Form 10-Q

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

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

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

As of April 1, 2007, the Company had outstanding 37,197,646 shares of common stock, $0.001 par value per share.

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

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

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

The condensed 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.

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

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

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

If the Company is unable to increase its revenues or if it is unable to reduce the amount of cash used by its operating activities during 2007 and into 2008, the Company may be required to undertake additional restructuring alternatives, sell certain operating assets or seek additional debt financing. In June 2008, the Company will be required to repay the outstanding amount of principal and interest on its 13.9% Notes. As of March 31, 2007, the outstanding principal and interest on these notes was $24.2 million. In July 2008, the Company may also be required to redeem its outstanding shares of Series D and Series E preferred stock to the extent the payment of cash to redeem shares is permitted by applicable law at that time. If no holders of the Company’s Series D and Series E preferred stock elect to convert their shares of preferred stock into common stock before the redemption date, the Company could be required to pay an aggregate of $162.5 million in July 2008 if allowed by applicable law. However, the Company’s ability to incur additional indebtedness is subject to certain limitations as discussed in the section below captioned “Ability to incur additional indebtedness” and the Company does not believe equity financing on terms reasonably acceptable is currently available. Additionally, the Company’s common stock now trades in the over-the-counter market on the OTC Bulletin Board owned by the Nasdaq Stock Market, Inc., which was established for securities that do not meet the listing requirements of the Nasdaq Global Market or the Nasdaq Capital Market. The OTC Bulletin Board is generally considered less efficient than the Nasdaq Global Market. Consequently, selling the Company’s common stock is likely more difficult because of diminished liquidity in smaller quantities of shares likely being bought and sold, transactions could be delayed, and securities analysts’ and news media coverage of the Company may be limited. The Company believes its listing on the OTC Bulletin Board, or further declines in its stock price, may greatly impair its ability to raise additional capital, should it be necessary, through equity or debt financing.

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

The Company’s principal sources of liquidity include its cash and cash equivalents. As of March 31, 2007, the Company had cash and cash equivalents available for operations totaling $12.2 million, of which $7.2 million was located in accounts outside the United States and which is not readily available for its domestic operations; however, the Company has developed a cash repatriation program which is intended to make access to its foreign cash more efficient. Accordingly, at March 31, 2007 the Company’s readily available cash resources in the United States were $5.0 million. Additionally, as of March 31, 2007, the Company had cash collateralized letters of credit totaling approximately $0.2 million which is recorded as restricted cash on its balance sheet and is not readily available for operations.

Based on the Company’s financing activities, continued restructuring activities and management’s projections as to the Company’s operating results, the Company believes that it has sufficient cash to meet its cash operating requirements for the next 12 months as well as the on-going investments in capital equipment to support research and development efforts and news group operations. The Company believes these projections are reasonable; however, these projections are subject to risks and uncertainties, some of which are beyond the Company’s control, such as the amount of revenues that will be generated. As a result, actual results could differ materially from such projections. In addition, as the Company approaches the June 2008 maturity of the 13.9% Notes, the Company anticipates that it will need to restructure its debt or seek additional financing in order to pay the 13.9% Notes upon maturity. Additionally, the Company also anticipates that it may need to restructure its outstanding preferred stock in order to delay the redemption of these preferred shares. However, any restructuring alternative that the Company may agree to may not be on terms that are reasonably acceptable. The Company has no present understandings, commitments or agreements for any material acquisitions of, or investments in, other complementary businesses, products or technologies. The Company continually evaluates potential acquisitions of, or investments in, other businesses, products and technologies, and may in the future utilize its cash resources or may require additional equity or debt financing to accomplish any acquisitions or investments. These alternatives could increase liquidity through the infusion of investment capital by third-party investors or decrease liquidity as a result of the Company seeking to fund expansion into these markets. Such expansions might also cause an increase in capital expenditures and operating expenses. For the long-term, the Company believes future improvements in its operating activities will be necessary to provide the liquidity and capital resources sufficient to support its business.

Subject to limited exceptions, the Company must seek the consent of its preferred shareholders and debt holders in order to incur any additional indebtedness.

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

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

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

At March 31, 2007, the Company was carrying $7.5 million of goodwill assets which, in accordance with SFAS No. 142, are not amortized. The change in the balance subsequent to December 31, 2006 is due to the revaluation of goodwill balances denominated in foreign currencies.

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

Notes payable at March 31, 2007 and December 31, 2006 consisted only of the Company’s 13.9% Notes.

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

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

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

The $18.0 million in proceeds from the financing transaction were allocated to the 13.9% Notes and warrants based upon their relative estimated fair values. The estimated fair value of the warrants has been classified as a derivative instrument and recorded as a liability on the Company’s balance sheet in accordance with current authoritative guidance. In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments, the Company is required to adjust the carrying value of the instrument to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of Other Income (Expense). The warrant derivative liability is being carried on the Company’s balance sheet at its fair value of $40,000 at March 31, 2007.

The 13.9% Notes are carried on the balance sheet as long-term “Notes payable” as follows:

For the three months ended March 31, 2007 and 2006, the Company recorded accrued interest of $0.8 million and $0.7 million, respectively. These notes are carried at cost and had an approximate fair value of $13.1 million at March 31, 2007.

As of March 31, 2007 and December 31, 2006 redeemable preferred stock was comprised of the following (in thousands, except for amounts authorized and issued):

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

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

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

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

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

In July 2004, at a special meeting of shareholders, the Company’s shareholders approved proposals to amend and restate the certificate of determination of preferences of Series D preferred stock (the Amended Series D). As part of this amendment, the automatic redemption date was changed to July 2008 and the dividend accrual rate was reduced to 5³/4%. The dividends which had accrued on the Series D preferred stock totaling approximately $12.2 million were recorded as a reduction to the carrying value of the Amended Series D. This amount was recorded as a reduction of the carrying amount of the Amended Series D and will accrete over the term of the Amended Series D. As of March 31, 2007 if the holders of Amended Series D preferred stock voluntarily opt to redeem, the conversion value of all Amended Series D preferred stock, as accreted is $68.1 million. Additionally, the Amended Series D preferred stock contains a liquidation preference of $22 per share.

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

During the three months ended September 30, 2004, the Company issued a total of approximately 55.9 million shares of Series E Redeemable Convertible Preferred Stock (Series E preferred stock). In July 2004, the Company issued approximately 30.6 million shares of Series E preferred stock to convert $45.5 million of the 10% Senior Notes plus accrued interest, issued 21.9 million shares of Series E preferred stock to convert $32.8 million of the 5 3/4% Notes and issued approximately 0.8 million shares of Series E preferred stock to convert certain holders of Series D preferred stock into Series E preferred stock. In August 2004, the Company issued approximately 2.6 million shares of Series E preferred stock in connection with its rights offering from which the Company received gross proceeds of approximately $4.0 million.

The Series E preferred stock ranks senior to all preferred and common stock of the Company in priority of dividends, rights of redemption and payment upon liquidation. The principal terms of the Series E preferred stock include an automatic redemption on July 9, 2008, cumulative dividends at a rate of 5 3/4% per year, dividends are not paid in cash but are added to the value of the Series E preferred stock on June 30 and December 31 each year, and conversion into shares of common stock calculated based on the quotient of the Series E accreted value divided by the Series E conversion price, $1.50.

At issuance, the total amount of costs associated with converting the Company’s debt into Series E preferred stock and costs associated with the rights offering, totaling approximately $4.6 million, will accrete over the term of the Series E preferred stock. Additionally, the conversion of the $45.5 million 10% Senior Notes into the Series E preferred stock was deemed to have a beneficial conversion feature totaling approximately $16.3 million. The value of the beneficial conversion feature, at issuance, was initially recorded as a reduction of the carrying amount of the Series E preferred stock and will accrete over the term of the Series E preferred stock. The carrying value of the Series E preferred stock is as follows (in thousands):

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

The Company must declare or pay dividends on the Series F preferred stock when the Company declares or pay dividends to the holders of common stock. Holders of Series F preferred stock are entitled to notice of all shareholders’ meetings and are entitled to vote on all matters submitted to the Shareholders for a vote, voting together with the holders of the common stock and all other classes of capital stock entitled to vote, voting as a single class (except where a separate vote is required by the Company’s amended and restated articles of incorporation, its bylaws or California law). The holders of Series F preferred stock will be entitled to vote as a separate class on any amendment to the terms or authorized number of shares of Series F preferred stock, the issuance of any equity security ranking senior to the Series F preferred stock and the redemption of or the payment of a dividend in respect of any junior security. At any time, holders of Series F preferred stock may elect to convert their Series F preferred stock into shares of common stock. Each share of Series F preferred Stock is currently convertible into ten shares of common stock. After three years from the date the Series E preferred stock is first issued, the Company may call for redemption of the Series F preferred stock under certain circumstances. On the fourth anniversary of the date the Series E preferred stock is first issued, the Company must call for redemption of the Series F preferred stock.

At March 31, 2007, no shares of Series F preferred stock have been exercised or were outstanding. Warrants to purchase 0.4 million shares of Series F preferred stock were issued and outstanding as of March 31, 2007 in connection with the issuance of the 13.9% Notes.

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

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

The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through 2014. Rent expense during the three months ended March 31, 2007 and 2006, totaled $0.5 million, and $0.7 million, respectively. Future minimum lease payments under noncancelable operating and capital leases are as follows:

The Company entered into other contractual obligations which total $4.2 million at March 31, 2007. These obligations are primarily associated with the future purchase of equipment and software, the maintenance of hardware and software products being utilized within engineering and hosted operations, and the management of data center operations and network infrastructure storage for the Company’s hosted operations. These obligations are expected to be completed over the next 2 years, including $2.7 million in 2007.

On June 28, 2006, the Company entered into a Sublease Agreement (the Sublease) with Babcock & Brown to lease 15,000 square feet of the existing headquarters facilities at 2 Harrison Street. The sublease with Babcock & Brown has a two-year term and monthly rent of approximately $39,000. In November 2006, the square footage the Company occupied of the sub leased premises was reduced by approximately 9,000 square feet and the monthly rent was also reduced to approximately $21,000 per month in accordance with the terms of the Sublease.

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

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

Action in the Superior Court of San Diego. In April 2006, the Company was added as a named defendant in a lawsuit previously filed by a former shareholder of Extricity, Inc. against current and former officers and directors of Peregrine Systems, Inc., Peregrine’s former accountants, some of Peregrine’s customers, including the Company and various other unnamed defendants. In February 2007, the plaintiff filed a third amended complaint, which for the first time contains certain allegations and claims raised against the Company. The complaint alleges that certain of the named defendants including the Company, as Peregrine’s customers, engaged in fraudulent transactions with Peregrine that were not accounted for by Peregrine in conformity with U.S. GAAP and that this substantially inflated the value of Peregrine securities issued as consideration in Extricity’s merger with Peregrine. The Company believes the allegations continue to be without merit. The Company has filed a demurrer to all claims and intends to defend itself vigorously. The Company has not recorded a liability against this claim as of March 31, 2007.

Securities Class Action in Southern District of New York. Beginning in July 2001, a number of securities class action complaints were filed against the Company, and certain of its former officers and directors and underwriters connected with the Company’s initial public offering (IPO) of common stock in the U.S. District Court for the Southern District of New York (In re Initial Public Offering Sec. Litig.). The purported class action complaints were filed by individuals who allege that they purchased the Company’s common stock at the initial and secondary public offerings between March 29, 1999 and December 6, 2000. The complaints allege generally that the prospectus under which such securities were sold contained false and misleading statements with respect to discounts and excess commissions received by the underwriters as well as allegations of “laddering” whereby underwriters required their customers to purchase additional shares in the aftermarket in exchange for an allocation of IPO shares. The complaints seek an unspecified amount in damages on behalf of persons who purchased the Company’s common stock during the specified period. Similar complaints have been filed against 55 underwriters and more than 300 other companies and other individuals. The over 1,000 complaints have been consolidated into a single action. The Company 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.

A final settlement approval hearing on the proposed issuer settlement was held on April 24, 2006. The district court took the matter under submission and has not yet ruled. Meanwhile the consolidated case against the underwriters has proceeded. On October 13, 2004, the district court certified a class in the underwriters’ proceeding. On December 5, 2006, however, the Second Circuit reversed, holding that a class could not be certified. The Second Circuit’s holding, while directly affecting only the underwriters, raises some doubt as to whether the proposed issuer settlement will be approved in its present form. On January 5, 2007, plaintiffs petitioned the Second Circuit for rehearing of the Second Circuit’s decision. On April 6, 2007, the Second Circuit denied the petition for rehearing. At a status conference on April 23, 2007, the district court suggested that the issuers’ settlement could not be approved in its present form, given the Second Circuit’s ruling. The district court set a further status conference for May 30, 2007. The Company has not recorded a liability against this claim as of March 31, 2007.

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

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

of a portion of the Company’s hosted messaging assets to Tucows.com, the Company agreed to indemnify Tucows.com and its affiliates for all losses (limited to the amount of the purchase price) incurred by them in connection with certain breaches of covenants, representations and warranties the Company made to Tucows.com relating to the sufficiency of the assets and rights being transferred; certain liabilities relating to the hosted business that were not assumed by Tucows.com; and noncompliance by the Company with any law or regulation relating to the hosted business or the sale of assets.

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

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

During each of the three months ended March 31, 2007 and 2006, the Company did not have any customers that accounted for more than 10% of its revenues. The following table sets forth the customers that accounted for more than 10% of the Company’s accounts receivable at March 31, 2007 and 2006.

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

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

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

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

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

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

The following table details stock-based compensation expense, related to the Company’s stock-based awards, on a functional basis as reported in the Company’s Consolidated Statement of Operations for the three months ended March 31, 2007 and 2006.

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

The value of the portion of the stock award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods. Including the unvested portion of the fair value of the June 2006 option exchange, total stock-based compensation of stock options granted but not yet vested, as of March 31, 2007, was approximately $155,000, which is expected to be recognized as expense over the future weighted average vesting period of 1.4 years.

The Company grants stock options through its 1998 Stock Option Plan and the 1999 Nonstatutory Stock Option Plan, respectively (together, the “Option Plans” and each a “Plan”). The 1998 Plan grants options to purchase shares of common stock to employees, officers, directors and consultants, with an increase annually on January 1 of each year by an amount equal to 2% of the total number of shares of the Company’s Common Stock authorized for issuance at the end of the most recently concluded fiscal year. The 1999 Plan provides for the granting of options to purchase shares of common stock to non-executive officer employees or the initial employment grant for executive officers. The 1998 Plan is a shareholder approved plan and allows for options to be granted as either incentive stock options (ISOs) or nonqualified stock options (NSOs). Options granted under the 1999 Plan may only be nonqualified stock options (NSOs). ISOs may be granted only to Company employees, including officers and employee directors. NSOs may be granted to Company employees, non-employee directors and consultants.

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

The following table summarizes activity under all stock option plans for the three month period ended March 31, 2007 (in thousands, except for per share amounts):

Based on the assumptions utilized in the Black-Scholes valuation model as discussed above, the weighted-average fair value of options granted under the stock option plans for the three months ended March 31, 2007 and 2006 was approximately $0.04 and $0.21, respectively.

The Company issues new shares of common stock upon exercise of stock options. During the three months ended March 31, 2007 and 2006, zero and 921 stock options were exercised, respectively. The stock options exercised during the three months ended March 31, 2006, had an insignificant aggregate intrinsic value. The aggregate intrinsic value represents the difference between the option exercise price and the closing stock price on the date of exercise for each option exercised during the period.

The aggregate intrinsic value of stock options outstanding at March 31, 2007 and 2006 was zero and $15,000, respectively. The aggregate intrinsic value of vested stock options at March 31, 2007 and 2006 was zero and $9,000, respectively. The aggregate intrinsic value, for purposes of this calculation, represents, on a pretax basis, the difference between the Company’s closing stock price as of the end of the first quarter of 2007 and 2006, respectively, and the option exercise price, multiplied by the number of options outstanding or exercisable. Stock options with exercise prices which are greater than the closing quarter end stock price are excluded from this calculation.

The following table summarizes information about stock options outstanding at March 31, 2007 (options in thousands):

As of March 31, 2006, there were 11,283,000 options outstanding and 11,152,000 options exercisable.

The Company has granted shares of restricted stock and restricted stock units to certain key employees and executive officers through its 1998 Plan. The Company did not issue any shares of restricted stock or restricted stock units during the three month period ended March 31, 2007.

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

The following table reflects the activity associated with shares of unvested restricted stock and restricted stock units during the three months ended March 31, 2007 (in thousands):

The fair value of restricted stock and restricted stock units which vested during the three month period ended March 31, 2007 totalled approximately $10,000.

As of March 31, 2007, there was approximately $98,000 in total unrecognized compensation cost associated with the unvested shares of restricted stock and restricted stock units. The cost is expected to be recognized over the future weighted average vesting period of 1.0 year.

On December 14, 2005, the Company entered into an Asset Purchase Agreement with Tucows.com (Tucows) for the sale of a portion of the Company’s hosted messaging assets, including a portion of its hosted messaging customer base, assembled hosted messaging workforce, and hosted messaging hardware (the Hosted Assets). On January 3, 2006, the Company completed the sale of its Hosted Assets. Under the Agreement, Tucows also acquired a software license for the Company’s Memova^® product and assumed certain contractual liabilities related to the Hosted Assets. Upon completion of the sale in January 2006, Tucows paid the Company $6.3 million in cash, of which $0.8 million was allocated to deferred revenue for future maintenance and support services to be provided by the Company in connection with the Memova Messaging license provided to Tucows under the Asset Purchase Agreement. During 2006, the Company received certain contingent consideration of $1.1 million related to the sale of the Hosted Assets and during the three months ended March 31, 2007, the Company received $0.1 million, the last of the amounts held in escrow as all post-closing conditions related to the sale of the Hosted Assets had been satisfied, which is recorded as a gain on sale of assets in the condensed consolidated statement of operations for the three months ended March 31, 2007.

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

The Company recorded restructuring expenses for the three months ended March 31, 2007 primarily related the closure of a certain office in the United Kingdom.

At March 31, 2007 and 2006, there were 115.3 million and 113.8 million, respectively, potential common shares that were excluded from the determination of diluted net loss per share, as the effect of such shares on a weighted average basis is anti-dilutive. The weighted average exercise prices of the potential common shares excluded from the determination of diluted net loss per share at March 31, 2007 and 2006 were $2.74 and $3.79, respectively.

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

There were no tax effects allocated to any components of other comprehensive loss during the three months ended March 31, 2007 and 2006.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q and the following disclosure contain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended and in effect from time to time. The words “anticipates,” “expects,” “intends,” “plans,” “believes,” “seek,” “proposed,” and “estimate” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements regarding our ability to operate in the future, our ability to obtain funding, the adequacy of funds to meet anticipated operating needs, our future strategic, operational and financial plans, possible financing, strategic or business combination transactions, anticipated or projected revenues for our overall business or specific parts of our business, expenses and operational growth, markets and potential customers for our products and services, the continued seasonality of our business, development and timing of release of new and upgraded products and service offerings, plans related to sales strategies and global sales efforts, the anticipated benefits of our relationships with strategic partners, growth of our competition, our ability to compete, investments in product development, our litigation strategy, use of future earnings, the features, benefits and performance of our current and future products and services, plans to reduce operating costs through continued expense management, the effect of the repayment of debt and our ability to improve our internal control over financial reporting. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, failure to meet sales and revenue forecasts, our management of expenses and restructuring activities, failure to obtain additional financing or to restructure our currently outstanding debt and preferred stock, on favorable terms or at all, the effect of the conversion of our preferred stock, the liquidation preference of our preferred stock, the accrual of dividends for our preferred stock, risks associated with our internal controls over financial reporting and our ability to address any material weaknesses in our internal controls over financial reporting, difficulties of forecasting future results due to our evolving business strategy, the emerging nature of the market for our products and services, turnover within and integration of senior management, board of directors, members and other key personnel, difficulties in our strategic plans to exit certain products and services offerings, failure to expand our sales and marketing activities, potential difficulties associated with strategic relationships, general economic conditions in markets in which we do business, risks associated with our international operations, inability to predict future trading prices of our common stock which have fluctuated significantly in the past, foreign currency fluctuations, unplanned system interruptions and capacity constraints, software defects, and those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing.

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

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

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

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

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

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

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

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

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

We have operated at a loss since our inception and as of March 31, 2007, we had an accumulated deficit of approximately $2.3 billion, which includes a $1.3 billion charge for impairment of goodwill and other long-lived assets that we recorded in fiscal year 2000. We have undertaken numerous restructuring initiatives in an effort to align our operating structure not only to the business and economic environments through which we have operated but also in response to our changing business in an effort to generate net income. Our restructuring activities in 2006 and 2005 were as follows:

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

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

If we are unable to increase our revenues or if we are unable to reduce the amount of cash used by our operating activities during 2007 and into 2008, we may be required to undertake additional restructuring alternatives, sell certain operating assets or seek additional debt financing. In June 2008, we will be required to repay the outstanding amount of principal and interest on our 13.9% Notes. As of March 31, 2007, the outstanding principal and interest on these notes was $24.2 million. In July 2008, we may also be required to redeem our outstanding shares of our Series D and Series E preferred stock to the extent the payment of cash to redeem shares is permitted by applicable law at that time. If no holders of our Series D and Series E preferred stock elect to convert their shares of preferred stock into common stock before the redemption date, we could be required to pay an aggregate of $162.5 million in July 2008 if allowed by applicable law. However, our ability to incur additional indebtedness is subject to certain limitations as discussed in the section below captioned “Ability to incur additional indebtedness” and we do not believe equity financing on terms reasonably acceptable to us is currently available. Additionally, our common stock now trades in the over-the-counter market on the OTC Bulletin Board owned by the Nasdaq Stock Market, Inc., which was established for securities that do not meet the listing requirements of the Nasdaq Global Market or the Nasdaq Capital Market. The OTC Bulletin Board is generally considered less efficient than the Nasdaq Global Market. Consequently, selling our common stock is likely more difficult because of diminished liquidity in smaller quantities of shares likely being bought and sold, transactions could be delayed, and securities analysts’ and news media coverage of us may be limited. We believe our listing on the OTC Bulletin Board, or further declines in our stock price, may greatly impair our ability to raise additional capital, should it be necessary, through equity or debt financing.

Subject to limited exceptions, we must seek the consent of our preferred shareholders and debt holders in order to incur any additional indebtedness.

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

Our principal sources of liquidity include our cash and cash equivalents. As of March 31, 2007, we had cash and cash equivalents available for operations totaling $12.2 million, of which $7.2 million was located in accounts outside the United States and which is not readily available for our domestic operations however, we have developed a cash repatriation program which is intended to make access to our foreign cash more efficient. Accordingly, at March 31, 2007 our readily available cash resources in the United States were $5.0 million. Additionally, as of March 31, 2007, we had cash collateralized letters of credit totaling approximately $0.2 million which is recorded as restricted cash on our balance sheet and is not readily available for our operations.

Based on our financing activities, continued restructuring activities and management’s projections as to our operating results, we believe that we have sufficient cash to meet our cash operating requirements for the next 12 months as well as the on-going investments in capital equipment to support our research and development efforts and usenet newsgroup operations. We believe these projections are reasonable; however, these projections are subject to risks and uncertainties, some of which

are beyond our control, such as the amount of revenues that will be generated. As a result, actual results could differ materially from such projections. In addition, as we approach the June 2008 maturity of the 13.9% Notes, we anticipate that we will need to restructure our debt or seek additional financing in order to pay the 13.9% Notes upon maturity. We also anticipate that we may need to restructure our outstanding preferred stock in order to delay the redemption of these preferred shares. However, any restructuring alternative that we may agree to may not be on terms that are reasonably acceptable to us. 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 liquidity as a result of our seeking to fund expansion into these markets. Such expansions might also cause an increase in capital expenditures and operating expenses. For the long-term, we believe future improvements in our operating activities will be necessary to provide the liquidity and capital resources sufficient to support our business.

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

Total cash and cash equivalents decreased during the three months ended March 31, 2007 primarily as a result of the cash used by our operating and investing activities as set forth in the table below (in thousands):

Net cash used by operating activities. Our operating activities used cash during the three months ended March 31, 2007. This cash was used to support our net loss of $3.0 million which, when adjusted for non-cash items such as: depreciation and amortization of $0.5 million, a $0.1 million gain due to the decrease in the fair value of embedded derivative liabilities, amortization of stock-based expenses of $30,000 as well as the gain on the sale of the Hosted Assets of $0.1 million and accrued interest and accretion on our 13.9% Notes of $1.0 million; totaled $1.6 million. Additionally, cash was used by our operating activities in connection with a $0.6 million net change in assets and liabilities. This change is primarily due to a $5.8 million increase in accounts receivable partially offset by a $3.5 million increase in deferred revenue, a $0.8 million increase in income and other tax liabilities and a $0.6 million decrease in prepaid and other current assets.

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

Accounts receivable balances and DSOs increased primarily due to annual support and third-party license renewals invoiced during the three months ended March 31, 2007 for which the corresponding revenue will be recognized ratably over the year, an increased proportion of revenue from a particular region whose customers typically have 90 to 120 day payment terms, as is customary in such region, and certain customers in Europe stretching their payment terms.

A number of non-cash items, such as: depreciation and amortization, stock-based expenses, deferred interest on debt and certain restructuring charges have been charged to expense and impacted our net results during the three months ended March 31, 2007 and 2006. To the extent these non-cash items increase or decrease in amount and increase or decrease our future operating results, there will be no corresponding impact on our cash flows. Our operating cash flows will be impacted in the future based on our operating results, our ability to collect our accounts receivable on a timely basis, and the timing of payments to our vendors for accounts payable.

Net cash used by investing activities. Our investing activities used $0.3 million of cash during the three months ended March 31, 2007 primarily as a result of purchases of equipment totaling $0.5 million used to support our remaining hosted usenet newsgroup service infrastructure and research and development efforts partially offset by $0.1 million received in connection with the sale of the Hosted Assets. We believe we will be required to continue to make investments in capital equipment during 2007 and in 2008 and we expect to fund these purchases through the use of our available cash resources. We do not believe leasing arrangements on terms we find reasonably acceptable are currently available.

We face restrictions on our ability to use cash held outside of the United States for purposes other than the operation of each of our respective foreign subsidiaries that hold that cash. For example, our ability to use cash held in a given European subsidiary for any reason other than the operation of this subsidiary may result in certain tax liabilities and may be subject to local laws that could prevent the transfer of cash from Europe to any other foreign or domestic account. Additionally, we are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, contracts with vendors, and working capital, as a significant portion or our worldwide operations have a functional currency other than the United States dollar. The impact of future exchange rate fluctuations cannot be predicted adequately. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates.

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

The table below sets forth our significant cash obligations and commitments as of March 31, 2007.

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

The following table sets forth our results of operations for the three months ended March 31, 2007 and 2006.

Total net revenues increased during the three months ended March 31, 2007 as compared to the same period in the prior year.

The following table sets forth our total revenues by region for the three months ended March 31, 2007 and 2006:

International revenues increased in total and as a proportion of total revenue for the three months ended March 31, 2007 as compared to the same period in the prior year primarily due to an increase in the volume of licenses for our messaging and identity management software platforms in Europe as well as increased revenue from a license for Memova Mobile in Europe and increased revenue recognized from our Memova Anti-Abuse product in Europe

Cost of net revenues increased during the three months ended March 31, 2007 as compared to the same period in the prior year.

Our total gross margin, which is gross profit divided by total net revenue, increased to 53% during the three months ended March 31, 2007, as compared to 51% during the same period in the prior year. This increase is primarily due to a decreased proportion of revenue from the resale of third-party products, which carry a lower margin than our Memova products, as well as the increase in hosted services revenues due to the early contract buyout with no associated costs, partially offset by decreased margins from our professional services primarily as a result of the decreased revenue as discussed above.

Total operating expenses decreased during the three months ended March 31, 2007 as compared to the same period in the prior year primarily due to reduced selling and marketing costs, research and development costs, general and administrative expense, restructuring expenses partially offset by a reduced gain on sale of assets.

During the three months ended March 31, 2007, we recorded restructuring expense primarily related to the closure of a certain office in the United Kingdom. At March 31, 2007, we carried a remaining restructuring liability of $25,000, the majority of which is expected to be utilized by June 30, 2007.

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

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

In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments, we are required to adjust the carrying value of the derivatives to their fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other income or expense. The estimated fair value of the embedded derivative at March 31, 2007 was $0.5 million.

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

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

The provision for income taxes represents the tax on the income generated by certain of our European subsidiaries operations. During the three months ended March 31, 2007 we recorded a benefit from income taxes in connection with a tax refund we received in Ireland. Since our inception, we have incurred net operating losses for income tax purposes in the U.S. and have incurred taxes only in those states which levy taxes on a state minimum or franchise tax basis. Additionally, no deferred provision or benefit for federal or state income taxes has been recorded as we are in a net deferred tax asset position for which a full valuation allowance has been provided due to uncertainty of realization.

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

Accretion on redeemable preferred stock increased during the three months ended March 31, 2007 as compared to the same period in the prior year primarily as a result of the increase in the accretion to the redemption value and beneficial conversion feature.

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

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

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

The following table presents the hypothetical changes in fair value in the 13.9% Notes at March 31, 2007. The value of the instrument is sensitive to changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (bps), 100 bps and 150 bps over a twelve-month time horizon. The base value represents the estimated traded fair market value of the notes.

As of March 31, 2007, we had cash and cash equivalents of $12.2 million and no investments in marketable securities and our long-term obligations consisted of our $18.0 million three year, 13.9% Notes due June 2008 and certain fixed rate capital leases. Accordingly, an immediate 10% change in interest rates would not affect our long-term obligations or our results of operations.

A significant portion of our international operations has a functional currency other than the United States dollar. Accordingly, we are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, and assets and liabilities of these operations. Fluctuations in exchange rates may harm our results of operations and could also result in exchange losses. The impact of future exchange rate fluctuations cannot be predicted with any certainty; however, our exposure to foreign currency exchange rate risk is primarily associated with fluctuations in the Euro. We realized a net loss on foreign exchange of $0.2 million during the three months ended March 31, 2007. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates.

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act) designed to ensure information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in 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.

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

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

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

On December 21, 2005 the United States Securities and Exchange Commission (SEC) issued Release No. 33-8644 “Revisions to Accelerated Filer Definition and Accelerated Deadlines For Filing Periodic Reports.” On December 15, 2006, the SEC issued Release No. 33-8760 “Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers and Newly Public Companies.” In accordance with the provisions of these releases, management did not include in our Annual Report on Form 10-K an assessment of the effectiveness of our internal control over financial reporting.

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

Accordingly, during 2005, 2006 and the three months ended March 31, 2007 we made the following changes to our system of internal controls:

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

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

From time to time, we have been subject to litigation including the pending litigation described below. Our current estimated range of liability related to some of the pending litigation below is based on claims for which we can estimate the amount and range of loss. Because of the uncertainties related to both the amount and range of loss on the remaining pending litigation, we are unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess our potential liability and revise our estimates. Pending or future litigation could be costly, could cause the diversion of management’s attention and could upon resolution, have a material adverse effect on our business, results of operations, financial condition and cash flow. Moreover, the results of complex legal proceedings are difficult to predict. Other than as described below, we are not a party to any other material legal proceedings.

Action in the Superior Court of San Diego. In April 2006, we were added as a named defendant in a lawsuit previously filed by a former shareholder of Extricity, Inc. against current and former officers and directors of Peregrine Systems, Inc., Peregrine’s former accountants, some of Peregrine’s customers, including us and various other unnamed defendants. In February 2007, the plaintiff filed a third amended complaint, which for the first time contains certain allegations and claims raised against us. The complaint alleges that certain of the named defendants including us, as Peregrine’s customers, engaged in fraudulent transactions with Peregrine that were not accounted for by Peregrine in conformity with U.S. GAAP and that this substantially inflated the value of Peregrine securities issued as consideration in Extricity’s merger with Peregrine. We believe the allegations continue to be without merit. We have filed a demurrer to all claims and intend to defend ourselves vigorously. We have not recorded a liability against this claim as of March 31, 2006.

Securities Class Action in Southern District of New York. Beginning in July 2001, a number of securities class action complaints were filed against us, and certain of our former officers and directors and underwriters connected with our initial public offering (IPO) of common stock in the U.S. District Court for the Southern District of New York (In re Initial Public Offering Sec. Litig.). The purported class action complaints were filed by individuals who allege that they purchased our common stock at the initial and secondary public offerings between March 29, 1999 and December 6, 2000. The complaints allege generally that the prospectus under which such securities were sold contained false and misleading statements with respect to discounts and excess commissions received by the underwriters as well as allegations of “laddering” whereby underwriters required their customers to purchase additional shares in the aftermarket in exchange for an allocation of IPO shares. The complaints seek an unspecified amount in damages on behalf of persons who purchased our common stock during the specified period. Similar complaints have been filed against 55 underwriters and more than 300 other companies and other individuals. The over 1,000 complaints have been consolidated into a single action. We 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.

A final settlement approval hearing on the proposed issuer settlement was held on April 24, 2006. The district court took the matter under submission and has not yet ruled. Meanwhile the consolidated case against the underwriters has proceeded. On October 13, 2004, the district court certified a class in the underwriters’ proceeding. On December 5, 2006, however, the Second Circuit reversed, holding that a class could not be certified. The Second Circuit’s holding, while directly affecting only the underwriters, raises some doubt as to whether the proposed issuer settlement will be approved in its present form. On January 5, 2007, plaintiffs petitioned the Second Circuit for rehearing of the Second Circuit’s decision. On April 6, 2007, the Second Circuit denied the petition for rehearing. At a status conference on April 23, 2007, the district court suggested that the issuers’ settlement could not be approved in its present form, given the Second Circuit’s ruling. The district court set a further status conference for May 30, 2007. We have not recorded a liability against this claim as of March 31, 2006.

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

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

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

If we are unable to significantly increase our revenues, reduce the amount of cash used by our operating activities and generate positive cash flow from our operating activities, we will be required to raise additional funds or undertake additional restructuring initiatives to continue our operations. Additionally, as we approach the June 30, 2008 maturity of the $18.0 million principal amount of our 13.9% Notes we anticipate that we will need to restructure our debt or seek additional financing in order to satisfy or delay payment of the 13.9% Notes upon maturity. We may also be required to redeem our outstanding preferred stock in July 2008, which could require us to pay a substantial amount of cash to our holders of preferred stock to the extent permitted by law. As we approach the redemption date, we anticipate that we may need to modify the terms of our preferred stock to delay redemption of our preferred stock. The holders of a majority of our outstanding preferred stock consist of the holders of a majority of our 13.9% Notes. Our ability to incur additional indebtedness, which financing may not be available in sufficient amounts or on terms acceptable to us, requires consent from the holders of two-thirds in principal amount of our outstanding 13.9% Notes and our preferred stockholders. The delisting of our common stock from the Nasdaq Global Market also impairs our ability to raise additional capital. Additionally, we face a number of challenges in operating our business, including our ability to overcome viability questions raised to our prospective customers by our competitors given our current capital needs.

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

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

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

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

We face restrictions on our ability to use cash that we currently hold outside of the United States for purposes other than the operation of each of our respective foreign subsidiaries that hold such cash. For example, our ability to use cash held in a given European subsidiary for any reason other than the operation of that subsidiary may result in certain tax liabilities and are subject to local laws that could prevent the transfer of cash from that subsidiary to any other foreign or domestic account. At March 31, 2007, approximately $7.2 million was held outside of the United States. Our inability to utilize this cash could slow our ability to operate and 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.

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

In the past, our management of operational expenses, including the restructurings of our operations, have placed significant strain on managerial, operational and financial resources and contributed to our history of losses. In addition, we may need to

improve or replace our existing operational, customer service and financial systems, procedures and controls and incur incremental costs of compliance with legislation, such as the Sarbanes-Oxley Act of 2002. Any failure to properly manage these systems and procedural transitions or these incremental compliance costs could impair our ability to attract and service customers, and could cause us to incur higher operating costs and delays in the execution of our business plan. If we cannot manage restructuring activities and expenses effectively, our business and operating results could decline.

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

In the event of liquidation, dissolution, winding up or change of control of Critical Path, we must repay the principal and accrued interest of the 13.9% Notes and satisfy the liquidation preferences of our outstanding preferred stock. The holders of Series E Redeemable Convertible Preferred Stock (Series E preferred stock) would be entitled to receive $1.50 per share of Series E preferred stock plus all accrued dividends on such shares before any proceeds from a liquidation, dissolution or winding up is paid with respect to any other series or class of our capital stock. Accordingly, at March 31, 2007, the approximately 48.8 million shares of Series E preferred stock outstanding had an aggregate liquidation preference of approximately $84.7 million. The aggregate amount of the preference will increase as the shares of Series E preferred stock accrue dividends based on simple interest at an annual rate of 5³/4%. After all of the then outstanding shares of Series E preferred stock have received payment of their liquidation preference, the holders of the approximately 3.5 million shares of outstanding Series D Cumulative Redeemable Convertible Preferred Stock (Series D preferred stock) would be entitled to receive the greater of $13.75 per share of Series D preferred stock plus all accrued dividends on such shares (which, as of March 31, 2007, would result in an aggregate liquidation preference of approximately $68.1 million) or $22 per share (which currently would equal a liquidation preference of $77.5 million) before any proceeds from the liquidation, dissolution, winding up or change in control is paid to holders of our common stock. The combined liquidation preference of our Series D and Series E preferred stock is $162.2 million. We also would be required to satisfy the liquidation preference of our Series F Redeemable Convertible Preferred Stock (Series F preferred stock) however, as of March 31, 2007, there were no shares of Series F preferred stock outstanding, but there are outstanding warrants to purchase an aggregate of 0.4 million shares of Series F preferred stock. As of March 31, 2007, the aggregate amount of outstanding principal and interest on our 13.9% Notes was $24.2 million. Holders of our common stock will not receive any proceeds from a liquidation, winding up or dissolution, including from a change of control, until after the holders of the $18.0 million in principal amount of our 13.9% Notes have been repaid and the liquidation preferences of our preferred stock are paid in full. Consequently, although we would likely be required under applicable law to obtain the separate class approval of the holders of our common stock for a change of control or the sale of all or substantially all of the shares of Critical Path, it is possible that such a transaction could result in all or substantially all of the proceeds of such transaction being distributed to the holders of our 13.9% Notes and our preferred stock.

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

The debt and significant equity ownership by each of the General Atlantic Investors and the Cheung Kong Investors could create conflicts of interest between these majority shareholders and our other shareholders and between the General Atlantic Investors and the Cheung Kong Investors. For example, the General Atlantic Investors and the Cheung Kong Investors may only approve a change in control transaction that results in the payment of their liquidation preference 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, could limit the number of potential partners willing to pursue such a transaction with us or limit the price that investors might be willing to pay for future shares of our common stock.

The debt and significant equity ownership by the General Atlantic Investors and the Cheung Kong Investors may limit the ability of our other shareholders to influence significant corporate decisions which could delay, cause, or prevent a change of control or depress our stock price.

As of March 31, 2007, the General Atlantic Investors beneficially own approximately 29.7% of our outstanding securities (which represents approximately 18.4% of the voting power) and the Cheung Kong Investors beneficially own approximately 15.5% of our outstanding securities (which represents approximately 13.1% of the voting power). As a result, the General Atlantic Investors and the Cheung Kong Investors, although not affiliated, may have the ability, as shareholders acting together, to control the outcome of shareholder votes, including votes concerning the election of a majority of our directors,

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

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

Our preferred stock can be converted into common stock at anytime in the discretion of the holder of preferred stock. For example, during the three months ended September 30, 2005, at the request of certain holders of our Series E preferred stock, we converted approximately 2.1 million shares of Series E preferred stock into approximately 2.2 million shares of common stock. As of March 31, 2007, there were approximately 3.5 million shares of Series D preferred stock outstanding, which were convertible into approximately 45.4 million shares of common stock. In addition, we have approximately 48.8 million shares of Series E preferred stock outstanding, which are convertible as of March 31, 2007, at the option of the holders, into approximately 56.5 million shares of common stock. We also have outstanding warrants to purchase 0.4 million shares of Series F preferred stock which, if exercised, would initially be convertible into approximately 3.9 million shares of common stock. Any conversion of our preferred stock into common stock would increase the number of additional shares of common stock that may be sold into the market, which could substantially decrease the price of our common stock.

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

Currently, shares of Series D preferred stock and shares of Series E preferred stock accrue dividends at a rate of 5³/4% per year. If the maximum amount of dividends accrue on the outstanding shares of Series D preferred stock and Series E preferred stock prior to the automatic call for redemption date, the number of shares of common stock issuable upon conversion will increase by approximately 6.4 million shares to approximately 108.3 million shares of common stock. Further, if we are legally unable to redeem the Series E preferred stock and our Series D preferred stock on the redemption date, the value of these preferred shares will continue to accrue dividends and be convertible into an even greater number of shares until such time as they are converted or redeemed.

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

We will be required to redeem our outstanding shares of our Series D preferred stock, Series E preferred stock and Series F preferred stock, to the extent any Series F preferred stock is outstanding, in July 2008 to the extent that we have cash legally available to pay for the redemption as determined in accordance with applicable law. We anticipate that we may need to modify the terms of our preferred stock to delay redemption of our preferred stock. However, we may be unable to modify these terms or do so on new terms reasonably acceptable to us. The amount we are required to pay for these shares will be equal to the accreted value of the shares at the time of redemption. As of the redemption date in July 2008, the redemption price per share that we will be required to pay will be $20.58 per share of Series D preferred stock, $1.84 per share of Series E preferred stock and $14.00 plus any accrued dividends per share of Series F preferred stock. If no holders of shares of our preferred stock elect to convert their shares into common stock prior to the redemption date, we would be required to pay an aggregate of $162.5 million in order to redeem the outstanding shares of preferred stock in July 2008. If we do not meet specified criteria under applicable law that allows a corporation to use its cash to redeem outstanding shares of capital stock, we will not be allowed to redeem these shares in July 2008. If we are legally unable to redeem our outstanding preferred stock on the redemption date, the redemption cost of these outstanding preferred shares will continue to increase as these shares will continue to accrue dividends until the shares are either converted or redeemed. Any cash payments we are required to make to redeem our outstanding preferred stock could harm our ability to operate and grow our business or reach our business objectives.

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

We may enter into a transaction that constitutes a change of control of Critical Path. Any such transaction could happen at any time, could be material to our business and could take any number of forms, including, for example, a merger or a sale of

all or substantially all of our assets. We will in the future continue to evaluate potential business combinations or strategic transactions which, if consummated, may constitute a change of control and trigger the repayment of outstanding debt and liquidation preference payments described below.

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

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

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

Our listing on the OTC Bulletin Board, or further declines in our stock price, may greatly impair our ability to raise additional capital, should it be necessary, through equity or debt financing, and significantly increase the dilution to our current stockholders caused by any issuance of equity in financing or other transactions. The price at which we would issue shares in such transactions is generally based on the market price of our common stock and a decline in the stock price could result in our need to issue a greater number of shares to raise a given amount of funding.

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

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

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

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

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

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

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

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

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

In addition to the factors set forth above, our financial results on a U.S. GAAP basis have been and will continue to be impacted by the extent to which we incur non-cash charges associated with stock-based arrangements with employees and non-employees. In particular, during the three months ended March 31, 2007, we incurred stock-based compensation expense of approximately $30,000 primarily relating to the issuance of common stock and the grant of options and warrants to employees and non-employees. Grants of options and warrants also may be dilutive to existing shareholders.

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

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

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

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

A limited number of customers and markets account for a high and increasing percentage of our revenues and if we lose a major customer, are unable to attract new customers, or the markets which we serve suffer financial difficulties, our revenues could decline.

We expect that sales of our products and services to a limited number of customers will continue to account for a high percentage of our revenue for the foreseeable future. For example, for the three months ended March 31, 2007 and for the years ended December 31, 2006 and 2005, our top ten customers accounted for approximately 42%, 41% and 35%, respectively, of our total revenues. During the three months ended March 31, 2007, we did not have any customers which accounted for 10% or more of our total revenues. Our future success depends on our ability to retain our current customers, and to attract new customers, in our target markets. The loss of one or several major customers, whether through termination of agreements, acquisitions or bankruptcy, could significantly reduce our revenues. Our agreements with our customers typically have terms of one to three years often with automatic one-year renewals and can be terminated without cause upon certain notice periods that vary among our agreements and range from a period of 30 to 120 days notice.

The telecommunications industry during the three months ended March 31, 2007 and years ended December 31, 2006 and 2005, accounted for approximately 33%, 74% and 32%, respectively, of the revenues from our top ten customers. If the relative financial performance of our customers deteriorates, it will impact our sales cycles and our ability to attract new business. If our customers terminate their agreements for any reason before the end of the contract term, the loss of the customer would reduce our current and future revenues. Also, if we are unable to enter into agreements with new customers and develop business with our existing customers, our business will not grow and we will not generate additional revenues.

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

Because we sell complex and sophisticated technology, our sales cycle, in particular with respect to our software solutions, can be long and unpredictable, often taking between four to 18 months. Because of the nature of our product and service offerings it can take many months of customer education and product evaluation before a purchase decision is made. Further, and particularly with regard to newer subscription based offerings, the deployment process following customer trials can add several months prior to the generation of revenue. In addition, many factors can influence the decision to purchase our

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

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

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

We believe competition will increase as current competitors increase the sophistication of their offerings, as new participants enter the market and as the market continues to grow, becoming increasingly attractive. Many current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do and may enter into strategic or commercial relationships with larger, more established and better-financed companies. Any delay in the development or introduction of products or services or updates, would also allow additional time for our competitors to improve their service or product offerings, and for new competitors to develop messaging and identity management products and services for our target markets. Increased competition could result in pricing pressures, reduced operating margins and loss of market share, any of which could cause our business to suffer.

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

We depend on strategic relationships with our customers and others to expand distribution channels and opportunities and to undertake joint marketing efforts. Our ability to increase revenues depends upon aggressively marketing our services through new and existing strategic relationships. We also depend on the ability of our customers to aggressively sell and market our services to their end-users. If we lose any strategic relationships, fail to fully exploit our relationships, or fail to develop new strategic relationships, we could encounter increased difficulty in selling our products and services.

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

The messaging industry is characterized by rapid technological change, changes in user and customer requirements and preferences, and the emergence of new industry standards and practices that could render our existing services, proprietary technology and systems obsolete. We must continually develop or introduce and improve the performance, features and reliability of our services, particularly in response to competitive offerings. Our success depends, in part, on our ability to develop new functionality, technology and services that address the increasingly sophisticated and varied needs of prospective customers. We believe that revenue from our Memova applications, for example the Memova Mobile application that we launched in the first quarter of 2005, is an important source of future revenues and we have made significant investments in their development. However, revenues from our Memova Mobile application from initial launch in the first quarter of 2005 to date have been immaterial. If we do not properly identify the feature preferences of prospective customers, or if we fail to deliver email features that meet the standards of these customers, our ability to market our service successfully and to increase revenues could be impaired. The development of proprietary technology and necessary service enhancements entails significant technical and business risks and requires substantial expenditures and lead-time. We may not be able to keep pace with the latest technological developments. We may also be unable to use new technologies effectively or adapt services to customer requirements or emerging industry standards.

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

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

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

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

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

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

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

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

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

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

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

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

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

Our customers have, in the past, experienced some interruptions in our hosted services. We believe that these interruptions will continue to occur from time to time. Our ability to retain existing customers and attract new customers will suffer and our revenues will decline if we experience frequent or long system interruptions that result in the unavailability or reduced performance of systems or networks or reduce our ability to provide usenet newsgroup hosting services. We expect to experience occasional temporary capacity and storage constraints due to unanticipated sharply increased traffic or sharply increased demand for storage, which may cause unanticipated system disruptions, slower response times, impaired quality and degradation in levels of customer service. If this were to continue to happen, our ability to retain existing customers and attract new customers could suffer dramatically and our revenues would decline.

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

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

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

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

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

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

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

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

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

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

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

technologies to protect against security breaches or to alleviate problems caused by any breach. Failure to prevent security breaches may make it difficult to retain and attract customers and cause us to spend additional resources that could cause our operating results to decline.

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

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

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

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 79%, 77% and 74% of our revenues from international sales in the three months ended March 31, 2007 and years ended December 31, 2006 and 2005, respectively. We intend to continue to operate in international markets and to spend significant financial and managerial resources to do so. If revenues from international operations do not exceed the expense of establishing and maintaining these operations, our business and our ability to increase revenue and improve our operating results could suffer. We have limited experience in international operations and may not be able to compete or operate effectively in international markets. We face certain risks inherent in conducting business internationally, including:

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

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

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

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

If such an ownership change were considered to have occurred, our use of our pre-change net operating losses would generally be limited annually to the product of the long-term tax-exempt rate as of the time the ownership change occurred and the value of our company immediately before the ownership change. (The long-term tax-exempt rate as of March 2007 was 5.01%.) This could increase our federal income tax liability if we generate taxable income in the future. There can be no assurance that the Internal Revenue Service would not be able to successfully assert that we have undergone one or more ownership changes in the preceding three-year period.

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

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

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

The trading price of our common stock has been and may continue to experience volatility, wide fluctuations and declines. For example, during the three months ended March 31, 2007, the closing sale prices of our common stock on the OTC Bulletin Board ranged from $0.17 per share on January 19, 2007 to $0.09 per share on March 22, 2007. Our stock price may further decline or fluctuate in response to any number of factors and events, such as a reduction in the liquidity of our common stock as a result of moving from the Nasdaq Global Market to the OTC Bulletin Board, announcements related to technological innovations, intense regulatory scrutiny and new corporate and securities and other legislation, strategic and sales relationships, new product and service offerings by us or our competitors, litigation outcomes, changes in senior management, changes in financial estimates and recommendations of securities analysts, the operating and stock price performance of other companies that investors may deem comparable, news reports relating to trends in our markets and the market for our stock, media interest in accounting scandals and corporate governance questions, overall market conditions and domestic and international economic factors unrelated to our performance. In addition, the stock market in general, particularly with respect to technology stocks, has experienced extreme volatility and a significant cumulative decline in recent quarters. This volatility and decline has affected many companies, including our company, irrespective of the specific operating performance of such companies. These broad market influences and fluctuations may adversely affect the price of our stock, regardless of our operating performance or other factors.

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

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

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

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

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

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

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

Our current director and officer liability insurance may not be adequate for the liabilities and expenses potentially incurred in connection with future claims. To the extent liabilities, expenses or settlements exceed the limitations or are outside of the scope of coverage, our business and financial condition could materially decline. Under California law, in connection with our charter documents and indemnification agreements we entered into with our executive officers and directors, we must indemnify our current and former officers and directors to the fullest extent permitted by law. The indemnification covers any expenses and liabilities reasonably incurred in connection with the investigation, defense, settlement or appeal of legal proceedings.

On May 10, 2007, the Compensation Committee (the Committee) of the Board of Directors of Critical Path, Inc., a California corporation (the Company), approved a bonus in the amount of $35,000 to be paid to James Clark, Chief Financial Officer, in recognition of his efforts in supervising the transition to the Company’s new independent auditors and transition of accounting operations to our Dublin, Ireland office, the implementation of improved core business systems, the favorable extension of the Company’s outstanding debt, the completion of the Company’s year-end audit, and the filing of its Form 10-K for 2006.

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)


PART 1- FINANCIAL INFORMATION		3

ITEM 1	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	3

ITEM 2	MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	29

ITEM 4	CONTROLS AND PROCEDURES	30

PART II- OTHER INFORMATION		33

ITEM 1	LEGAL PROCEEDINGS	33

ITEM 1A	RISK FACTORS	34

ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46

ITEM 3	DEFAULTS UPON SENIOR SECURITIES	46

ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	46

ITEM 5	OTHER INFORMATION	46

ITEM 6	EXHIBITS	46

SIGNATURE		48

Exhibit Index		49


	March 31, 2007			December 31, 2006 (a)
ASSETS
Current assets
Cash and cash equivalents	$	12,189		$	14,542
Accounts receivable, net		16,060			10,283
Prepaid and other current assets		1,994			2,427

Total current assets		30,243			27,252
Property and equipment, net		2,622			2,612
Goodwill		7,510			7,460
Restricted cash		212			212
Other assets		314			467

Total assets	$	40,901		$	38,003

LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT

Current liabilities
Accounts payable	$	3,900		$	3,995
Accrued compensation and benefits		3,870			3,796
Income and other tax liabilities		1,121			4,079
Other accrued liabilities		9,301			8,962
Deferred revenue		10,404			6,848
Capital lease and other obligations, current		13			24

Total current liabilities		28,609			27,704
Deferred revenue, long-term		183			229
Notes payable, long-term		23,436			22,396
Income and other tax liabilities, long-term		3,764			—
Embedded derivative liability		500			612

Total liabilities		56,492			50,941

Redeemable preferred stock		138,055			134,406

Commitments and contingencies (see Note 5)

Shareholders’ deficit
Common stock and additional paid-in-capital, par value $0.001; shares authorized: 200,000; shares issued and outstanding 37,198 and 37,228, respectively		2,177,480			2,181,099
Accumulated deficit		(2,329,040	)		(2,326,055	)
Accumulated other comprehensive loss		(2,086	)		(2,388	)

Total shareholders’ deficit		(153,646	)		(147,344	)

Total liabilities, redeemable preferred stock and shareholders’ deficit	$	40,901		$	38,003


	Three months ended March 31,
	2007			2006
Net revenues
Software licensing	$	4,181		$	2,928
Hosted services		1,507			1,222
Professional services		2,082			2,575
Maintenance and support		4,454			4,289

Total net revenues		12,224			11,014

Cost of net revenues
Software licensing		1,546			1,306
Hosted services		767			777
Professional services		2,017			1,976
Maintenance and support		1,369			1,294

Total cost of net revenues		5,699			5,353

Gross profit		6,525			5,661

Operating expenses
Selling and marketing		3,153			3,490
Research and development		2,232			2,320
General and administrative		3,217			3,269
Restructuring expenses		48			915
Gain on sale of assets		(127	)		(1,971	)

Total operating expenses		8,523			8,023

Operating loss		(1,998	)		(2,362	)
Other expense, net		(109	)		(459	)
Interest income (expense), net		(1,022	)		(853	)

Loss before provision for income taxes		(3,129	)		(3,674	)
Benefit from (provision for) income taxes		144			(268	)

Net loss		(2,985	)		(3,942	)
Dividends and accretion on redeemable preferred stock		(3,649	)		(3,461	)

Net loss attributable to common shareholders	$	(6,634	)	$	(7,403	)

Basic and diluted net loss per share attributable to common shareholders	$	(0.18	)	$	(0.21	)

Weighted average shares - basic and diluted		36,696			35,928


	Three months ended March 31,
	2007			2006
Cash flows from operating activities:
Net loss	$	(2,985	)	$	(3,942	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for allowance for doubtful accounts		39			125
Depreciation		441			489
Stock-based expense		30			144
Gain on sale of certain Hosted Assets		(127	)		(1,971	)
Amortization of debt issuance costs		33			224
Loss on disposal of property and equipment		—			53
Change in fair value of embedded derivative liabilities		(112	)		120
Accrued interest and accretion notes payable		1,040			699
Changes in assets and liabilities:
Accounts receivable		(5,816	)		(4,564	)
Prepaid expenses and other assets		553			(159	)
Accounts payable		(95	)		(11	)
Accrued compensation and benefits		74			(241	)
Income and other tax liabilities		806			1,134
Other accrued liabilities		339			(619	)
Deferred revenue		3,510			4,439

Net cash used in operating activities		(2,270	)		(4,080	)

Cash flows from investing activities
Proceeds from sale of certain Hosted Assets, net of transaction costs of $1,037 for the three months ended March 31, 2006		127			4,463
Purchases of property and equipment		(451	)		(278	)
Restricted cash		—			66

Net cash (used in) provided by investing activities		(324	)		4,251

Cash flows from financing activities
Principal payments on lease obligations		(11	)		—

Net cash used in financing activities		(11	)		—

Net change in cash and cash equivalents		(2,605	)		171
Effect of exchange rates on cash and cash equivalents		252			190
Cash and cash equivalents, beginning of period		14,542			18,707

Cash and cash equivalents, end of period	$	12,189		$	19,068


	Redeemable preferred stock				Shareholders’ deficit
	Amended Series D		Series E		Common stock and additional paid in capital			Accumulated deficit and other comprehensive loss			Total
Balance at December 31, 2006	$	62,814	$	71,592	$	2,181,099		$	(2,328,443	)	$	(147,344	)
Accretion of dividend on redeemable preferred stock		847		1,053		(1,900	)		—			(1,900	)
Accretion to redemption value for redeemable preferred stock		653		1,096		(1,749	)		—			(1,749	)
Stock-based compensation associated with grants of stock options and restricted stock		—		—		30			—			30
Foreign currency translation adjustments		—		—		—			302			302
Net loss		—		—		—			(2,985	)		(2,985	)

Balance at March 31, 2007	$	64,314	$	73,741	$	2,177,480		$	(2,331,126	)	$	(153,646	)


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


	Three months ended March 31,
	2007			2006
	(in thousands)
Net loss attributable to common shareholders	$	(6,634	)	$	(7,403	)
Net cash used by operating activities		(2,270	)		(4,080	)


	March 31, 2007			December 31, 2006
	(in thousands)
Proceeds from the issuance of the 13.9% Notes	$	18,000		$	18,000
Less proceeds allocated to the fair value of the Series F preferred stock warrant derivative instrument		(2,711	)		(2,711	)
Add accretion to redemption value		1,974			1,735
Add accrued interest		6,173			5,372

Carrying value of the 13.9% Notes	$	23,436		$	22,396


	Authorized	March 31, 2007					December 31, 2006
	Authorized	Issued	Carrying value		Liquidity value		Issued	Carrying value		Liquidity value
Series D(a)	4,188,587	3,520,537	$	64,314	$	77,452	3,520,537	$	62,814	$	77,452
Series E	68,000,000	48,811,945		73,741		84,676	48,811,945		71,592		83,623
Series F	450,000	—		—		—	—		—		—

	72,638,587	52,332,482	$	138,055	$	162,128	52,332,482	$	134,406	$	161,075


Beginning balance Series D preferred stock at December 31, 2006	$	62,814
Add accrued dividends		847
Add amortization and accretion		653

Ending balance Series D preferred stock at March 31, 2007		64,314

Liquidation value of Series D preferred stock at March 31, 2007	$	77,452


Beginning balance Series E preferred stock at December 31, 2006	$	71,592
Add accrued dividends		1,053
Add amortization and accretion		1,096

Ending balance Series E preferred stock at March 31, 2007	$	73,741

Liquidation value of Series E preferred stock at March 31, 2007	$	84,676


	Capital leases			Operating leases
	(in thousands)
Year ending December 31,
2007	$	3		$	1,870
2008		—			2,044
2009		—			1,125
2010		—			1,064
2011		—			1,062
Thereafter		—			1,594

Total minimum lease payments		3		$	8,759

Less amount representing interest		(1	)

Present value of capital lease obligations	$	2


	March 31,
	2007		2006
As a percent of net accounts receivable
Customer A	15.0	%	0.0	%
Customer B	14.5	%	12.8	%
Customer C	14.0	%	6.9	%


	Three months ended March 31,
	2007		2006
Risk free interest rate	4.5	%	4.8	%
Expected lives (in years)	4.75		6.25
Dividend yield	0.0	%	0.0	%
Expected volatility	123	%	137	%


	Shares Available for Grant		Number Outstanding		Weighted Average Exercise Price per Share
Balance at December 31, 2006	17,782		9,125		$	1.96
Additional shares authorized	4,000		—
Options granted	(23	)	23			0.13
Options exercised	—		—			—
Options forfeited	311		(311	)		0.27

Balance at March 31, 2007	22,070		8,837		$	2.02

Exercisable, March 31, 2007			6,410		$	2.70


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$ 0.10 - $ 0.19	153	6.98	$	0.15	27	$	0.16
$ 0.20 - $ 0.20	6,740	6.17		0.20	4,475		0.20
$ 0.21 - $ 0.75	276	7.10		0.49	240		0.52
$ 0.76 - $ 2.00	575	5.36		1.56	575		1.56
$ 2.01 - $ 5.00	373	5.79		3.22	373		3.22
$ 5.01 - $ 10.30	669	4.68		8.81	669		8.81
$ 10.31 - $ 300.00	51	3.29		166.00	51		166.00

	8,837	5.29	$	2.02	6,410	$	2.70


	Shares		Weighted Average Grant Date Fair Value
Unvested restricted shares at December 31, 2006	546		$	1.21
Granted	—			—
Vested	(92	)		1.37
Forfeited	—			—

Unvested restricted shares at March 31, 2007	454		$	1.19


	Workforce reduction		Facility and operations consolidation and other charges			Total
	(in thousands)
Liability at December 31, 2006	$	25	$	46		$	71
Total gross charges		—		48			48
Cash payments		—		(94	)		(94	)

Liability at March 31, 2007	$	25	$	—		$	25


	Three months ended March 31,						Change
	2007			2006			$		%
	(in thousands)
Net loss attributable to common shareholders	$	(6,634	)	$	(7,403	)	$	769	-10	%
Net cash used by operating activities		(2,270	)		(4,080	)		1,810	-44	%


Beginning balance at December 31, 2006	$	14,542
Net cash used by operating activities		(2,270	)
Net cash used by investing activities		(324	)
Net cash used by financing activities		(11	)

Net decrease in cash and cash equivalents		(2,605	)
Effect of exchange rates on cash and cash equivalents		252

Ending balance at March 31, 2007	$	12,189


	Total	Year ended December 31,
	Total	2007	2008	2009	2010	2011	Thereafter
	(in thousands)
Redeemable preferred stock (a)	162,509	—	162,509	—	—	—	—
13.9% Notes (b)	28,674	—	28,674	—	—	—	—
Operating lease obligations	8,759	1,870	2,044	1,125	1,064	1,062	1,594
Capital lease obligations	3	3	—	—	—	—	—
Other purchase obligations ( c)	4,167	2,696	1,470	—	—	—	—

	204,112	4,570	194,697	1,125	1,064	1,062	1,594


	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		No change in interest rate		50 bps		100 bps		150 bps
	(in thousands)
13.9% Notes	$	13,134	$	13,106	$	13,078	$	13,050	$	13,022	$	12,995	$	12,967


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