customers will continue to impact our sales cycles and our ability to attract new business. Worldwide technology spending has also decreased in recent quarters across all industries. If our customers terminate their agreements for any reason before the end of the contract term, the loss of the customer could reduce our current and future revenues. Also, if we are unable to enter into agreements with new customers and develop business with our existing customers, our business will not grow and we will not generate additional revenues.

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

Because we have a variety of messaging and directory infrastructure products and services, we encounter different competitors at each level of our products and services. Our primary competitors for service providers seeking insourced or outsourced product-based solutions are Sun Microsystems’ iPlanet, OpenWave Systems, Inc.,

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Mirapoint, Inc., Oracle Corporation, Microsoft Corporation and IBM Corporation’s Lotus Division. In the enterprise eBusiness directory category, we compete primarily with iPlanet, Microsoft Corporation and Novell Corporation, and our competitors in the meta-directory market are iPlanet, Microsoft, Novell and Siemens Corporation. Our competitors for corporate customers seeking outsourced hosted messaging solutions are e-mail service providers, such as CommTouch, Easylink Services Corporation (formerly Mail.com), USA.Net and application service providers who offer hosted communications services and hosted Microsoft Exchange services. If we are unable to successfully compete in our product market, our ability to retain our customers and attract new customers could decline.

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

• breadth of platform features and functionality of our offerings and the sophistication and innovation of competitors;

• total cost of ownership and operation;

• scalability, reliability, performance and ease of expansion and upgrade;

• ease of integration to customers’ existing systems; and

• flexibility to enable customers to manage certain aspects of their systems internally and leverage outsourced services in other cases when resources, costs and time to market reasons favor an outsourced offering.

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

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

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

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

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

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

We are a defendant in a shareholder lawsuit filed in San Diego Superior Court by shareholders of one of our former customers alleging we participated in fraudulent transactions to inflate artificially revenues of that customer. We are also a defendant in a number of securities class action lawsuits filed in the U.S. District Court for the Southern District of New York, alleging that prospectuses under which securities were sold contained false and misleading statements with respect to discounts and commissions received by underwriters. Should these lawsuits linger for a long period of time, whether ultimately resolved in our favor or not, or further lawsuits be filed against us, coverage limits of our insurance or our ability to pay such amounts may not be adequate to cover the fees and expenses and any ultimate resolution associated with such litigation. Likewise, we may not be able to conclude or settle such litigation on terms that coincide with the coverage limits of our insurance or ability to pay upon any final determination. It is also likely that our insurance may not cover some or all of the claims alleged in the pending lawsuits, which would require us, rather than our insurance carrier, to pay all or some of the expenses and damages, if any, relating to these claims. The size of these payments, individually or in the aggregate, could seriously impair our cash reserves and financial condition. The continued defense of these lawsuits also could result in continued diversion of our management’s time and attention away from business operations, which could cause our financial results to decline. A failure to resolve definitively current or future material litigation in which we are involved or in which we may become involved in the future, regardless of the merits of the respective cases, could also cast doubt as to our prospects in the eyes of our customers, potential customers and investors, which could cause our revenues and stock price to further decline.

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

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

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

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

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

Our current director and officer liability insurance, which was renewed in March 2004, and continues through March 2005, may not be adequate for the liabilities and expenses potentially incurred in connection with current and future claims. To the extent liabilities, expenses or settlements exceed the limitations or are outside of the scope of coverage, our business and financial condition could materially decline.

Under California law, in connection with our charter documents and indemnification agreements we entered into with our executive officers and directors, we must indemnify our current and former officers and directors to the fullest extent permitted by law. The indemnification covers any expenses and liabilities reasonably incurred in connection with the investigation, defense, settlement or appeal of legal proceedings. We have made payments and may continue to make payments in connection with the indemnification of officers and directors in connection with lawsuits and possibly pending investigations. See “Lingering effects of the recent SEC investigations could cause further disruption in our operations and lead to a decline in our financial results” on page 38. However, it is unlikely that our director and officer liability insurance will be available to cover such payments.

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

The loss of the services of key personnel may create a negative perception of our business and adversely affect our ability to achieve our business goals. Our success also depends on our ability to recruit, retain and motivate highly skilled sales and marketing, operational, technical and managerial personnel. Competition for these people is intense and we may not be able to successfully recruit, train or retain qualified personnel. If we fail to do so, we may be unable to develop new services or continue to provide a high level of customer service, which could result in the loss of customers and revenues. In addition, volatility and declines in our stock price may also affect our ability to retain key personnel, all of whom have been granted stock-based incentive compensation. In recent quarters we have also initiated reductions in our work force and job eliminations to balance the size of our employee base with anticipated revenue levels. Reductions in our workforce could make it difficult to motivate and retain remaining employees or attract needed new employees, and provide distractions affecting our ability to deliver products and solutions in a timely fashion and provide a high level of customer service and support.

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

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

In 2002, we incurred a number of restructuring charges related to the resizing of our business given market conditions and the current operating environment. These efforts included additional facilities and equipment lease terminations, continuing expense management and headcount reductions. In 2003, we continued to restructure our operations including consolidating some office locations and reducing our global workforce by approximately 175 positions, or approximately 30% of the workforce. We expect to continue to make determinations about the

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strategic future of our business and operations, and our ability to execute on such plans effectively and to make such determinations prudently could affect our future operations. A failure to execute successfully on such plans and to plan appropriately could cause or expenses to continue to outpace our revenues and our financial condition could significantly decline.

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

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

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

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

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

We currently license many third-party technologies and may need to license further technologies, which could delay and increase the cost of product and service developments.

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

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

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

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

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

Finally, the Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the Securities and Exchange Commission have required changes in corporate governance practices of public companies. In addition to final rules and rule proposals already made by the Securities and Exchange Commission, the Nasdaq Stock Market has adopted revisions to its requirements for listed companies. We are currently reviewing all of our accounting policies and practices, legal disclosure and corporate governance policies under the new legislation, including those related to our relationships with our independent auditors, enhanced financial disclosures, internal controls, board and board committee practices, corporate responsibility and loan practices, and intend fully to comply with such laws. We expect these new rules and regulations to make it more difficult for us to attract and retain qualified executive officers and qualified members of our board of directors, particularly to serve on our various committees of the Board including, in particular, the audit committee. Given the significant turnover of the members of our board of directors and the fact that some members would not qualify as “independent” under the new SEC rules and the listing standards adopted by the Nasdaq Stock Market to which we are subject, it may be difficult for us to maintain sufficient independent directors to comply with these new rules and regulations. For instance, we currently do not have a sufficient number of independent directors to constitute a majority of the board or to serve on the audit committee of the board under listing standards that will apply later this year. If we fail to comply, our common stock may be delisted from the Nasdaq National Market. Please see the discussion below titled “We may not be able to maintain our listing on the Nasdaq National Market, and if we fail to do so, the price and liquidity of our common stock may decline.”

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

The Nasdaq Stock Market has quantitative maintenance criteria for the continued listing of common stock on the Nasdaq National Market. The current requirements affecting us include (i) having total assets of at least $50 million, (ii) having total revenue of $50 million, and (iii) maintaining a minimum closing bid price per share of $1.00. On December 23, 2002, The Nasdaq Stock Market Inc. issued us a letter that we were not in compliance with

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the minimum closing bid price requirement and, therefore, faced delisting proceedings. Since that time, we have worked with The Nasdaq Stock Market in an effort to maintain our listing. On July 24, 2003, The Nasdaq Stock Market notified us that we had regained compliance with the requirements for continued listing. Nevertheless, we may not be able to comply with the quantitative or quantitative maintenance criteria or any of the Nasdaq National Market’s listing requirements or other rules, or other markets listing requirements to the extent our stock is listed elsewhere, in the future. For instance, if we were to issue a large number of shares of common stock, the price per share of the common stock could fall. If we fail to maintain continued listing on the Nasdaq National Market and must move to a market with less liquidity, our stock price would likely further decline. If we are delisted, it could have a material adverse effect on the market price of, and the liquidity of the trading market for, our common stock.

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

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

Our current insurance may not cover claims of these types or may not be adequate to indemnify us for all liability that may be imposed. There is a risk that a single claim or multiple claims, if successfully asserted against us, could exceed the total of our coverage limits. There also is a risk that a single claim or multiple claims asserted against us may not qualify for coverage under our insurance policies as a result of coverage exclusions that are contained within these policies. Should either of these risks occur, capital contributed by our shareholders might need to be used to settle claims. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage could result in substantial out-of-pocket costs to us, or could result in the imposition of criminal penalties.

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

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

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

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

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

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

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

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

We rely on a combination of trademark, copyright and trade secret laws, contractual restrictions, such as confidentiality agreements and licenses, and patents to establish and protect our proprietary rights, which we view as critical to our success. Our ability to compete and grow our business could suffer if these rights are not adequately protected. Despite the precautionary measures we take, unauthorized third parties may infringe or copy portions of our services or reverse engineer or obtain and use information that we regard as proprietary, which could harm our competitive position and market share. In addition, we have several patents pending in the United States and may seek additional patents in the future. However, the status of United States patent protection in the software industry is not well defined and will evolve as the U.S. Patent and Trademark Office grants additional patents. We do not know if our patent applications or any of our future patent applications will be issued with the scope of the claims sought, if at all, or whether any patents we have received or will receive will be challenged or invalidated.

Our proprietary rights may not be adequately protected because:

• laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies;

• policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of this unauthorized use; and

• end user license provisions in our contracts that protect us against unauthorized use, copying, transfer and disclosure of the licensed program may be unenforceable.

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

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

We assume a certain level of credit risk with our customers in order to do business. Conditions affecting any of our customers could cause them to become unable or unwilling to pay us in a timely manner, or at all, for products or services we have already provided them. For example, if economic conditions decline or if new or unanticipated government regulations are enacted which affect our customers, they may experience financial difficulties and be unable to pay their bills. In the past, we have experienced significant collection delays from certain customers, and

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we cannot predict whether we will continue to experience similar or more severe delays in the future. In particular, some of our customers are suffering from the general weakness in the economy and among technology companies in particular. Any reserves that we may establish to cover losses due to delays in their inability to pay may not be sufficient to cover our losses. If losses due to delays or inability to pay are greater than our reserves, our capital resources may not be sufficient to meet our operating needs and our business could suffer.

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

We derived 62% of our revenues from international sales in 2003 and 54% of our revenues from international sales in 2002. 63% of our revenues were from international sales during the three months ended March 31, 2004. We intend to continue to operate in international markets and to spend significant financial and managerial resources to do so. In particular, in 2002 we purchased the remaining interests of our joint venture partners for our operations in Japan. We hope to expend revenues and plan to increase resources to grow our operations in the Asian market. If revenues from international operations do not exceed the expense of establishing and maintaining these operations, our business and our ability to increase revenue and improve our operating results could suffer. We have limited experience in international operations and may not be able to compete or operate effectively in international markets. We face certain risks inherent in conducting business internationally, including:

• difficulties and costs of staffing and managing international operations;

• fluctuations in currency exchange rates and imposition of currency exchange controls;

• differing technology standards and language and translation issues;

• difficulties in collecting accounts receivable and longer collection periods;

• changes in regulatory requirements, including U.S. export restrictions on encryption technologies;

• political and economic instability;

• potential adverse tax consequences; and

• reduced protection for intellectual property rights in some countries.

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

The issuance of our Series E preferred stock to the General Atlantic Investors and the Cheung Kong Investors upon conversion of their convertible notes and the amendment of the terms of the Series D preferred stock will result in significant equity ownership by the General Atlantic Investors and the Cheung Kong Investors, which may limit the ability of our other shareholders to influence significant corporate decisions either of which could delay or prevent a change of control or depress our stock price.

If we obtain shareholder approval and convert the notes held by the General Atlantic Investors and the Cheung Kong Investors into Series E preferred stock and amend the terms of our Series D preferred stock, the General Atlantic Investors will beneficially own approximately 30% of our outstanding securities (which represents 20.8% of the voting power) and the Cheung Kong Investors will beneficially own approximately 26.2% of our outstanding securities (which represents 27.6% of the voting power). In addition, the General Atlantic Investors have the right, but not the obligation, to purchase 55% of the shares of Series E preferred stock not subscribed for by the holders of our common stock and the Cheung Kong Investors have the right, but not the obligation, to purchase 45% of the shares of Series E preferred stock not subscribed for by the holders of our common stock. Further, the General Atlantic Investors and the Cheung Kong Investors have the right to purchase shares of Series E preferred stock, if any, not purchased by the other. Accordingly, the percentage ownership of the General Atlantic Investors and the Cheung Kong Investors may increase as a result of the proposed rights offering. In addition, the holders of our Series D preferred stock, which is controlled by the General Atlantic Investors, are entitled to elect one director and, upon consummation of the transactions contemplated by the convertible note purchase and exchange agreement, the

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Cheung Kong Investors will have the right to elect one director. As a result, the General Atlantic Investors and the Cheung Kong Investors, although not affiliated, will have the ability, acting together, to control the outcome of shareholder votes, including votes concerning the election of a majority of our directors, approval of merger transactions involving us and the sale of all or substantially all of our assets or other business combination transactions, charter and bylaw amendments and other significant corporate actions, which could delay or prevent a change in control or depress our stock price.

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

The significant equity ownership by each of the General Atlantic Investors and the Cheung Kong Investors could create conflicts of interest between these majority shareholders and our other shareholders and between the General Atlantic Investors and the Cheung Kong Investors. For example, the General Atlantic Investors and the Cheung Kong Investors can approve a change in control transaction in order to receive payment of their liquidation preference even if our other shareholders oppose the transaction, which could depress the price of our common stock. Alternatively, the General Atlantic Investors and the Cheung Kong Investors may prevent or delay a corporate transaction that is favored by our other shareholders. In addition, it is also possible that the risk that the General Atlantic Investors and the Cheung Kong Investors may disagree on approving a significant corporate transaction, for example a change in control transaction, which could depress our stock price, limit the number of potential investors willing to pursue such a transaction with us or limit the price that investors might be willing to pay for future shares of our common stock.

The conversion price for our 10% senior convertible notes and the subscription price determined for our proposed rights offering is not necessarily an indication of our value.

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

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

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

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

The trading price of our common stock has been and may continue to experience volatility, wide fluctuations and declines. For example, during the first quarter of 2004, the closing sale prices of our common stock on the Nasdaq National Market ranged from $1.31 on January 6, 2004 to $2.63 on February 19, 2004. Our stock price may further decline or fluctuate in response to any number of factors and events, such as announcements related to technological innovations, intense regulatory scrutiny and new corporate and securities and other legislation, strategic and sales

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

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

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

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

• prohibit shareholder action by written consent; and

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

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

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

If we account for employee stock options using the fair value method, it could significantly impact our results from operations.

There has been ongoing public debate whether stock options granted to employees should be treated as a compensation expense and, if so, how to properly value such charges. On March 31, 2004, the Financial Accounting Standard Board (FASB) issued an Exposure Draft, Share-Based Payment: an amendment of FASB statements No. 123 and 95, which would require a company to recognize, as an expense, the fair value of stock options and other stock-based compensation to employees beginning in 2005 and subsequent reporting periods. If we elect or are required to record an expense for our stock-based compensation plans using the fair value method as described in the Exposure Draft, we could have significant and ongoing accounting charges.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following table presents the hypothetical changes in fair value in our outstanding convertible subordinated notes and senior convertible notes at March 31, 2004. The value of both instruments is sensitive to changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of plus or minus 50 basis points ( BPS ), 100 BPS and 150 BPS over a twelve-month time horizon. The base value represents the traded fair market value of the notes (in thousands):

	Valuation of Borrowing Given an Interest Rate Decrease of X Basis Points						No Change in Interest Rate		Valuation of Borrowing Given an Interest Rate Increase of X Basis Points
	150 BPS		100 BPS		50 BPS				50 BPS		100 BPS		150 BPS
5 3/4% Convertible subordinated notes	$	35,226	$	35,055	$	34,885	$	34,716	$	34,548	$	34,380	$	34,214
10% senior convertible notes	$	44,612	$	43,994	$	43,777	$	43,561	$	43,346	$	43,133	$	42,921

As of March 31, 2004, we had cash and cash equivalents of $37.1 million and no investments in marketable securities. Our long-term obligations consist of our $38.4 million five-year, 5 ³/4% Convertible Subordinated Notes due April 2005, $43.6 million four-year, 10% Senior Convertible Notes due November 2007, January 2008 and March 2008 and certain fixed rate capital leases. Accordingly, an immediate 10% change in interest rates would not affect our long-term obligations or our results of operations.

A significant portion of our international operations has a functional currency other than the United States dollar. Accordingly, we are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, and assets and liabilities of these operations. Fluctuations in exchange rates may harm our results of operations and could also result in exchange losses. The impact of future exchange rate fluctuations cannot be predicted with any certainty, however our exposure to foreign currency rate risk is primarily associated with fluctuations in the Euro. We realized a net gain on foreign exchange of $362,000 during the first quarter of 2004. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Chief Executive Officer and the Chief Financial Officer have concluded that these controls and procedures are effective at the “reasonable assurance” level.

Based on their evaluation as of of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

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

PART 2 — OTHER INFORMATION

Item 1. Legal Proceedings

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

Action in the Superior Court of San Diego. On December 24, 2003, we were named in a lawsuit filed by former shareholders of Remedy Corporation against current and former officers and directors of Peregrine Systems, Inc., Peregrine’s former accountants, some of Peregrine’s customers, including ourselves, and various other unnamed defendants. The second amended complaint alleges that we, as Peregrine’s customer, engaged in a series of fraudulent transactions with Peregrine that were not accounted for by Peregrine in conformity with GAAP and that this substantially inflated the value of Peregrine securities issued as consideration in Remedy’s merger with Peregrine in August 2001. The complaint alleges causes of action for fraud and deceit, negligent misrepresentation, violations of California Corporations Code provisions regarding sales of securities by means of false statements or omissions, violations of California Corporations Code provisions regarding securities sales made on the basis of undisclosed, material inside information, common law conspiracy to commit fraud, and common law aiding and abetting the commission of fraud. The complaint seeks an unspecified amount of compensatory and punitive damages, along with rescission of the Peregrine securities purchased in the Remedy merger, interest and attorneys fees. We believe the claims are without merit and intends to defend itself vigorously. Litigation in this matter is ongoing.

Securities Class Action in Southern District of New York. Beginning on July 18, 2001, a number of securities class action complaints were filed against us, and certain of our former officers and directors and underwriters connected with our initial public offering of common stock in the U.S. District Court for the Southern District of New York (In re Initial Public Offering Sec. Litig.). The purported class action complaints were filed by individuals who allege that they purchased our common stock at the initial and secondary public offerings between March 29, 1999 and December 6, 2000. The complaints allege generally that the prospectus under which such securities were sold contained false and misleading statements with respect to discounts and excess commissions received by the underwriters as well as allegations of “laddering” whereby underwriters required their customers to purchase additional shares in the aftermarket in exchange for an allocation of IPO shares. The complaints seek an unspecified amount in damages on behalf of persons who purchased our stock during the specified period. Similar complaints have been filed against 55 underwriters and more than 300 other companies and other individuals. The over 1,000 complaints have been consolidated into a single action. We have reached an agreement in principle with the plaintiffs to resolve the cases. The proposed settlement involves no monetary payment by us and no admission of liability. However it is subject to approval by the Court.

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

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

In April 2002, the landlord filed suit in San Francisco Superior Court against us alleging, among other things, breach of the lease and tort claims related to the lease transaction. In its complaint, the landlord sought unspecified damages for back rent, attorneys’ fees, treble damages under certain statutes, and unspecified punitive damages. Between April 2002 and July 2003, we succeeded through several motions filed with the Court in having a number of the landlord’s claims dismissed and some of its requests for damages stricken, including treble damages. The landlord has chosen not to further amend its complaint. In August 2003, we filed our answer to the second amended complaint and a cross-complaint against the landlord, under which we sought compensatory damages and unspecified punitive damages for the landlord’s failure to disclose the zoning restrictions on the leased premises before the lease was signed. In early February, we reached an agreement in principle with the landlord to fully and finally settle this litigation in exchange for $100,000 in cash and a warrant to purchase 100,000 shares of common stock at a purchase price equal to current fair market value as of the date of settlement. A final written settlement agreement was executed by the parties on May 4, 2004. However, the cases have not yet been dismissed.

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

Other Contractual Obligations We entered into other contractual obligations which total $10.8 million at March 31, 2004. These obligations are primarily associated with the maintenance of hardware and software products being utilized within engineering and hosted operations, and the management of data center operations and network infrastructure storage for our hosted operations. These obligations are expected to be completed over the next 4 years, including $8.3 million in 2004.

Indemnifications. We provide general indemnification provisions in our license agreements. In these agreements, we generally state that we will defend or settle, at our own expense, any claim against the customer by a third party asserting a patent, copyright, trademark, trade secret or proprietary right violation related to any products that we have licensed to the customer. We agree to indemnify our customers against any loss, expense or liability, including reasonable attorney’s fees, from any damages alleged against the customer by a third party in its course of using products sold by us. We have not received any claims under this indemnification and do not know of any instances in which such a claim may be brought against us in the future.

Under California law, in connection with both our charter documents and indemnification agreements we entered into with its 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. We have made payments in connection with the indemnification of officers and directors in connection with currently pending lawsuits and have reserved for estimated future amounts to be paid in connection with legal expenses and others costs of defense of pending lawsuits.

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Item 2. Changes in Securities and Issuer Purchases of Securities

(c) Recent Sales of Unregistered Securities

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

In March 2004, we issued $18.5 million in principal amount of 10% senior convertible notes to investment entities affiliated with Crosslink Capital, Criterion Capital Management, Heights Capital Management and Apex Capital. These notes are convertible into approximately 12.3 million shares of Series E convertible preferred stock at $1.50 per share only if we receive shareholder approval. If we do not obtain shareholder approval, these notes will be convertible, at the option of each note holder, into shares of our common stock at $2.18 per share, provided the note holder will not be able to convert its notes into shares of common stock to the extent the note holder, together with its affiliates, would own 9.9% or more of our common stock after conversion. The investors were qualified institutional buyers and the issuance of the notes was exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder.

In February 2004, in settlement of litigation with a landlord regarding office space in San Francisco, California, we reached an agreement in principle to issue a warrant to purchase up to 100,000 shares of common stock at $2.34 per share, the fair market value of our common stock on that day. We intend to issue the warrant and underlying shares of common stock based on an exemption from registration provided by Section 4(2) of the Securities Act and Regulation D thereunder.

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

In each case where we have indicated that we relied on Section 4(2) of the Securities Act and Regulation D promulgated under that Act, our reliance was based on the fact that (1) the issuance of the securities did not involve a public offering, (2) there were no more than 35 investors, (3) each investor represented to us that it was either an “accredited investor” (as defined in Regulation D) and/or that it had such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment and to make an informed investment decision, (4) each investor agreed that the securities acquired cannot be sold without registration under the Securities Act, except in reliance upon an exemption from that Act and applicable securities laws, (5) each investor represented to us its intention to acquire the securities for investment only and not with a view to distribution, (6) appropriate legends were affixed to the certificates representing the securities, (7) the offers and sales were made in compliance with Rules 501 and 502 of Regulation D, and (8) each investor acknowledged that it had adequate access to sufficient information about us to make an informed investment decision.

(e) Issuer Purchases of Equity Securities.

We repurchased no equity securities during the period covered by this report.

In connection with William E. McGlashan, Jr.’s termination as our Chief Executive Officer and continuation as our Chairman of the Board, our board of directors approved entering into a Separation Agreement with him that amends and restates provisions of his employment and change of control agreements. With respect to the promissory note and stock pledge agreement in principal amount of $1.74 million that we entered into with Mr. McGlashan in May 2002 to fund his early exercise of options to purchase 250,000 shares of our common stock, we agreed to permit Mr. McGlashan to repay the loan by surrendering all of the shares of common stock acquired by early exercise.

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

Item 5. Other Information.

(a) Recent Events.

Special Shareholder Meeting

Our board of directors has called a special meeting of our shareholders for June 11, 2004. Our board of directors is soliciting proxies for the special meeting pursuant to a proxy statement that was mailed to our shareholders on or about May 7, 2004. Shareholders of record on April 30, 2004 will be entitled to vote at the special meeting. We are seeking to approve:

• the issuance of approximately 7.3 million shares of Series E preferred stock with a price per share of $1.50 to General Atlantic Partners 74, L.P., GAP Coinvestment Partners II, L.P., GapStar, LLC and GAPCO GmbH & Co. K.G. (referred to below as the General Atlantic investors), which are issuable upon conversion of $11 million principal amount and interest of the convertible notes, and such additional shares of Series E preferred stock as they may purchase in connection with the proposed rights offering;

• the issuance of approximately 21.9 million shares of Series E preferred stock with a price per share of $1.50 to a group of investors led by Cheung Kong Group and its Whampoa Limited affiliates including Campina Enterprises Limited, Cenwell Limited, Great Affluent Limited, Dragonfield Limited and Lion Cosmos Limited, which are issuable upon exchange of approximately $32.8 million principal amount of 5 ³/4% convertible subordinated notes, and such additional shares of Series E preferred stock as they may purchase in connection with the proposed rights offering;

• the issuance of approximately 10 million shares of Series E preferred stock with a price per share of $1.50 to Permal U.S. Opportunities Limited, Zaxis Equity Neutral, L.P., Zaxis Institutional Partners, L.P., Zaxis Offshore Limited, Zaxis Partners, L.P. and Passport Master Fund, L.P., which are issuable upon conversion of approximately $15.0 million principal amount and interest of 10% convertible notes;

• the issuance of approximately 12.3 million shares of Series E preferred stock with a price per share of $1.50 to entities affiliated with Crosslink Capital, Criterion Capital Management, Heights Capital Management and Apex Capital, which are issuable upon conversion of approximately $18.5 million principal amount and interest of 10% convertible notes;

• the amendment of warrants to purchase 625,000 shares of common stock held by members of the General Atlantic investors that reduce the exercise price per share from $4.20 to $1.50;

• an amendment to our current amended and restated articles of incorporation to increase the authorized number of shares of common stock from 125 million to 200 million and the authorized number of shares of preferred stock from 5 million to 75 million; and

• an amended and restated certificate of determination of preferences of Series D preferred stock to, among other things, amend the Series D preferred stock liquidation preference upon a liquidation and change of control, to eliminate the participation feature, to reduce the conversion price from $4.20 to $1.50 and to reduce the amount of dividends to which the holders of Series D preferred stock are entitled.

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If the matters above are approved by our shareholders, we will exchange 69,149 shares of Series D preferred stock for 733,333 shares of Series E preferred stock pursuant to a settlement agreement that we entered into with MBCP PeerLogic, LLC and its affiliates on November 21, 2003.

Rights Offering

Our board of directors declared a dividend of rights to purchase preferred stock to shareholders of record on April 30, 2004. Each record shareholder will receive 0.65 subscription rights for each share of our common stock held on the record date. Each subscription right entitles the holder to purchase one share of our Series E preferred stock at the subscription price of $1.50 per share. Each share of Series E preferred stock is convertible into the number of shares of common stock obtained by dividing $1.50 plus the amount of dividends accreted to the Series E preferred stock from the date of issuance through the most recent semi-annual dividend accrual date by $1.50. We filed a registration statement for the Series E preferred stock to be issued pursuant to the rights offering, which the Securities and Exchange Commission declared effective on May 5, 2004. If shareholders approve the matters set forth above at a special meeting to be held on June 11, 2004, we currently intend to consummate the rights offering on or around June 25, 2004.

Management and Board of Director Changes

In January 2004, William S. Cohen and Raul J. Fernandez resigned from our board of directors, and in February 2004, Peter L.S. Currie, who is affiliated with the General Atlantic Investors, one of our principal shareholders, was appointed to fill a vacancy. In March 2004, Chris Gorog resigned from our board of directors and Frost R.R. Prioleau was appointed to fill the vacancy. In February 2004, William M. Smartt resigned as our Executive Vice President and Chief Financial Officer and James Clark, formerly chief financial officer of Diversified Healthcare Services, Inc., was hired as his successor. Most recently, in March 2004, we appointed Mark Ferrer, formerly president and chief executive officer of Vastera, Inc., to assume the position of Chief Executive Officer formerly held by William McGlashan, Jr., who continues to serve as Chairman of the Board of Directors.

At the end of March 2004, we appointed Mark Ferrer to assume the position of Chief Executive Officer formerly held by William McGlashan, Jr. Mr. McGlashan continues to serve as Chairman of the Board of Directors. We entered into an employment agreement with Mr. Ferrer pursuant to which we agreed to pay him an annual base salary of $375,000. Mr. Ferrer is also eligible to receive annual bonus compensation of 50% of his base salary for achieving performance objectives established by our board of directors (or a committee) or as high as 150% of Mr. Ferrer’s base salary for extraordinary performance as determined by the board of directors (or a committee). Pursuant to Mr. Ferrer’s employment agreement, on March 29, 2004, we granted him options to purchase up to 1,061,052 shares of our common stock at $2.11 per share and 707,368 shares of restricted common stock. We also agreed that, upon consummation or termination of our proposed rights offering and subject to the approval of our board of directors, Mr. Ferrer would receive an additional grant of stock options at fair market value on the date of grant and restricted stock so that Mr. Ferrer would continue to hold options to purchase up to 1.5% of our outstanding stock and restricted shares of common stock equal to 1% of our outstanding stock to take into account the dilutive effect of those transactions.

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

(b) Disclosure regarding Nominating Committee Functions and Communications between Security Holders and Boards of Directors.

No change.

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

4.47	Form of Warrant to Purchase up to 100,000 shares of Common Stock, by and between Max Limited and the Registrant
10.62	Separation Agreement and Mutual Release, dated as of April 14, 2004, by and between the Registrant and William McGlashan
10.63	Amendment to Employment Agreement, dated December 20, 2002, by and between the Registrant and Michael Zukerman
10.64	Change of Control Severance Agreement, dated as of May 29, 2003, by and between the Registrant and Michael J. Zukerman
10.65	Amendment to Employment Agreement, dated December 23, 2003, by and between the Registrant and Michael J. Zukerman
10.66	Waiver Agreement made and entered into as of December 23, 2003, by and between Registrant and Michael J. Zukerman
10.67	Confidential Settlement Agreement and Mutual Release, effective February 4, 2004, by and between Max Limited, LLC, and the Registrant; Prince Acquisition Corp.; and PeerLogic, Inc.
10.68	Fourth Amendment to Amended and Restated Loan and Security Agreement dated as of April 15, 2004 by and between Registrant and Silicon Valley Bank
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

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

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

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

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

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

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

• A Current Report on Form 8-K was furnished by the Company on April 29, 2004. In this report, Critical Path furnished a press release announcing the preliminary unaudited financial results for its fiscal quarter ended March 31, 2004.

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SIGNATURE

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

CRITICAL PATH, INC.
By:	/s/ JAMES A. CLARK
	James A. Clark Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

Date: May 10, 2004

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INDEX TO EXHIBITS

4.47	Form of Warrant to Purchase up to 100,000 shares of Common Stock, by and between Max Limited and the Registrant
10.62	Separation Agreement and Mutual Release, dated as of April 14, 2004, by and between the Registrant and William McGlashan
10.63	Amendment to Employment Agreement, dated December 20, 2002, by and between the Registrant and Michael Zukerman
10.64	Change of Control Severance Agreement, dated as of May 29, 2003, by and between the Registrant and Michael J. Zukerman
10.65	Amendment to Employment Agreement, dated December 23, 2003, by and between the Registrant and Michael J. Zukerman
10.66	Waiver Agreement made and entered into as of December 23, 2003, by and between Registrant and Michael J. Zukerman
10.67	Confidential Settlement Agreement and Mutual Release, effective February 4, 2004, by and between Max Limited, LLC, and the Registrant; Prince Acquisition Corp.; and PeerLogic, Inc.
10.68	Fourth Amendment to Amended and Restated Loan and Security Agreement dated as of April 15, 2004 by and between Registrant and Silicon Valley Bank
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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EX-4.47

EXHIBIT 4.47

THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. NO SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, OR (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.

WARRANT TO PURCHASE COMMON STOCK

OF

CRITICAL PATH, INC.

Void after March 5, 2007

This certifies that, for value received, Max Limited, a California limited liability company, or registered assigns (“Holder”), is entitled, subject to the terms set forth below, to purchase from CRITICAL PATH, INC, a California corporation (the “Company”), 100,000 shares of the Common Stock (“Common Stock”) of the Company, as constituted on the date hereof (the “Warrant Issue Date”), upon surrender hereof, at the principal office of the Company referred to below, with the subscription form attached hereto duly executed, and simultaneous payment therefor in lawful money of the United States or otherwise as hereinafter provided, at the Exercise Price as set forth in Section 2 below. The term “Warrant” as used herein shall include this Warrant, and any warrants delivered in substitution or exchange therefor as provided herein.

1. Term of Warrant. Subject to the terms and conditions set forth herein, this Warrant shall be exercisable, in whole or in part, during the term commencing on the Warrant Issue Date and ending at 5:00 p.m., PST, on March 5, 2007, and shall be void thereafter.

2. Exercise Price.

(a) The exercise price at which this Warrant may be exercised shall be Two and Thirty-Four One Hundredths Dollars ($2.34) per share of Common Stock, as the same may be adjusted pursuant to Section 2(b) below (“Exercise Price”).

(b) The Common Stock issuable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows:

(i) Adjustment for Dividends in Stock or Other Securities or Property. In the event, at any time or from time to time, on or after the date hereof, the holders of the Common Stock of the Company (or any shares of stock or other securities at the time issuable upon the exercise of this Warrant) shall have received or, on or after the record date fixed for the

determination of eligible stockholders (the “Record Date”), shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, the Holder shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Company which such Holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the Record Date and had thereafter, during the period from the Record Date to and including the date of such exercise, retained such shares and/or all other additional stock during such period, giving effect to all adjustments called for during such period by this paragraph.

(ii) Stock Splits and Reverse Stock Splits. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall thereby be proportionately reduced and the number of shares receivable upon exercise of the Warrant shall thereby be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number of shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall thereby be proportionately increased and the number of shares receivable upon exercise of this Warrant shall thereby be proportionately decreased.

(iii) Assumption of Warrant. If at any time, while this Warrant, or any portion thereof, is outstanding and unexpired there shall be (a) an acquisition of the Company by another entity by means of a merger, consolidation, or other transaction or series of related transactions resulting in the exchange of the outstanding shares of the Company’s Common Stock such that stockholders of the Company prior to such transaction own, directly or indirectly, less than 50% of the voting power of the surviving entity, or (b) a sale or transfer of all or substantially all of the Company’s assets to any other person, then, as a part of such acquisition, sale or transfer, lawful provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Exercise Price, the number of shares of stock or other securities or property of the successor corporation resulting from such acquisition, sales or transfer which the holder of the Common Stock deliverable upon exercise of this Warrant would have been entitled to receive in such acquisition, sale or transfer if this Warrant had been exercised immediately before such acquisition, sale or transfer.

3. Exercise of Warrant.

(a) The purchase rights represented by this Warrant are exercisable by the Holder in whole or in part (but in multiples of 1,000 shares if exercised in part), at any time, or from time to time, during the term hereof as described in Section 1 above, by the surrender of this Warrant and the notice of exercise annexed hereto (Exhibit “A”)(“Notice of Exercise”) duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), upon payment in cash or equivalent of the purchase price of the shares to be purchased.

2

(b) In lieu of exercising this Warrant in the manner provided in Section 3(a) above, the Holder may elect to receive shares equal to the value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant and the Notice of Exercise duly completed and executed on behalf of the Holder, at the office of the Company in which event the Company shall issue to holder a number of shares of Common Stock computed using the following formula:

X = Y (A - B)

            A

Where X = The number of shares of Common Stock to be issued to Holder by Holder’s exercise of the Warrant pursuant to Section 3(b).

Y = The number of shares of Common Stock that may be acquired on the exercise of this Warrant (at the date of such calculation).

A = The fair market value of the Common Stock (at the date of such calculation).

B = The Exercise Price

For purposes of this Section 3(b), fair market value of the Common Stock shall mean the average of the closing bid and asked prices of the Common Stock quoted in the over-the-counter market summary or the closing price quoted by the Nasdaq National Market or any exchange on which the Common Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the business day prior to the date of determination of fair market value. If the Common Stock is not traded over-the-counter, on the Nasdaq National Market or on an exchange, the fair market value shall be the price per share as determined in good faith by the Company’s Board of Directors.

(c) This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company at its expense will execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant has not been exercised.

4. Replacement of Warrant. On receipt of evidence reasonably satisfactory of the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount.

3

5. Rights of Stockholders. The Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Stock for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised as provided herein and then, only in respect of those shares of Common Stock issued upon such exercise.

6. Transfer of Warrant.

(a) Warrant Register. The Company will maintain a register (the “Warrant Register”) containing the names and addresses of the Holder or Holders. Any Holder of this Warrant or any portion thereof may change his address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary.

(b) Warrant Agent. The Company may, by written notice to the Holder, appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 6(a) above, replacing this Warrant with a certificate evidencing the Holder’s ownership hereof under an agreement with any such agent upon substantially the terms hereof, issuing the Common Stock or other securities then issuable upon the exercise of this Warrant, exchanging this Warrant, or any or all of the foregoing. Thereafter, any such registration, issuance, exchange, or replacement, as the case may be, shall be made at the office of such agent.

(c) Transferability and Negotiability of Warrant. This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and the transferee. Subject to compliance with such laws, title to this Warrant may be transferred by endorsement (by the Holder executing the Assignment Form annexed hereto (Exhibit “B”)) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery.

(d) Exchange of Warrant Upon a Transfer. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions of this Warrant with respect to compliance with applicable securities laws and with the limitations on assignments and transfers contained in this Section 6, the Company at its expense shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof.

(e) Compliance with Securities Laws. The Holder of this Warrant, by acceptance hereof, agrees that the Holder will not offer, sell or otherwise dispose of this Warrant

4

or any shares of Common Stock to be issued upon exercise hereof except under circumstances that will not result in a violation of the federal or any state securities laws.

7. Authority; Reservation of Stock. The Company has the right and power, and is duly authorized and empowered, to enter into, execute, deliver and perform its obligations under this Warrant. The Company covenants that during the term this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant and, from time to time, will take all steps necessary to amend its Certificate of Incorporation to provide sufficient reserves of shares of Common Stock issuable upon exercise of the Warrant. The Company further covenants that all shares that may be issued upon the exercise of the rights represented by this Warrant and payment of the Exercise Price, all as set forth herein, will be free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein). The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant.

8. Notices.

(a) In case:

(i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or

(ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation, or

(iii) of any voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Holder or Holders a notice specifying, as the case may be, (A) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (B) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance dissolution, liquidation or winding-up. Such notice shall be mailed at least 15 days prior to the date therein specified.

5

(b) All such notices, advices and communications shall be deemed to have been received (i) in the case of personal delivery, on the date of such delivery and (ii) in the case of mailing, on the third business day following the date of such mailing.

9. Amendments. Any term of this Warrant may be amended with the written consent of the Company and the Holder. No waivers of, or exceptions to, any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision.

10. Miscellaneous.

(a) Governing Law. This Warrant shall be governed in all respects by the laws of the State of California as it is applied to domiciliaries thereof.

(b) Successors and Assigns. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the successors and permitted assigns of the Company and the Holder. Nothing in this Warrant is intended to confer upon any party other than the Company and the Holder or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Warrant, except as expressly provided in this Warrant.

(c) Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by United States first-class mail, postage prepaid, or delivered personally addressed by hand or special courier (a) if to the Holder, to the address of the Holder indicated on the records of the Company, or at such other address as the Holder shall have furnished to the Company in writing, or (b) if to the Company, at 350 The Embarcadero, San Francisco, CA 94105, or at such other address as the Company shall have furnished to the Holder in writing. Except as otherwise specified herein, all such notices and other written communications shall be effective (i) if mailed, three (3) days after mailing and (ii) if delivered, upon delivery.

(d) Entire Agreement. This Warrant constitutes the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements or understandings, written or oral, between the parties with respect thereto.

(e) Attorneys’ Fees. In the event that any dispute between the Company and the Holder should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Warrant, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals.

(f) Section Headings. Section captions are inserted for convenience only and are not to be construed to define, limit or affect the construction or interpretation hereof.

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized.

6

Dated:

CRITICAL PATH, INC.

By

Name :

Title:

7

Exhibit “A”

NOTICE OF EXERCISE

To: CRITICAL PATH, INC.

(1) The undersigned hereby elects to purchase shares of Common Stock of CRITICAL PATH, INC., pursuant to the terms of the attached Warrant.

(2) Method of Exercise (Please initial the applicable blank):

(i)                     The undersigned elects to exercise the attached Warrant by means of a cash payment, and tenders herewith or by concurrent wire transfer payment in full for the purchase price of the shares being purchased, together with all applicable transfer taxes, if any.

(ii)                     The undersigned elects to exercise the attached Warrant by means of the net exercise provisions of Section 3(b) of the Warrant.

(3) In exercising the Warrant, the undersigned hereby confirms and acknowledges that the shares of Common Stock are being acquired solely for the account of the undersigned and not as a nominee for any other party, or for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Common Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws.

(4) Please issue a certificate or certificates representing such shares of Common Stock in the name of the undersigned or in such other name as is specified below:

(Name)

(5) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below:

	(Name)
(Date)	(Signature)

8

Exhibit “B”

ASSIGNMENT FORM

FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock set forth below:

Name of Assignee Address No. of Shares

and does hereby irrevocably constitute and appoint as Attorney                                                                               to make such transfer on the books of CRITICAL PATH, INC., maintained for the purpose, with full power of substitution in the premises.

The undersigned also represents that, by assignment hereof, the Assignee acknowledges that this Warrant and the shares of stock to be issued upon exercise hereof are being acquired for investment and that the Assignee will not offer, sell or otherwise dispose of this Warrant or such shares except under circumstances which will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Further, the Assignee has acknowledged that upon exercise of this Warrant, the Assignee shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or resale.

Dated:                     ,         .

Signature of Holder

9

EX-10.62

EXHIBIT 10.62

SEPARATION AGREEMENT AND MUTUAL RELEASE

This Separation Agreement and Mutual Release (the “Agreement”) is entered into as of April 14, 2004 (the “Execution Date”) by and between Critical Path, Inc., a California corporation (the “Company”), and William McGlashan (“Executive”) (together “the Parties”). This Agreement is effective only if it has been executed by the Parties and the revocation period has expired (without revocation of this Agreement) as set forth in Sections 18(c) and (d) below (the “Effective Date”).

WHEREAS, Executive was employed by the Company as Chairman and Chief Executive Officer pursuant to the terms of an agreement dated August 1, 2001 as amended and restated on January 7, 2002 and as further amended on September 1, 2003 (the “Employment Agreement”);

WHEREAS, the Parties have mutually agreed (i) to terminate their employment relationship as of the Effective Date, and (ii) that they will release each other from any and all claims; and

WHEREAS, the Parties have mutually agreed to treat the termination of employment as eligible for payment of certain of the separation benefits provided under the Employment Agreement with the following additional provisions (as set forth below in this Agreement): (i) Executive will forfeit his eligibility to receive a $1,500,000 loan from the Company in connection with the purchase of a personal residence, (ii) Executive will continue to serve as a nonemployee Chairman of the Board of Directors receiving annual compensation of $80,000 while serving in an active role, (iii) subject to Executive’s compliance with his additional post-termination obligations and continued service as Chairman or as an elected director, the Change of Control Severance Agreement dated May 29, 2003 between the Parties is amended to provide that its applicability shall be extended by an additional six months and that any payout to Executive shall first be reduced by $405,000 before payment to Executive, (iv) Executive’s outstanding stock options shall cease vesting but shall remain exercisable for three years from the Effective Date, and (v) Executive’s outstanding stock loan shall be retired and the Loan Agreement, dated May 20, 2002, between the Parties shall be terminated.

NOW, THEREFORE, in consideration of the mutual promises contained herein, the Parties agree as follows:

1. Termination of Employment. Executive and the Company acknowledge and agree that Executive’s employment with the Company shall terminate by mutual agreement effective as of the

close of business on the Effective Date and that pursuant to that agreement Executive will voluntarily resign as an employee of the Company (both Parties acknowledge that Executive had previously resigned as CEO and President of the Company and its subsidiaries as of March 29, 2004). For purposes of Executive’s Employment Agreement, such termination and resignation shall be deemed to be a termination of employment by the Company without Cause except as modified herein. Executive and the Company further acknowledge and agree that Executive shall continue as the Company’s Chairman of the Board of Directors. Executive shall receive six thousand six hundred sixty six and 66/100 dollars ($6,666.66) per month paid in arrears for so long as he serves as active Chairman working at least thirty-two (32) hours per month on strategic matters, including without limitation working with customers and partners, provided that the Chief Financial Officer may decrease the payment in any month to be commensurate with his contribution for that month.

2. Separation Benefits. In consideration for the release of claims set forth below and other obligations under this Agreement and in full satisfaction of its obligations to Executive under the terms of the Employment Agreement, and provided this Agreement is signed by Executive and not revoked under Section 18 herein, and further provided that Executive remains in full compliance with all of his obligations to the Company under this Agreement, the Company agrees to provide the separation benefits specified in Section 3 below to Executive. Benefits previously provided to Executive shall not be subject to forfeiture under this Section, but benefits that have not yet been provided (such as, for example, Executive’s ability to exercise his stock options in the future and change of control benefits) and the Company’s obligations under this Agreement will be subject to cancellation upon written notice to Executive of a material breach of Executive’s obligations or covenants followed by Executive’s failure to cure such breach within 10 days of notice. Upon written notice of such a breach, all separation benefits (and the Company’s obligations) shall be suspended pending the Company’s determination of whether Executive has cured the breach to the Company’s satisfaction within the 10 day time period. Except as set forth in Section 3(b), Executive acknowledges that as of the Effective Date, Executive shall have no right, title or interest in or to any other shares of the Company’s capital stock or any other payments or benefits under any other agreement (oral or written) or plan with the Company.

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3. Payments and Benefits.

(a) Consideration. As of the Effective Date, and in consideration of the release of Executive’s claims against the Company, the Company will pay to Executive a one time cash lump sum payment of $405,000. The entire amount of such payment after applicable tax withholdings shall be withheld in connection with the loan forgiveness described in Section 3(c). For this purpose, it is assumed that the employment, state and federal tax withholding on such amounts are at a combined marginal tax rate of 41.5%.

(b) Stock Options. As of the Effective Date, all of the Executive’s Company stock options (other than the stock used to secure the Promissory Note described below in Section 3(c)) will accelerate vest by one year and all of his stock options and stock used to secure the Promissory Note will cease to further vest on the Effective Date and any unvested stock options shall be forfeited to the Company. Executive’s right to exercise all of his Company stock options that are vested on the Effective Date shall continue until the third anniversary of the Effective Date. Executive shall not be eligible for a loan from the Company to exercise any of his stock options notwithstanding anything to the contrary in his Employment Agreement and/or stock option agreements.

(c) Promissory Note. On the Effective Date, the Executive forfeits his eligibility to receive a $1,500,000 housing loan and the Loan Agreement, dated May 20, 2002, between the Parties will thereby be terminated without further consideration. The Executive shall also surrender to the Company all of the shares that secure his obligation to repay the Company $1,740,000 plus interest (the “Promissory Note”), and the value of such shares shall be used to repay the Promissory Note. The vested shares shall be valued at their Fair Market Value (as such term is defined by the Company’s Amended and Restated 1998 Stock Plan) on the Effective Date and the unvested shares shall be valued at their original cost, and any remaining balance shall be forgiven by the Company and the Promissory Note will be cancelled and the original returned to the Executive.

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(d) Change of Control. Section 4(a) of Executive’s Change of Control Severance Agreement is amended to read as follows:

“Until the earliest to occur of the following (i) Executive resigns as Chairman, (ii) Executive is not reelected as a director or is removed from being a director by the Company, (iii) Executive’s death, (iv) Executive breaches his Separation Agreement, dated April 14, 2004, with the Company (the “Separation Agreement”), or (v) nine (9) months after the Effective Date of the Separation Agreement, if a Change of Control occurs before such earliest point in time and Executive then signs and does not revoke a standard release of all claims with the Company in a form acceptable to the Company, the Executive shall be eligible to receive the severance benefits specified below in Sections 4(a)(i) through (iv) (provided, however, that any cash payment made pursuant to Section 4(a) shall first be reduced by $405,000 and Executive shall not otherwise be entitled to any benefits under this Agreement notwithstanding any conflicting provision in the Agreement). The payments under Sections 4(a)(i) and (ii) shall be made within thirty (30) days after the Change of Control.”

In addition, the phrase “within three (3) months” in Section 4(b) of Executive’s Change of Control Severance Agreement shall be replaced with the phrase “within nine (9) months”.

(e) Taxes. Any tax obligations of Executive and tax liability therefore, including any penalties and interest based upon such tax obligation, that arise from the benefits and payments made to him under this Section 3 (or pursuant to Executive’s Change of Control Severance Agreement or stock option agreements) shall be Executive’s responsibility and liability. The Company will report each payment provided for in this Section 3 on form W-2 for the tax year in which the payment is made. All payments or benefits made to Executive shall be subject to applicable tax withholding laws and regulations. Executive shall be required to fully satisfy any such withholding as a condition of receipt of any payments or benefits.

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4. Confidential Information. In addition to applicable law, Executive agrees to continue to be bound by and comply with the Proprietary Information and Inventions Agreement and the Mutual Agreement of Confidentiality that were executed by and between Executive and the Company and these confidentiality obligations shall survive the termination of this Agreement.

5. Conflicting Obligations. Executive certifies that Executive has no outstanding agreement or obligation that is in conflict with any of the provisions of this Agreement, or that would preclude Executive from complying with the provisions hereof, and further certifies that Executive will not enter into any such conflicting agreement.

6. Non-Disparagement. Each party agrees not to make any unfavorable or disparaging written or oral remarks about the other to third parties. However, Executive acknowledges and agrees that the Company’s non-disparagement obligation pursuant to this Agreement shall extend solely to the actions of the Company’s current or future directors and officers and the Company employees directly responsible for the Company’s public relations and press releases during the period of their service to the Company. The Company agrees that its officers and directors will not direct Company employees to make disparaging remarks about Executive. For purposes of this Agreement, “Officers” are those persons meeting the definition provided under Rule 16a-1(f) of the Securities Exchange Act of 1934 as amended.

7. Arbitration and Equitable Relief.

(a) Disputes. Except as provided in Section 7(c) below, the Company and the Executive agree that any dispute or controversy arising under or in conjunction with this Agreement will be settled exclusively by arbitration in San Francisco, California. Any claim for arbitration shall be filed in writing with the arbitrator selected by both Parties within 3 business days after either party has notified the other in writing that it desires a dispute between them to be settled by arbitration. In the event the Parties cannot agree on such arbitrator within such three-day period, each party will select an arbitrator and inform the other party in writing of such arbitrator’s name and address within two business days after the end of such three-day period and the two arbitrators so selected will as soon thereafter as possible select a third arbitrator; provided, however, that in the event of a failure by either party to select an arbitrator and notify the other party of such selection

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within the time period provided above, the arbitrator selected by the other party will be the sole arbitrator of the dispute. The arbitration hearing will be held within seven days (or as soon thereafter as possible) after the selection of the arbitrator. Hearing procedures which will expedite the hearing may be ordered at the arbitrator’s discretion and the arbitrator may close the hearing in his or her discretion after determining that he/she has heard sufficient evidence. The decision of the arbitrator will be issued as expeditiously as possible and in no event later than five business days after the hearing and the decision will be binding upon the parties and judgment in accordance with that decision may be entered in any court having jurisdiction therefor. Punitive damages will not be awarded.

(b) Consent to Personal Jurisdiction. The arbitrator(s) will apply California law to the merits of any dispute or claim, without deference to conflicts of law rules. Executive hereby consents to the personal jurisdiction of the state and federal courts located in California for any action or proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.

(c) Equitable Relief. The parties may apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction, or other interim or conservatory relief as necessary, without breach of this arbitration agreement and without abridgment of the powers of the arbitrator.

(d) Acknowledgment. EXECUTIVE HAS READ AND UNDERSTANDS THIS AGREEMENT, WHICH DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF, TO BINDING ARBITRATION, EXCEPT AS PROVIDED IN SECTION 7(c), AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF EXECUTIVE’S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE RELATIONSHIP BETWEEN THE PARTIES.

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8. Governing Law. This Agreement will be governed by the internal substantive laws, but not the choice of law rules, of the State of California.

9. Attorney’s Fees. In any action brought by one of the parties to enforce or interpret the provisions of this Agreement, the prevailing party will be entitled to reasonable attorney’s fees, in addition to any other relief to which that party may be entitled under this Agreement.

10. Assignment. This Agreement and all rights under this Agreement will be binding upon and inure to the benefit of and be enforceable by the Parties hereto and their respective owners, agents, officers, shareholders, employees, directors, attorneys, subsidiaries, parents, affiliates, successors, personal or legal representatives, executors, administrators, heirs, distributes, devisees, legatees, and assigns. This Agreement is personal in nature, and neither of the Parties to this Agreement will, without the written consent of the other, assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity; except that the rights and obligations of the Company under this Agreement may be assigned (without the consent of the Executive) to an entity which becomes the successor to the Company as the result of a merger or other corporate reorganization or sale of substantially all the assets to a successor which continues the business of the Company or any other subsidiary of the Company, provided, that such assignment will not relieve the Company of its obligations hereunder.

11. Notices. For purposes of this Agreement, notices and other communications provided for in this Agreement will be in writing and will be delivered personally or sent by United States certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:	William McGlashan
If to the Company:	Critical Path, Inc.
	350 The Embarcadero
	San Francisco, CA 94105-1204
	Attn: Board of Directors

or to such other address or the attention of such other person as the recipient party has previously furnished to the other party in writing in accordance with this Section 11. Such notices or other

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communications will be effective upon delivery or, if earlier, three days after they have been mailed as provided above.

12. Integration. This Agreement, the Executive’s stock option agreements with the Company (as amended by this Agreement), the Change of Control Severance Agreement with the Company (as amended by this Agreement), the Proprietary Information and Inventions Agreement and the Mutual Agreement of Confidentiality represent the entire agreement and understanding between the parties as to the subject matter hereof and supersedes all prior agreements whether written or oral. Except as amended herein, the provisions contained in the Executive’s stock option agreements and Change of Control Severance Agreement remain in effect.

13. Modification. This Agreement may only be amended in a writing signed by Executive and the Chief Executive Officer of the Company. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in writing and signed by the party against whom enforcement of the change or modification is sought. Failure or delay on the part of either party hereto to enforce any right, power, or privilege hereunder will not be deemed to constitute a waiver thereof. Additionally, a waiver by either party or a breach of any promise hereof by the other party will not operate as or be construed to constitute a waiver of any subsequent waiver by such other party.

14. Right to Advice of Counsel. Executive acknowledges that he has had the opportunity to fully review this Agreement and, if he so chooses, to consult with counsel, and is fully aware of his rights and obligations under this Agreement.

15. Release of Executive. In exchange for Executive’s promises set forth herein, all of which are good and valuable consideration, the Company agrees to and does hereby release and forever discharge Executive from any rights, claims, actions and demands it has against Executive under, as a result of, or arising out of Executive’s prior employment as an employee, from any and all other rights, claims, actions, demands, causes of action, obligations, attorneys’ fees, costs, damages, and liabilities of whatever kind or nature, in law or in equity that the Company may have as of the Execution Date (whether or not known) including but not limited to any claims it may have under any other federal, state or local Constitution, Statute, Ordinance and/or Regulation and/or

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those arising under common law including but not limited to tort, express and/or implied contract and/or implied contract, arising out of or, in any way, related to Executive’s employment or service as a director with the Company.

16. Civil Code Section 1542. The Parties represent that they are not aware of any claim by either of them other than the claims that are released by this Agreement. The Parties also represent that they do not presently intend to bring any claims on their own behalf or on behalf of any other person or entity against any other person or entity referred to herein. Executive and the Company acknowledge that they are familiar with the provisions of California Civil Code Section 1542, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

Executive and the Company, being aware of said Code section, agree to expressly waive any rights they may have thereunder, as well as under any other statute or common law principles of similar effect.

17. Executive’s Covenants.

(a) Confidentiality of this Agreement. Executive agrees to use his reasonable efforts to maintain in confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as “Separation Information”). Executive hereto agrees to take every reasonable precaution to prevent disclosure of any Separation Information to third parties, except for disclosures required by law or necessary to effectuate the terms of this Agreement.

(b) Cooperation. Executive shall fully cooperate in the defense of any action brought by any third party against the Company that relates in any way to Executive’s acts or omissions while employed by the Company or in the defense of any action brought by any third party relating to litigation pending against the Company as of the Effective Date.

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(c) Company Resources. As of the Effective Date, Executive will no longer represent that he is an employee of the Company. As soon as practicable following execution of this Agreement, Executive will return all Company property to the Company except for those items necessary to his continuing service as a director.

(d) Non-Solicitation. For as long as Executive is a director of the Company, but in any event for not less than one (1) year following the Execution Date, Executive agrees that he shall not either directly or indirectly solicit, induce, recruit or encourage any of the Company’s employees or consultants to terminate their relationship with the Company, or attempt to solicit, induce, recruit, encourage any of the Company’s employees or consultants to terminate their relationship with the Company, or attempt to solicit, induce, recruit, encourage or take away employees or consultants of the Company, either for himself or for any other person or entity. Further, Executive shall not attempt to negatively influence any of the Company’s clients or customers from purchasing Company products or services or to solicit or influence or attempt to influence any client, customer or other person either directly or indirectly, to direct his or its purchase of products and/or services to any person, firm, corporation, institution or other entity in competition with the business of the Company. For as long as Executive is a director of the Company, Executive further agrees that he shall not (i) engage, directly or indirectly, in any other business activity that is competitive with, or that places him in a competing position to that of the Company or any Affiliated Company (provided that Executive may own less than two percent (2%) of the outstanding securities of any publicly traded corporation), or (ii) hire, solicit, or attempt to hire on behalf of himself or any other party any employee or exclusive consultant of the Company. For purposes of this Agreement, an Affiliated Company is any other corporation or entity that directly or indirectly controls, is controlled by, or is under common control with the Company.

(e) No Further Employment. Executive understands and agrees that he is not entitled to any further or future employment with the Company or further or future compensation and/or payments of any kind from the Company other than those specifically provided for under this Agreement. Executive warrants and represents that he shall not hereafter reapply for or otherwise seek any position of employment with the Company and he shall not institute or participate in any

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claim, action, lawsuit or proceeding against the Company for any failure to employ or re-employ him after the Effective Date.

18. Executive’s Release of Claims. In exchange for the Company’s promises set forth herein, all of which are good and valuable consideration, Executive hereby releases and forever discharges the Company, its agents, employees, shareholders, directors, officers, affiliates and successors of and from any and all rights, claims, actions, demands, causes of action, obligations, attorneys’ fees, costs, damages, and liabilities of whatever kind or nature, in law or in equity, that Executive may have (whether known or not known) (except for his claims to indemnification to the extent permitted under the Company’s bylaws or pre-existing indemnification agreements or as permitted by California law or as may be available to Executive under the Company’s directors’ and officers’ liability insurance coverage) and except as provided in this Agreement and the Executive’s stock option agreements and Change of Control Severance Agreement (collectively, “Claims”), accruing to him as of the Execution Date, that he has ever had, including but not limited to Claims based on and/or arising under Title VII of the Civil Rights Act of 1964, as amended, The Americans with Disabilities Act, The Family Medical Leave Act, The Equal Pay Act, The Employee Retirement Income Security Act, The Fair Labor Standards Act, and/or the California Fair Employment and Housing Act; The California Constitution, The California Government Code, The California Labor Code, The Industrial Welfare Commission’s Orders, The Securities Act of 1933, The Securities Exchange Act of 1934 and any and all other Claims he may have under any other federal, state or local Constitution, Statute, Ordinance and/or Regulation; and all other Claims arising under common law including but not limited to tort, express and/or implied contract and/or quasi-contract, arising out of or, in any way, related to Executive’s previous relationship with the Company as an employee or director. Furthermore, Executive acknowledges that he is waiving and releasing any rights he may have under the Older Workers Benefit Protection Act, Age Discrimination in Employment Act of 1967 (“ADEA”), as amended, and that this waiver and release is knowing and voluntary. Executive acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Executive was already entitled. Executive further acknowledges that he has been advised by this writing that:

(a) he should consult with an attorney prior to executing this Agreement;

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(b) he has at least twenty-one (21) days within which to consider this Agreement;

(c) he has up to seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and

(d) this Agreement shall not be effective until the revocation period in Section 18(c) has expired without revocation of this Agreement.

The Company and Executive agree that the release set forth in this Section 18 shall be and remain in effect in all respects as a complete general release as to the matters released.

19. Labor Code Section 206.5. Executive agrees that the Company has paid to Executive his salary and vacation accrued as of the Effective Date and that these payments represent all such monies due to Executive through the Effective Date. In light of the payment by the Company of all wages due, or to become due to Executive, California Labor Code Section 206.5 is not applicable to the Parties hereto. That section provides in pertinent part as follows:

No employer shall require the execution of any release of any claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of such wages has been made.

20. Severability. Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

21. Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, and which together will be a single instrument.

22. No Representations. Each Party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this

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Agreement. Neither Party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement.

23. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Executive represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.

24. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that:

(a) They have read this Agreement;

(b) They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel;

(c) They understand the terms and consequences of this Agreement and of the releases it contains;

(d) They are fully aware of the legal and binding effect of this Agreement.

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the day and year first above written.

WILLIAM MCGLASHAN, EXECUTIVE			CRITICAL PATH, INC.
By:	/s/ WILLIAM McGLASHAN, JR.	By:	/s/ MICHAEL J. ZUKERMAN
			Name: MICHAEL J. ZUKERMAN
AGREED			Title: SVP & GENERAL COUNSEL

Name:	/s/ MARIE McGLASHAN
	MARIE MCGLASHAN

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EX-10.63

EXHIBIT 10.63

December 20, 2002

Michael Zukerman

Dear Mike:

This letter amends the employment agreement between you and Critical Path (the “Company”) dated June 11, 2001 (the “Original Agreement”), in the following respects:

1. On or before January 30, 2003, you will receive a bonus payment of $50,000. This bonus payment will be 100% recoverable by the Company in the event your employment is involuntarily terminated for Cause or voluntarily terminated by you for any reason (other than Constructive Termination) prior to December 31, 2003.

2. Effective February 1, 2003, you will report to Paul Bartlett, who is expected to become the EVP and CFO, and you will assume responsibility for the management of the Human Resources and Legal functions. In the event Mr. Bartlett does not become the EVP, CFO of the Company, you and I will discuss the appropriate reporting relationship. Effective immediately, you will be a part of, and attend all meetings of, the Executive Committee of the Company.

3. Section 3 of the Original Agreement obligates you to loyally and conscientiously perform the duties required of you, and to devote your full business energies, efforts and abilities to your employment with the Company, and you hereby reaffirm that obligation.

4. If, prior to December 31, 2003, your employment with the Company terminates for any reason whatsoever (including for Cause or voluntarily by you), the Company will, on or before the last day of your employment, make a severance payment to you equal to the amount you would have received in the event that your position were to be eliminated in the RIF currently planned for January 15, 2003. For the avoidance of doubt, this amount is equal to the severance amount as calculated under your original agreement, plus a WARN statutory payment of two months base salary, for a total of $166,666.67. Following December 31, 2003, any severance payable by the Company to you shall be as provided under the Original Agreement.

5. An additional item (iv) shall be permanently added to the definition of Constructive Termination contained in Exhibit A of your agreement, as follows: “(iv) any change, for any reason, in the status of Bill McGlashan as either Chairman or CEO of the Company, unless you agree in writing to a waiver of this event as a Constructive Termination trigger.”

6. Any dispute, claim or controversy arising out of or relating to this Amendment or the Original Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this Amendment or the Original Agreement to arbitrate, shall be determined by binding arbitration (without the necessity for any earlier mediation or other ADR) in San Francisco, CA, before a sole arbitrator, and the fees and costs of such arbitration shall be paid by the Company. The arbitration shall be administered by JAMS pursuant to its Streamlined Arbitration Rules and Procedures and with no rights of discovery by either party. Such arbitration shall occur within 30 days of the first demand by the Company or by you for arbitration. The Parties agree that arbitration shall be the exclusive and final remedy, and any arbitrator’s award shall be enforceable in any court having jurisdiction. The arbitrator shall, in the award, allocate the attorneys’ fees of the prevailing party against the party who did not prevail. In any judicial proceeding in connection with the enforcement of an arbitrator’s award, the prevailing party shall be entitled to, and shall receive, its attorney’s fees and costs. Any payment under Section 4 of this agreement which is delayed for any reason shall automatically bear interest at the rate of 2% per month.

Initials:                                      

7. In the case of any conflict between the terms of this letter and the Original Agreement, this letter shall control. All other terms and conditions contained in the Original Agreement which are not inconsistent with the terms of this letter shall remain in full force and effect. All capitalized terms not defined herein shall have the meanings prescribed to them in the Original Agreement.

If you agree with the terms and conditions contained in this letter, please sign where indicated below.

Sincerely,

/s/ William McGlashan, Jr.

William McGlashan, Jr.

Chairman and CEO

/s/ Laureen DeBuono

Laureen DeBuono

EVP and CFO

Accepted and Agreed:

/s/ Michael Zukerman

Michael Zukerman

Initials:                                      

EX-10.64

EXHIBIT 10.64

CRITICAL PATH, INC.

CHANGE OF CONTROL SEVERANCE AGREEMENT

This Change of Control Severance Agreement (this “Agreement”) is made and entered into effective as of May 29, 2003 (the “Effective Date”), by and between Michael Zukerman (the “Executive”) and Critical Path, Inc., a California corporation (the “Company”). Certain capitalized terms used in this Agreement are defined in Section 1 below.

RECITALS

A. It is expected that the Company from time to time will consider the possibility of a Change of Control. The Board of Directors of the Company (the “Board”) recognizes that such consideration can be a distraction to the Executive and can cause the Executive to consider alternative employment opportunities.

B. The Board believes that it is in the best interests of the Company and its shareholders to provide the Executive with an incentive to continue his employment and to maximize the value of the Company upon a Change of Control for the benefit of its shareholders.

C. In recognition of Executive’s longstanding service with the Company during which time Executive’s leadership has been fundamental to the Company’s development and in order to provide the Executive with enhanced financial security and sufficient encouragement to remain with the Company notwithstanding the possibility of a Change of Control, the Board believes that it is imperative to provide the Executive with certain severance benefits upon the Executive’s termination of employment in connection with a Change of Control.

AGREEMENT

In consideration of the mutual covenants herein contained and the continued employment of the Executive by the Company, the parties agree as follows:

1. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings:

(a) Cause. “Cause” shall mean (i) the Executive’s willful, repeated failure to substantially perform his duties (except due to physical or mental illness), if the Executive fails to cure within fifteen (15) days after there has been delivered to the Executive from the Board written notice of such failure; (ii) a willful act by the Executive that constitutes gross misconduct and is injurious to the Company; (iii) any act of personal dishonesty taken by the Executive in connection with his responsibilities as an employee which is intended to result in substantial personal enrichment of the Executive; or (iv) the Executive’s conviction of or plea of no contest to a felony.

CRITICAL PATH, INC.

CHANGE OF CONTROL SEVERANCE AGREEMENT (MICHAEL ZUKERMAN)

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(b) Change of Control. “Change of Control” shall mean the occurrence of any of the following events:

(i) the approval by the shareholders of the Company of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets;

(ii) the approval by shareholders of the Company of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation;

(iii) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becoming the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the total voting power represented by the Company’s then outstanding voting securities; or

(iv) a change in the composition of the Board, as a result of which fewer than sixty-six percent (66%) of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date hereof or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors whose election or nomination was not in connection with any transactions described in subsections (i), (ii) or (iii), or in connection with an actual or threatened proxy contest relating to the election of directors of the Company.

Notwithstanding the foregoing, the term “Change of Control” shall not be deemed to have occurred if the Company files for bankruptcy protection, or if a petition for involuntary relief is filed against the Company.

(c) High Bonus. “High Bonus” shall mean the highest annual bonus that could have been paid to the Executive by the Company under the bonus plan or agreement applicable to the Executive for the preceding five (5) fiscal years, whether or not such bonus was paid.

(d) Involuntary Termination. “Involuntary Termination” shall mean:

(i) without the Executive’s express written consent, a significant reduction of the Executive’s title, authority, duties, position or responsibilities relative to the Executive’s title, authority, duties, position or responsibilities in effect immediately prior to such reduction, which would be deemed to occur if Executive ceases to serve as a senior vice president and general counsel of a stand-alone publicly traded company; or the removal of the

CRITICAL PATH, INC.

CHANGE OF CONTROL SEVERANCE AGREEMENT (MICHAEL ZUKERMAN)

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Executive of such title, authority, position, duties or responsibilities, unless the Executive is provided with comparable title, authority, duties, position and responsibilities;

(ii) without the Executive’s express written consent, a material reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to the Executive immediately prior to such reduction;

(iii) without the Executive’s express written consent, a reduction by the Company of the Executive’s base salary or bonus opportunity as in effect immediately prior to such reduction;

(iv) without the Executive’s express written consent, a material reduction by the Company in the kind or level of employee benefits to which the Executive is entitled immediately prior to such reduction with the result that the Executive’s overall benefits package is materially reduced;

(v) without the Executive’s express written consent, the relocation of the Executive’s principal place of employment to a facility or a location more than thirty (30) miles from his current location;

(vi) any purported termination of the Executive by the Company which is not effected for Cause or for which the grounds relied upon are not valid; or

(vii) the failure of the Company to obtain the assumption of this Agreement or any other agreement between the Company and Executive by any successors contemplated in Section 7 below.

(e) Termination Date. “Termination Date” shall mean the effective date of any notice of termination delivered by one party to the other hereunder.

2. Term of Agreement. This Agreement shall terminate upon the date that all obligations of the parties hereto under this Agreement have been satisfied.

3. At-Will Employment. The Company and the Executive acknowledge that the Executive’s employment is and shall continue to be at-will, as defined under applicable law.

4. Severance Benefits.

(a) Involuntary Termination in Connection with a Change of Control. If the Executive’s employment with the Company terminates as a result of an Involuntary Termination at any time within twenty-four (24) months after a Change of Control or within three (3) months on or before a Change of Control, and the Executive signs and does not revoke a standard release of claims with the Company in a form acceptable to the Company, then the Executive shall be entitled to the following severance benefits:

(i) two (2) times the Executive’s annual base salary as in effect as of the date of such termination, less applicable withholding, payable in a lump sum within thirty (30) days of the Involuntary Termination;

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(ii) two (2) times the High Bonus, less applicable withholding, payable in a lump sum within thirty (30) days of the Involuntary Termination;

(iii) to the extent eligible on the date of termination, the Executive will be permitted to convert his coverage under the Company’s life insurance plan to an individual policy for six (6) months from the date of the Executive’s termination, at no additional after-tax cost than the Executive would have had as an employee. To the extent such individual coverage cannot be provided without jeopardizing the tax status of the Company’s life insurance plan, for underwriting reasons or otherwise, the Company shall pay the Executive an amount such that the Executive can purchase such benefits separately at no greater after-tax cost to the Executive than he would have had if the benefits were provided to the Executive as an employee; and

(iv) reimbursement by the Company of the group health continuation coverage premiums for the Executive and the Executive’s eligible dependents under Title X of the Consolidated Budget Reconciliation Act of 1985, as amended (“COBRA”) as in effect through the lesser of (x) eighteen (18) months from the date of such termination, (y) the date upon which the Executive and the Executive’s eligible dependents become covered under similar plans or (z) the date the Executive no longer constitutes a “Qualified Beneficiary” (as such term is defined in Section 4980B(g) of the Code); provided, however, that the Executive will be solely responsible for electing such coverage within the required time period.

(b) Voluntary Resignation in Connection with a Change of Control. If the Executive’s employment with the Company terminates as a result of a voluntary resignation within one hundred eighty (180) days following a Change of Control, and the Executive signs and does not revoke a standard release of claims with the Company in a form acceptable to the Company, then the Executive shall be entitled to the following severance benefits:

(i) one (1) times the Executive’s annual base salary as in effect as of the date of such termination, less applicable withholding, payable in a lump sum immediately upon termination but not earlier than the expiration of any revocation period applicable to the release which the Executive is required to deliver as a condition of payment; and

(ii) one (1) times the High Bonus, less applicable withholding, payable in a lump sum immediately upon termination but not earlier than the expiration of any revocation period applicable to the release which the Executive is required to deliver as a condition of payment.

(c) Termination Apart from a Change of Control. If the Executive’s employment with the Company terminates other than as a result of an Involuntary Termination within the twenty-four (24) months following a Change of Control or within three (3) months on or before a Change of Control, or other than as a result of a voluntary resignation within one

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hundred eighty (180) days following a Change of Control, then the Executive shall not be entitled to receive severance or other benefits hereunder.

(d) Accrued Wages and Vacation; Expenses. Without regard to the reason for, or the timing of, the Executive’s termination of employment: (i) the Company shall pay the Executive any unpaid wages due for periods prior to the Termination Date; (ii) the Company shall pay the Executive all of the Executive’s accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to the Termination Date. These payments shall be made promptly upon termination and within the period of time mandated by law.

5. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Executive (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Executive’s benefits under this Agreement shall be either:

(a) delivered in full or

(b) delivered as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax,

whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by the Executive on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code.

Unless the Company and the Executive otherwise agree in writing, any determination required under this Section 5 shall be made in writing by the Company’s independent public accountants (the “Accountants”), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 5. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5.

6. Legal Fees. The Company shall reimburse the Executive up to twenty thousand dollars ($20,000) for reasonable legal fees incurred as a result of any dispute between the Executive and the Company relating to this Agreement and arising following, or within three (3)

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months on or before, a Change of Control, payable within thirty (30) business days of the Company’s receipt of a written invoice from the Executive for such incurred fees.

7. Successors.

(a) Company’s Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume the Company’s obligations under this Agreement and agree expressly to perform the Company’s obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law.

(b) Executive’s Successors. Without the written consent of the Company, the Executive shall not assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity. Notwithstanding the foregoing, the terms of this Agreement and all rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

8. Notices.

(a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

(b) Notice of Termination. Any termination by the Company for Cause or by the Executive as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with this Section 8. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the Termination Date (which shall be not more than thirty (30) days after the giving of such notice). The failure by the Executive to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder.

9. Non-Solicitation. Until the date that is one (1) year from the date of termination of the Executive’s employment with the Company, the Executive agrees and acknowledges that

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the Executive shall not either directly or indirectly solicit, induce, attempt to hire, recruit, encourage, take away, hire any employee of the Company or cause an employee to leave his or her employment either for the Executive or for any other entity or person. Upon any breach of this Section 9, all severance payments pursuant to this Agreement shall immediately cease.

10. Arbitration.

(a) General. In consideration of the Executive’s service to the Company, its promise to arbitrate all employment related disputes, the Executive’s receipt of the compensation, pay raises and other benefits paid to the Executive’s by the Company, at present and in the future, the Executive agrees that any and all controversies, claims or disputes with anyone (including the Company and any employee, officer, director, shareholder or benefit plan of the Company in their capacity as such or otherwise) arising out of, relating to, or resulting from the termination of the Executive’s service with the Company, including any breach of this Agreement, shall be subject to binding arbitration in San Francisco, California (without the necessity for any earlier mediation or other ADR) under the Arbitration Rules set forth in California Code of Civil Procedure Sections 1280 through 1294.2, including Section 1283.05 (the “Rules”) and pursuant to California law. Disputes which the Executive agrees to arbitrate, and thereby agrees to waive any right to a trial by jury, include any statutory claims under state or federal law, including, but not limited to, claims under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the California Fair Employment and Housing Act, the California Labor Code, claims of harassment, discrimination or wrongful termination and any statutory claims. The Executive further understands that this Agreement to arbitrate also applies to any disputes that the Company may have with the Executive.

(b) Procedure. The Executive agrees that any arbitration will be administered by JAMS pursuant to its Streamlined Arbitration Rules and that a neutral arbitrator will be selected in accordance with such rules. The arbitration proceedings will not allow for discovery. Such arbitration shall occur within thirty (30) days of the first demand by the Company or by the Executive for arbitration. The Executive understands the Company will pay for any administrative or hearing fees charged by the arbitrator or JAMS except that the Executive shall pay the first $200.00 of any filing fees associated with any arbitration initiated by the Executive.

(c) Remedy. Except as provided by the Rules, arbitration shall be the sole, exclusive and final remedy for any dispute between the Executive and the Company and any arbitrator’s award shall be enforceable in any court having jurisdiction. Accordingly, except as provided for by the Rules, neither the Executive nor the Company will be permitted to pursue court action regarding claims that are subject to arbitration except for claims directly related to the enforcement of an arbitrator’s award. The arbitrator shall, in the award, allocate the attorneys’ fees of the prevailing party against the party who did not prevail. In any judicial proceeding in connection with the enforcement of an arbitrator’s award, the prevailing party shall be entitled to, and shall receive, its attorneys’ fees and costs. Any payment due Executive under

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this agreement which is delayed for any reason shall automatically bear interest at the rate of two percent (2%) per month.

(d) Availability of Injunctive Relief. In addition to the right under the Rules to petition the court for provisional relief, the Executive agrees that any party may also petition the court for injunctive relief where either party alleges or claims a violation of this Agreement or the Confidentiality Agreement or any other agreement regarding trade secrets, confidential information, non-solicitation or Labor Code Section 2870. In the event either party seeks injunctive relief, the prevailing party shall be entitled to recover reasonable costs and attorneys’ fees, subject to Section 6 hereof.

(e) Administrative Relief. the Executive understands that this Agreement does not prohibit the Executive from pursuing an administrative claim with a local, state or federal administrative body such as the Department of Fair Employment and Housing, the Equal Employment Opportunity Commission or the workers’ compensation board. This Agreement does, however, preclude the Executive from pursuing court action regarding any such claim.

(f) Voluntary Nature of Agreement. The Executive acknowledges and agrees that the Executive is executing this Agreement voluntarily and without any duress or undue influence by the Company or anyone else. The Executive further acknowledges and agrees that the Executive has carefully read this Agreement and that the Executive has asked any questions needed for him to understand the terms, consequences and binding effect of this Agreement and fully understand it, including that the Executive is waiving his right to a jury trial. Finally, the Executive agrees that he has been provided an opportunity to seek the advice of an attorney of his choice before signing this Agreement.

11. Miscellaneous Provisions.

(a) No Duty to Mitigate. The Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source.

(b) Waiver. No provision of this Agreement may be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(c) Integration. This Agreement represents the entire agreement and understanding between the parties with respect to the payment of severance or other benefits if the Executive’s employment with the Company terminates as a result of an Involuntary Termination within twenty-four (24) months following a Change of Control or within three (3) months on or before a Change of Control, or as a result of a voluntary resignation within one hundred eighty (180) days following a Change of Control, and supersedes all prior or

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contemporaneous agreements, whether written or oral, with respect thereto; provided, however, that this Agreement does not supersede any agreement between the Company and the Executive with respect to the treatment of options to acquire Common Stock of the Company [or shares of Common Stock of the Company with respect to which the Company has a repurchase right] in the event of a Change of Control and does not supersede any agreement in respect of the payment of severance or other benefits in circumstances pursuant to which benefits would not be payable hereunder.

(d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal substantive laws, but not the conflicts of law rules, of the State of California.

(e) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

(f) Employment Taxes. All payments made pursuant to this Agreement shall be subject to withholding of applicable income and employment taxes.

(g) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

COMPANY:	CRITICAL PATH, INC.
	By:	/s/ William McGlashan, Jr.
	Title:	Chairman and CEO
EXECUTIVE:	/s/ Michael Zukerman
	Signature
	/s/ Michael Zukerman
	Printed Name

CRITICAL PATH, INC.

CHANGE OF CONTROL SEVERANCE AGREEMENT (MICHAEL ZUKERMAN)

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EX-10.65

EXHIBIT 10.65

December 23, 2003

Michael Zukerman

Dear Mike:

For good and valuable consideration, the sufficiency of which is hereby acknowledged, Critical Path, Inc. (the “Company”) hereby amends the employment agreement between you and Critical Path (the “Company”) dated June 11, 2001 (the “Original Agreement”), as subsequently amended December 20, 2002 (the “First Amendment”) in the following respects:

1. Section 1. (b) of the Original Agreement is hereby amended to provide as follows:

“(b) Notwithstanding the last sentence of Section 1(a) above, upon your termination without Cause or your constructive termination at any time after you have been employed by the Company for more than six (6) months, you shall receive a lump sum payment equal to twelve (12) months of your then current base salary, plus twelve (12) months continuation of your then current benefits (as described in paragraph 8) from the Company.”

2. For the avoidance of doubt, the parties reaffirm and acknowledge that Section 6 of the first Amendment shall govern any dispute resolution related to this amendment.

3. In the case of any conflict between the terms of this letter and either the Original Agreement or the First Amendment, this letter shall control. All other terms and conditions contained in the Original Agreement and the First Amendment which are not inconsistent with the terms of this letter shall remain in full force and effect. All capitalized terms not defined herein shall have the meanings prescribed to them in the Original Agreement.

If you agree with the terms and conditions contained in this letter, please sign where indicated below.

Sincerely,

/s/ William McGlashan, Jr.

William McGlashan, Jr.

Chairman and CEO

Accepted and Agreed:

/s/ Michael Zukerman

Michael Zukerman

EX-10.66

EXHIBIT 10.66

WAIVER AGREEMENT

This Waiver Agreement (this “Agreement”) is made and entered into as of December 23, 2003, by and between Critical Path, Inc., a California corporation (the “Company”), and Michael J. Zukerman (“Executive”):

W I T N E S S E T H:

WHEREAS, pursuant to that certain Change of Control Severance Agreement, dated as of May 29, 2003, between the Company and Executive (the “Severance Agreement”), the Company and Executive agreed to certain severance benefits upon Executive’s termination of employment in connection with a Change of Control (as defined in the Severance Agreement);

WHEREAS, the Company entered into that certain Convertible Note Purchase and Exchange Agreement, dated as of November 18, 2003 (the “Financing Agreement”), among the Companyand the investors listed therein (each, an “Investor” and collectively, the “Investors”);

WHEREAS, pursuant to the terms of the Financing Agreement, certain of the Investors agreed to lend to the Company $10 million in exchange for convertible secured promissory notes that convert into shares of Series E Preferred Stock of the Company (the “Series E Preferred Stock”) and certain other of the Investors agreed to exchange approximately $32.8 million in face value of the Company’s outstanding 5 ¾% convertible notes for shares of Series E Preferred Stock;

WHEREAS, the Company contemplates undertaking a registered rights offering to its common shareholders to purchase shares of Series E Preferred Stock (the “Rights Offering”) pursuant to which the Investors may acquire additional shares of Series E Preferres Stock;

WHEREAS, in connection with the consummation of the transactions contemplated by the Financing Agreement and the Rights Offering, certain of the Investors will become “beneficial owners” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the Company’s then outstanding voting securities; and

WHEREAS, in connection with the Financing Agreement and the Rights Offering and to induce the Investors to consummate the Financing Agreement, Executive has agreed that the transactions contemplated by the Financing Agreement should not constitute a Change of Control under the Severance Agreement:

NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, the parties hereto hereby agree as follows:

1. Notwithstanding the terms and provisions contained in the Severance Agreement and in accordance with Section 11(b) of the Severance Agreement, Executive hereby agrees that the consummation of the transactions contemplated by the Financing Agreement shall not constitute a Change of Control under the Severance Agreement, and Executive expressly waives any rights he may have to any severance benefits under Section 4 of the Severance Agreement in

connection with the execution or consummation of the transactions contemplated by the Financing Agreement.

2. Except as expressly waived pursuant to this Agreement, the Severance Agreement is and shall continue to be in a full force and effect in accordance with its terms, and this Agreement shall not constitute the consent by Executive to any other amendment or modification to or waiver of the Severance Agreement or any of the other agreements related to the Severance Agreement.

3. This Agreement may not be amended, waived or modified in any manner without the prior written consent of the party against whom the amendment, waiver or modification is sought to be enforced.

4. This Agreement may be executed by the parties hereto in one or more counterparts, and all of such counterparts shall be deemed to constitute the same instrument, and all such counterparts together shall be deemed an original of this Agreement.

5. This Agreement shall be governed by, and construed and interpreted in accordance with the laws of the State of California.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized officers as of the date first set forth above.

CRITICAL PATH, INC., a California corporation
By	/s/ William Smartt
Name:	William Smartt
Title:	EVP & CFO
EXECUTIVE
/s/ Michael J. Zukerman
Michael J. Zukerman

EX-10.67

EXHIBIT 10.67

CONFIDENTIAL SETTLEMENT AGREEMENT,

MUTUAL RELEASE

AND COVENANT NOT TO SUE

This Confidential Settlement Agreement and Mutual Release (the “Agreement”), effective February 4, 2004, is made and entered into by and between Max Limited, LLC, a California limited liability company (“Max” or “Plaintiff”) and Critical Path, Inc., a California corporation (“Critical Path”); Prince Acquisition Corp., a California corporation (“Prince”); PeerLogic, Inc., a California corporation (“PeerLogic”) (Critical Path, Prince and PeerLogic are hereinafter collectively referred to as “Defendants”). Plaintiff and Defendants are sometimes jointly referred to as the “Parties.”

RECITALS

A. The Parties hereto have been involved in a present and actual dispute arising from and related to an Office Lease Agreement, dated July 14, 2000. In the Office Lease Agreement (hereinafter referred to as the “Lease”), PeerLogic agreed to rent from Max approximately 13,370 square feet of office space located at 292 Ivy Street, San Francisco, California, Suite F (the “Premises”). The Lease was to run for seven (7) years, commencing, on August 9, 2000, when Max delivered the Premises to PeerLogic.

B. The dispute between the Parties involved Max’s claims that Defendants negligently and fraudulently concealed certain information from Max relating to Defendants’ intent to occupy the Premises and Defendants’ financial condition and breached the Lease by failing to pay rent due to alleged zoning restrictions with respect to the Premises. In turn, Defendants alleged that Max was aware of zoning restrictions that would prohibit Defendants’ business use of the Premises and concealed that information from Defendants, thus making the Lease invalid and unenforceable. In April 2002, Max filed a lawsuit against Defendants for

various causes of action, including breach of contract and fraud, relating to Defendants’ breach of the Lease. Critical Path filed a cross-complaint against Max seeking to recover its costs incurred in connection with the Lease. These claims and allegations by the Parties are collectively referred to as the “Dispute.”

C. On March 12, 2001, Critical Path submitted a formal request for a written determination to the Zoning Administrator for the City and County of San Francisco (the “ZA”) regarding the types of uses that were legally permitted on the Premises. The ZA issued a written determination, on December 18, 2001, finding that PeerLogic’s and Critical Path’s activities were not a “business and professional service” but instead were an “administrative service” under the NCD Controls. Max appealed to the Board of Appeals to overturn the ZA’s determination. At its February 20, 2002 hearing on the appeal, the Board of Appeals overturned and reversed the ZA’s determination. Then, on September 8, 2003, the Honorable Ronald A. Quidachay of the San Francisco Superior Court issued a Judgment and Writ of Administrative Mandamus vacating the Board of Appeal’s decision and requiring the Board of Appeals to rehear the case. Max appealed Judge Quidachay’s ruling, temporarily staying execution of the Writ and the hearing. These claims and allegations by the Parties are collectively referred to as the “Zoning Action.”

D. The Parties each respectively deny the allegations of the other party and deny that the other party is entitled to any recovery or relief based on such allegations.

E. Based upon a careful and independent investigation into all of the facts deemed by such party to be material to the agreements set forth herein and material to the Dispute and Zoning Action between the Parties, the Parties each now desire to settle and forever resolve any and all aspects of the Dispute and Zoning Action relating both to the formation and execution of

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the Lease and the allowable use of the Premises and all obligations and liabilities under the Lease that involve each of them and to release each other from all possible liability, known and unknown, in connection with the Lease pursuant to the full and timely performance of the following Terms and Conditions in the manner prescribed herein.

F. The advice of legal counsel has been obtained by each party hereto prior to entering into this Agreement. Each party hereto executes this Agreement with full knowledge of its Terms and Conditions and their significance and with the express intention of effecting its legal consequences.

TERMS AND CONDITIONS

1. Termination of the Lease And All Lease Obligations. In consideration for the full and timely performance by each party hereto of each of the Terms and Conditions of this Agreement in the manner prescribed herein, including without limitation all releases, dismissals, waivers, covenants, warranties and representations, execution and delivery of all documentation required herein, and in full and final settlement of the Action, the Parties hereby agree that the Lease, and all contemporaneous or subsequent agreements formed or executed under or in connection with the Lease, are hereby terminated and superseded by this Agreement. Moreover, the Parties agree that all rights and obligations under the Lease, and all contemporaneous agreements entered into in connection with the Lease, are hereby extinguished as of the effective date of this Agreement.

2. Retention by Max Of Security Deposit, Advanced Rent and Letter Of Credit. Moreover, the Parties hereby agree that in consideration for the full and timely performance by each party hereto of each of the Terms and Conditions of this Agreement, Max shall be entitled to retain possession of the following funds: (1) the $207,235 security deposit made by PeerLogic

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in connection with the execution of the Lease; (2) the sum of $69,078 in advanced rent paid by PeerLogic in connection with the Lease; and (3) the sum of $492,487, which represents funds obtained by Max in connection with the Letter of Credit provided by PeerLogic to secure the Lease.

3. Payment to Max. Moreover, the Parties hereby agree that in consideration for the full and timely performance by each party hereto of each of the Terms and Conditions of this Agreement, Critical Path has caused or will cause to be paid to Max the total sum of One Hundred Thousand Dollars and 00/100’s ($100,000.00) in the form of a cashier’s check payable to “Senn Meulemans Trust Account.”

4. Issuance of Warrant to Max. Moreover, the Parties hereby agree that in consideration for the full and timely performance by each party hereto of each of the Terms and Conditions of this Agreement, Critical Path will issue to Max a warrant for 100,000 shares of Critical Path stock at its market value on the date of this Agreement (i.e., February 4, 2004). The basic warrant terms are generally as follows: (i) the warrant is immediately exercisable; (ii) the term of the warrant is three (3) years; and (iii) the exercise price of the warrant is $2.34 per share (the closing price on February 4, 2004). The terms of the Warrant are fully set forth in Exhibit ”B” and are fully incorporated into this Settlement Agreement.

5. Order of Dismissals. After this Agreement has been fully executed, Max shall dismiss, with prejudice, its Complaint against Defendants and Defendants shall dismiss, with prejudice, its Cross-Complaint against Max, an endorsed-filed copy of which dismissal will be attached hereto as Exhibit “A.” Moreover, Max will simultaneously dismiss its appeal, with prejudice, in the Zoning Action.

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6. Mutual Release. In consideration for the full and timely performance of all Terms and Conditions of this Agreement in the manner prescribed herein, each party hereto, on behalf of itself/himself and on behalf of each of its/his respective heirs, executors, administrators, trustors, trustees, beneficiaries, predecessors, successors, assigns, members, former shareholders, shareholders, former partners, partners, partnerships, parents, subsidiaries, affiliated and related entities, officers, directors, principals, agents, servants, employees, representatives, and all persons, firms associations and/or corporations connected with them hereby releases and forever discharges each other and their respective heirs, executors, administrators, trustors, trustees, beneficiaries, predecessors, successors, assigns, members, former shareholders, shareholders, former partners, partners, partnerships, parents, subsidiaries, affiliated and related entities, officers, directors, principals, agents, servants, employees, representatives, and all persons, firms, associations and/or corporations connected with them, who are or may ever become liable to them, of and from any and all claims, demands, causes of action, obligations, liens, taxes, damages, losses, costs, attorneys’ fees and expenses of every kind and nature whatsoever, known or unknown, fixed or contingent which any of them may now have or may hereafter have against each other in any way (including all statutory attorneys’ fees that may have been recoverable by Defendants against Max in the Zoning Action) other than any actions that may relate to an alleged breach of the terms of this Settlement Agreement, including the Warrant, attached and incorporated into this Settlement Agreement as Exhibit “B”. This paragraph also shall not be construed to limit any of the rights that Max may have by virtue of the warrant and/or its potential status as a shareholder of Critical Path.

7. Waiver. Each party hereto acknowledges that there is a risk that, subsequent to the execution of this Agreement, they may incur, suffer or sustain injury, loss, damage, costs,

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attorneys’ fees, expenses, or any of these, which are in some way caused by or connected with the persons, entities, matters and/or issues referred to in Section 6 above, or which are unknown and unanticipated at the time this Agreement is executed, or which are not presently capable of being ascertained. Each party hereto further acknowledges that there is a risk that such damages as are presently known may hereafter become more serious than any of them now expects or anticipates. Nevertheless, each party hereto acknowledges that this Agreement has been negotiated and agreed upon in light of that realization and each party hereby expressly waives all rights each may have in such unsuspected claims. In so doing, each party hereto has had the benefit and advice of counsel and hereby knowingly and specifically waives its rights under California Civil Code, Section 1542, which provides as follows:

A general release does not extend to the claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor.

8. Covenant Not to Sue. Each party hereto hereby covenants and agrees never to commence, aid in any way or in any manner prosecute against any other party hereto any legal action or other proceeding based in whole or in part based upon the Dispute or the Zoning Action, or any claims, demands, causes of action, obligations, damages or liabilities released in this Agreement, as described in Section 6 above, provided, however, that this paragraph shall not be construed as a covenant by either party to not sue the other party in the event of the other party’s alleged breach of the terms of this Agreement, including, but not limited to, the terms of the Warrant attached as Exhibit “B” to this Agreement. This paragraph also shall not be construed to limit any of the rights that Max may have by virtue of the warrant and/or its potential status as a shareholder of Critical Path.

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9. Representation and Warranties. Counsel for each party represents and warrants that the person or persons signing this Agreement and all other settlement documentation on behalf of the parties represented by each such counsel is duly and fully authorized to do so.

10. Warranty of Authorized Signatories. Each of the signatories hereto warrants and represents that he or she is competent and authorized to enter into this Agreement on behalf of the party for whom he or she purports to sign, and each agrees to indemnify and hold harmless each other party hereto against all claims, suits, actions and demands, including necessary expenses of investigation and reasonable attorneys’ fees and costs, in which it may be successfully asserted that he or she was not competent or so authorized to execute this Agreement and to receive the consideration therefor.

11. Compromise. This Agreement is the result of a compromise and shall never at any time or for any purpose be considered an admission of liability or responsibility on the part of any party herein released, nor shall the payment of any sum of money in consideration for the execution of this Agreement constitute or be construed as an admission of any liability whatsoever by any party herein released, all of which continue to deny such liability and to disclaim such responsibility.

12. Attorneys’ Fees. The parties hereto acknowledge and agree that each of them shall bear their own costs, expenses and attorneys’ fees arising out of or connected with the Dispute and Zoning Action, including all statutory attorneys’ fees that may have been recoverable by Defendants against Max in the Zoning Action, in addition to all fees arising from the negotiation, drafting the execution of this Agreement, and all matters arising out of or connected therewith, except that in the event any action or proceeding is brought to enforce this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees and costs against

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the non-prevailing parties, in addition to all other relief to which that party or those parties may be entitled.

13. Construction of Agreement. This Agreement is the product of negotiation and preparation by and among each party hereto and their respective attorneys. Accordingly, the Parties hereto acknowledge and agree that this Agreement shall not be deemed prepared or drafted by one party or another, or the attorneys for one party or another, and shall be construed accordingly.

14. Governing Law. This Agreement shall be interpreted in accordance with and governed in all respects by the laws of the State of California.

15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties hereto, and their respective heirs, executors, administrators, trustors, trustees, beneficiaries, predecessors, successors, members, assigns, partners, partnerships, parents, subsidiaries, affiliated and related entities, officers, directors, principals, agents, servants, employees, representatives, and all persons, firms, associations and/or corporations connected with each of them, including without limitation their insurers, sureties, attorneys, consultants and experts.

17. Severability. If any provision or any part of any provision of this Agreement shall for any reason be held to be invalid, unenforceable or contrary to public policy or any law, then the remainder of this Agreement shall not be affected thereby and shall remain in full force and effect.

18. Counterparts. This Agreement may be executed in counterparts and all so executed shall constitute one agreement which shall be binding upon all parties hereto,

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notwithstanding that the signatures of the Parties’ designated representatives do not appear on the same page.

19. Facsimile Signatures: The parties agree that facsimile signatures on this Agreement have the same force and legal effect as original signatures.

20. Entire Agreement. This Agreement, including all exhibits attached hereto and herein incorporated by reference, contains the entire understanding among the parties to this Agreement with regard to the matters herein set forth, and is intended to be and is a final integration thereof. There are no representations, warranties, agreements, arrangements, undertakings, oral or written, between or among the parties hereto relating to the Terms and Conditions of this Agreement which are not fully expressed herein.

21. Warranty of Authority. The Parties represent and warrant that each signatory of this Agreement has full authority to legally bind the entity or entities on behalf of which each is signing.

DATED:	MAX LIMITED, LLC
April 19, 2004	By:	/s/ Deborah Chalsty
		Deborah Chalsty
April 19, 2004	By:	/s/ Maria McVarish
		Maria McVarish
April 20, 2004	By:	/s/ John Chalsty
		John Chalsty

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DATED: May 4, 2004	PEERLOGIC, INC.
	By:	/s/ Michael Zukerman
	Print Name: Michael Zukerman
	Title: Officer
DATED: May 4, 2004	CRITICAL PATH, INC.
	By:	/s/ Michael Zukerman
	Print Name: Michael Zukerman
	Title: Senior Vice President
DATED: May 4, 2004	PRINCE ACQUISITION CORP.
	By:	/s/ Michael Zukerman
	Print Name: Michael Zukerman
	Title: Officer
APPROVED AS TO FORM:	SENN MEULEMANS, LLP
DATED:                     , 2004	By:
		Catherine S. Meulemans Attorney for MAX LIMITED, LLC
APPROVED AS TO FORM:	STEEFEL, LEVITT & WEISS, P.C.
DATED: May 5, 2004	By:	/s/ Ashley K. Dunning
		Ashley K. Dunning
		Attorneys for CRITICAL PATH, INC., PRINCE ACQUISITIONS CORP. and PEERLOGIC, INC.

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EX-10.68

EXHIBIT 10.68

FOURTH AMENDMENT TO

AMENDED AND RESTATED

LOAN AND SECURITY AGREEMENT

THIS FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the “Fourth Amendment”) is entered into as of April 15, 2004, by and between SILICON VALLEY BANK, a California-chartered bank (the “Bank”), and CRITICAL PATH, INC., a California corporation (the “Borrower”), in reliance on the following:

RECITALS

A. On or about July 18, 2003, the Borrower and the Bank entered into that certain Amended and Restated Loan and Security Agreement (the “Loan Agreement”) pursuant to which the Bank made available to the Borrower a revolving credit facility (the “Senior Debt Facility”) in the principal amount of up to $15,000,000.00.

B. On or about November 18, 2003, the Borrower entered into that certain Convertible Note Purchase and Exchange Agreement among the Borrower, General Atlantic Partners 74, L.P. (“GAP 74”), GAP Coinvestment Partners II, L.P. (“GAP Coinvestment”), GapStar, LLC (“GapStar”) and GAPCO GmbH & Co. KG (“GAPCO” and, together with GAP 74, GAP Coinvestment and GapStar, the “Investors”), and the other entities listed on the signature pages thereto (collectively with the notes and other documents executed and delivered by the Borrower in connection therewith, as amended in accordance with the terms of the First Subordination Agreement defined below, the “First Junior Debt Documents”), pursuant to which the Borrower issued to such Investors convertible notes in the aggregate principal amount of $10,000,000.00 (the “First Junior Debt”) and granted a security interest to the Investors in certain of the Collateral on November 26, 2003.

C. The Bank consented to the Borrower’s entering into the First Junior Debt Documents and performing its obligations thereunder pursuant to the terms of that certain First Amendment to Amended and Restated Loan and Security Agreement dated as of November 26, 2003 (the “Amendment”). The Amendment provided, in part, that the Investors would enter into that certain Subordination Agreement with the Bank dated as of November 26, 2003 (the “First Subordination Agreement”) to evidence the terms by which the First Junior Debt is subordinated to the Senior Debt Facility.

D. On or about January 16, 2004, the Borrower entered into that certain Convertible Note Purchase Agreement dated as of January 16, 2004, by and among the Borrower as issuer, on the one hand, and Permal U.S. Opportunities Limited, Zaxis Equity Neutral, L.P., Zaxis Partners, L.P., Zaxis Offshore Limited, Zaxis Institutional Partners, L.P., and Passport Master Fund, L.P. as creditors (collectively, the “Second Subordinated Creditors”), on the other hand, and the Notes, the Guaranty and Security Agreement and the other documents executed and delivered in connection therewith (collectively, the “Second Junior Debt Documents”).

E. The Bank consented to the Borrower’s entering into the Second Junior Debt Documents and the Borrower’s granting to the Second Subordinated Creditors a security interest

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in certain of the Collateral, all as more fully set forth in the Second Junior Debt Documents, conditioned upon the execution and delivery by the Second Subordinated Creditors of a “Second Subordination Agreement” by and among the Bank, as senior creditor, and the Second Subordinated Creditors, as junior creditors, in form and substance acceptable to the Bank, and the consent of the Investors to the Borrower’s entering into the Second Junior Debt Documents.

F. On or about January 30, 2004, the Borrower entered into that certain Second Amendment to the Loan Agreement (the “Second Amendment”). The Second Amendment provided, in part, an extension of the Maturity Date to October 31, 2004.

G. On or about March 9, 2004, the Borrower entered into that certain Convertible Note Purchase Agreement dated as of March 9, 2004, by and among the Borrower as issuer, on the one hand, and Permal U.S. Opportunities Limited, Zaxis Equity Neutral, L.P., Zaxis Partners, L.P., Zaxis Offshore Limited, Zaxis Institutional Partners, L.P., Guggenheim Portfolio Company XIII, Crosslink Crossover Fund IV, L.P., Sagamore Hill Hub Fund, Ltd., Criterion Capital Partners, Ltd. Criterion Capital Partners, Institutional, Criterion Capital Partners, L.P. and Capital Ventures International as creditors (collectively, the “Third Subordinated Creditors”), on the other hand, and the Notes, the Guaranty and Security Agreement and the other documents executed and delivered in connection therewith (collectively, the “Third Junior Debt Documents”).

H. The Bank consented to the Borrower’s entering into the Third Junior Debt Documents and the Borrower’s granting to the Third Subordinated Creditors a security interest in certain of the Collateral, all as more fully set forth in the Third Junior Debt Documents, conditioned upon the execution and delivery by the Third Subordinated Creditors of a “Third Subordination Agreement” by and among the Bank, as senior creditor, and the Third Subordinated Creditors, as junior creditors, in form and substance acceptable to the Bank, and the consent of the Investors and Second Subordinated Creditors to the Borrower’s entering into the Third Junior Debt Documents.

I. On or about March 12, 2004, the Borrower entered into that certain Third Amendment to the Loan Agreement dated as of January 30, 2004 (the “Third Amendment”). The Third Amendment provided, in part, an extension of the Maturity Date to June 30, 2005. The Loan Agreement as amended by the Amendment, the Second Amendment and Third Amendment, along with all other documents entered into by the parties in connection with the Loan Agreement, the Amendment, the Second Amendment and the Third Amendment are hereinafter referred to as the “Senior Loan Documents,” and each capitalized term used in this Fourth Amendment shall have the meaning accorded to it in the Senior Loan Documents unless it is otherwise defined herein.

J. The Borrower now desires to waive a certain financial covenant in the Senior Loan Documents and to amend the Senior Loan Documents further in order to modify a certain financial covenant upon the terms set forth herein.

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AGREEMENT

NOW, THEREFORE, in reliance upon the foregoing and in consideration of the mutual covenants set forth herein and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:

1. Waiver. The Bank hereby waives the Borrower’s failure to comply with the financial covenant set forth in Section 5.1 of Schedule 1 for the quarter ended March 31, 2004. The foregoing waiver is effective solely as to this covenant for the quarter ended March 31, 2004 and shall not constitute a continuing waiver by the Bank of its rights under Section 5.1 of Schedule 1 or elsewhere in the Senior Loan Documents. Without limiting the foregoing, the Bank’s waiver in this Section 1 shall not serve as a waiver of the Borrower’s failure to comply with the provisions of said Section 5.1 of Schedule 1 as of the end of any future quarter.

2. Consolidated Revenues Covenant. The existing Section 5.1 of Schedule 1 is hereby deleted and a new Section 5.1 of Schedule 1 is hereby added to read in full as follows:

“5.1 Minimum Consolidated Revenues. Borrower shall maintain minimum Consolidated Revenues on a rolling three-month basis (the first such three-month period being 10/1/03—12/31/03), measured by the Bank each month commencing on December 31, 2003, in the following amounts: (i) $16,500,000.00 for the period commencing on February 29, 2004 through June 30, 2004; and (ii) $18,500,000.00 for each three-month period thereafter through the Maturity Date. For purposes of this covenant, “Consolidated Revenues” shall mean the revenues of Borrower and its subsidiaries as reported to the Bank on a consolidated basis in Borrower’s monthly financial statements.”

3. Going Concern Qualification. A “going concern” qualification in an audit report in connection with the Borrower shall not be issued during the period commencing from the date hereof through the Maturity Date.

4. Waiver Fee. The Borrower will pay the Bank a waiver fee on the date hereof the amount of $25,000.00 (the “Waiver Fee”), which Waiver Fee shall be fully-earned and non-refundable upon payment.

5. Reaffirmation of Obligations. The Borrower reaffirms to the Bank that, as of the date hereof, the outstanding principal amount of all Loans under the Senior Loan Documents (including the face amount of all Letters of Credit outstanding under the Letter of Credit Sublimit) is $2,701,501.00. The Borrower acknowledges that the Senior Loan Documents fully and accurately reflect and constitute the valid and enforceable Obligations of the Borrower to the Bank, and the Borrower remains fully obligated to perform all covenants thereunder and has no defenses to or offsets against such Obligations.

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6. Conditions to Effectiveness. The following conditions must be satisfied in full, or waived in writing by the Bank, before this Fourth Amendment shall be effective and the Bank shall become obligated hereunder.

6.1 Execution and Delivery of Documents. The Borrower shall have executed and delivered to the Bank this Fourth Amendment, and the Bank shall have received any and all other instruments and documents, fully executed and in form and substance acceptable to the Bank, as are contemplated hereby or otherwise reasonably requested by the Bank.

6.2 Payment of Fees and Expenses. The Borrower shall have paid to the Bank all fees due and owing under the Senior Loan Documents as amended hereby (including but not limited to the Waiver Fee), as well as a sum sufficient to reimburse the Bank for all costs and expenses incurred by the Bank in entering into this Fourth Amendment and any and all other documents and instruments contemplated hereby or thereby (including but not limited to all attorneys’ fees and expenses.)

6.3 Representations and Warranties; No Default. The representations and warranties of the Borrower as set forth in the Senior Loan Documents shall be true and correct in all material respects as of the date on which this Fourth Amendment becomes effective, and no Event of Default shall have occurred and be continuing as of such date without having been cured.

7. Continued Full Force and Effect. Except to the extent expressly amended hereby, all of the terms and provisions of the Senior Loan Documents shall remain in full force and effect, and the lien in favor of the Bank in the Collateral shall be and remain a fully perfected senior lien upon all of the Collateral pursuant to the terms of the Senior Loan Documents, it being the intent of the parties that nothing herein shall affect or impair the Bank’s rights or remedies under the Senior Loan Documents or its lien upon the Collateral. Henceforth, the term “Loan Documents” shall be deemed to mean the Senior Loan Documents as modified and supplemented by the terms of this Fourth Amendment, and any default of the Borrower hereunder shall constitute an Event of Default under the Senior Loan Documents.

8. General Provisions.

8.1 Choice of Law and Venue. This Fourth Amendment shall be governed by and construed in accordance with the internal laws of the State of California, without regard to principles of conflicts of law, and any action or proceeding arising out of this Fourth Amendment shall be commenced in the Superior Court of the State of California for the County of Santa Clara, or in the District Court of the United States in the Northern District of California.

8.2 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, ON THE ONE HAND, AND THE BANK, ON THE OTHER HAND, WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS FOURTH AMENDMENT, THE SENIOR LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT

4

FOR EACH OF THE PARTIES TO ENTER INTO THIS FOURTH AMENDMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL AND UNDERSTANDS THE RAMIFICATIONS THEREOF.

8.3 Entire Agreement. This Fourth Amendment, along with the Loan Agreement and the other Senior Loan Documents, together constitute the entire agreement and understanding between the parties hereto with respect to the transactions contemplated hereunder and thereunder and supersede all prior negotiations, understandings and agreements between the parties with respect to such transactions.

8.4 Counterparts. This Fourth Amendment may be executed and delivered in any number of counterparts, each of which shall be an original and all of which together shall constitute one and the same agreement.

8.5 Time of the Essence. Time is of the essence in the performance by each party of its obligations hereunder and the satisfaction of all conditions specified herein.

IN WITNESS WHEREOF, each of the parties hereto has caused its duly authorized representative to execute this Fourth Amendment as of the date first set forth above.

BORROWER:		BANK:
CRITICAL PATH, INC.,		SILICON VALLEY BANK,
a California corporation		a California-chartered bank
By:	/s/ James A. Clark	By:	/s/ Brian Harrison
Name:	James A. Clark	Name:	Brian Harrison
Title:	EVP and CFO	Title:	Vice President

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Mark Ferrer, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Critical Path, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstance under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2004

/s/ MARK FERRER

Mark Ferrer

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, James A. Clark, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Critical Path, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstance under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2004

/s/ JAMES A. CLARK

James A. Clark

Chief Financial Officer and

Executive Vice President

EX-32.1

EXHIBIT 32.1

STATEMENT OF CHIEF EXECUTIVE OFFICER UNDER 18 U.S.C. SECTION 1350

I, Mark Ferrer, the chief executive officer of Critical Path, Inc. (the “Company”), certify for the purposes of section 1350 of chapter 63 of title 18 of the United States Code that, to my knowledge,:

(i) the Quarterly Report of the Company on Form 10-Q for the quarterly period ended March 31, 2004 (the “Report”) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2004

/s/ MARK FERRER

Mark Ferrer

Chief Executive Officer

A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to Critical Path, Inc. and will be retained by Critical Path, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

(1) The material contained in this Exhibit 32.1 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

EX-32.2

EXHIBIT 32.2

STATEMENT OF CHIEF FINANCIAL OFFICER UNDER 18 U.S.C. SECTION 1350

I, James Clark, the chief financial officer of Critical Path, Inc. (the “Company”), certify for the purposes of section 1350 of chapter 63 of title 18 of the United States Code that, to my knowledge,:

(i) the Quarterly Report of the Company on Form 10-Q for the quarterly period ended March 31, 2004 (the “Report”) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2004

/s/ JAMES A. CLARK

James A. Clark

Chief Financial Officer and Executive Vice President

A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to Critical Path, Inc. and will be retained by Critical Path, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

(1) The material contained in this Exhibit 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.