CRITICAL PATH INC, 424B4, 1999-03-30

CRITICAL PATH INC
424B4, 1999-03-30
BUSINESS SERVICES, NEC

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<PAGE>

FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-71499

[LOGO OF CRITICAL PATH, INC.]
4,500,000 Shares
Common Stock

Critical Path, Inc. is offering 4,500,000 shares of its common stock. This is
Critical Path's initial public offering and no public market currently exists
for its shares. We have applied for approval for quotation on the Nasdaq
National Market under the symbol "CPTH" for the shares we are offering. The
initial public offering price is $24.00 per share.

---------------

Investing in the common stock involves risks.
See "Risk Factors" beginning on page 6.

---------------

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price................................... $24.00 $108,000,000
Underwriting Discounts and Commissions.................. $ 1.68 $ 7,560,000
Proceeds to Critical Path............................... $22.32 $100,440,000
</TABLE>

The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.

Critical Path has granted the underwriters a 30-day option to purchase up to
an additional 675,000 shares of common stock to cover over-allotments.

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BancBoston Robertson Stephens Hambrecht & Quist

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Dain Rauscher Wessels FAC/Equities
a division of Dain Rauscher Incorporated

---------------

The date of this prospectus is March 29, 1999.
<PAGE>

INSIDE FRONT COVER

EMAIL
Questions
Need
Answers
is your email always up
and running?

Can you upgrade your
email quickly and easily
to support additional users?

is your email operation the
most cost-effective?

Will you be able to keep up
with the internet messaging
demands of tomorrow?

[Logos of Strategic
partners appear here]
<PAGE>

GATEFOLD

Critical Path The email messaging service enterprise services

Software Solution future capabilities
including

Branding Service basic secure ecommerce unified messaging
email email services directions
24x7 hosting hosting
Scalable calendaring
spam SSL-based future
blocking messaging capabilities
including

anti-virus billing transactions

security

<PAGE>

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. In this prospectus, the
"Company," "Critical Path," "we," "us," and "our" refer to Critical Path, Inc.,
a California corporation.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................. 4
Risk Factors............................................................ 6
Use of Proceeds......................................................... 18
Dividend Policy......................................................... 18
Capitalization.......................................................... 19
Dilution................................................................ 20
Selected Consolidated Financial Information............................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 22
Business................................................................ 31
Management.............................................................. 49
Certain Transactions.................................................... 58
Principal Shareholders.................................................. 61
Description of Capital Stock............................................ 63
Shares Eligible for Future Sale......................................... 66
Underwriting............................................................ 68
Legal Matters........................................................... 71
Experts................................................................. 71
Where You Can Find More Information..................................... 71
Index to Consolidated Financial Statements.............................. F-1
</TABLE>

----------------

This prospectus contains trademarks and trade names of other companies.

----------------

Unless otherwise noted, the information in this prospectus assumes that all of
the outstanding preferred stock of Critical Path, with the exception of 53,293
shares of preferred stock that Critical Path intends to repurchase at $4.26 per
share prior to the closing of the offering, will be converted into common
stock, that certain warrants for the purchase of Series A and Series B
Preferred Stock will be exercised on a net basis and that the underwriters will
not exercise their overallotment option.

3
<PAGE>

SUMMARY

This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" and the
Financial Statements, carefully before making an investment decision.

The Company

We are a leading provider of email hosting services designed to allow a wide
range of organizations, including Internet service providers, web hosting
companies, web portals and corporations, to reduce costs and improve customer
service by outsourcing their email systems. We believe we are a leading
provider of email hosting services because our services are designed to support
growth, enhance reliability, allow access to advanced technologies and provide
greater access with high levels of security. In addition, our service is
designed so that our customers can enhance their brand recognition by
maintaining their existing "look and feel" while improving the functionality of
their email service. We intend to build on our expertise in email services to
provide additional Internet messaging services in the future. At December 31,
1998, we had over 100 customers. We seek to establish strategic relationships
with entities that are both commercial partners and/or equity investors or with
whom we have contractualized reseller relationships. We have strategic
relationships with ICQ, a subsidiary of America Online, E*TRADE, Network
Solutions, Sprint and US West.

Email, one of the most popular Internet applications, has broadened from a
simple messaging tool to a widely accepted form of communication for both
personal and business use. According to Electronic Mail & Messaging Systems,
there were 263 million electronic mailboxes worldwide as of September 30, 1998.
Electronic Mail & Messaging Systems estimates that there could be as many as
400 million electronic mailboxes worldwide by the end of 1999. According to the
Gartner Group, approximately 300 billion electronic mail messages were sent in
1998. In addition, the complexity of the individual messages is increasing,
allowing email to become a more functional communications tool for both
personal and business use. At the same time, we believe that customers are
increasingly expecting the same reliability from their email service that they
are accustomed to receiving from their telephone service, commonly referred to
as web-tone reliability. Due to this expectation and the expense and expertise
required to maintain a reliable email system, organizations are increasingly
seeking to outsource their email systems.

Our services provide the following benefits to our customers:

. reduced costs associated with acquiring and maintaining hardware and
software and with recruiting and retaining systems engineering and
administrative support;

. a scalable and reliable system architecture designed to support global
service over hundreds of millions of mailboxes across millions of domains
with web-tone reliability;

. access to advanced technologies based on our expertise in rapidly
deploying new technologies, combating system failures and maintaining
network and system security;

. easy access by customers and end-users by designing our services on open
Internet-based standards; and

. control over their own brand and functionality through customized web-
based email interfaces.

Our headquarters are located at 320 1st Street, San Francisco, California
94105 and our telephone number is (415) 808-8800. Our website address is
www.cp.net. The information on our website is not a part of this prospectus.

4
<PAGE>

The Offering

<TABLE>
<C> <S>
Common stock offered by Critical Path.............. 4,500,000 shares
Common stock to be outstanding after the offering.. 34,115,161 shares
Use of proceeds.................................... Expand sales and marketing
activities, open
additional data centers,
expand international
operations and for general
corporate purposes and
working capital.
Proposed Nasdaq National Market symbol............. CPTH
</TABLE>

Summary Consolidated Financial Data
(in thousands, except per share data)

Please see Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in computing per
share data. The As Adjusted Consolidated Balance Sheet Data summarized below
reflects the application of the net proceeds from the sale of the 4,500,000
shares of common stock offered by Critical Path at an initial public offering
price of $24.00 per share and after deducting the underwriting discounts and
commissions and our estimated offering expenses.

<TABLE>
<CAPTION>
December 31, 1998
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................... $14,791 $114,431
Working capital............................................. 12,524 112,164
Total assets................................................ 20,663 120,303
Capital lease obligations, long-term........................ 2,454 2,454
Shareholders' equity........................................ 15,358 114,998
</TABLE>

5
<PAGE>

RISK FACTORS

This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock. Our business, operating
results and financial condition could be adversely affected by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you could lose all or part of your investment. You should
also refer to the other information set forth in this prospectus, including our
financial statements and the related notes.

This prospectus also contains certain forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions, and the assumptions underlying or
relating to any of these statements. These statements may be identified by the
use of words such as "expects," "anticipates," "intends," and "plans" and
similar expressions. Our actual results could differ materially from those
discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed below and
elsewhere in this prospectus.

Because we have a limited operating history, it is difficult to evaluate our
business and we may face various risks, expenses and difficulties associated
with early stage companies

Because we have only a limited operating history upon which you can evaluate
our business and prospects, you should consider the risks, expenses and
difficulties that we may encounter when making your investment decision. These
risks include our ability to:

. expand our sales and marketing activities;

. create and maintain strategic relationships;

. expand our customer base and retain key clients;

. introduce new services;

. manage growing operations;

. compete in a highly competitive market;

. upgrade our systems and infrastructure to handle any increases in
messaging traffic;

. reduce service interruptions; and

. recruit and retain key personnel.

We expect that our operating expenses will increase as we spend resources on
building our business and that this increase may have a negative effect on our
operating results and financial condition

We have spent heavily on technology and infrastructure development. We expect
to continue to spend substantial financial and other resources on developing
and introducing new email service offerings, and expanding our sales and
marketing organizations, strategic relationships and operating infrastructure.
We expect that our cost of revenues, sales and marketing expenses, general and
administrative expenses, operations and customer support expenses, and
depreciation and amortization expenses will continue to increase in absolute
dollars and may increase as a percent of revenues. If our revenues do not
correspondingly increase, our operating results and financial condition could
be negatively affected.

6
<PAGE>

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

We incurred net losses of approximately $1.1 million for the period from
February 19, 1997 (inception) through December 31, 1997 and $11.5 million for
the year ended December 31, 1998. As of December 31, 1998, we had an
accumulated deficit of approximately $12.5 million. We have not achieved
profitability in any period, and we expect to continue to incur net losses for
the foreseeable future. Should we continue to incur net losses in future
periods, we may not be able to increase our number of employees or our
investment in capital equipment, sales and marketing programs, and research and
development in accordance with our present plans. Continuation of our net
losses may also require us to secure additional financing sooner than
anticipated. Such financing may not be available in sufficient amounts, or on
terms acceptable to us, and may dilute existing shareholders. We may never
obtain sufficient revenues to achieve profitability. If we do achieve
profitability, we may not sustain or increase profitability in the future. This
may, in turn, cause our stock price to decline.

Due to our limited operating history and the emerging nature of the email
services market, our future revenues are unpredictable, and our quarterly
operating results may fluctuate

We cannot accurately forecast our revenues as a result of our limited
operating history and the emerging nature of the Internet-based email services
market. Our revenues could fall short of our 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 our operating results, including,
but not limited to:

. continued growth of the Internet in general and of email usage in
particular;

. demand for outsourced email services;

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

. our ability to upgrade, develop and maintain our systems and
infrastructure;

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

. technical difficulties or system outages;

. the announcement or introduction of new or enhanced services by our
competitors;

. our ability to attract and retain qualified personnel with Internet
industry expertise, particularly sales and marketing personnel;

. the pricing policies of our competitors;

. failure to increase our international sales; and

. governmental regulation surrounding the Internet and email in particular.

In addition to the factors set forth above, our operating results will be
impacted by the extent to which we incur non-cash charges associated with
stock-based arrangements with employees and non-employees. In particular, we
expect to incur substantial non-cash charges associated with the grant of a
warrant to America Online. In addition to amortization of the initial fair
value of this warrant, which totaled $16.5 million, we expect that future
changes in the trading price of our common stock at the end of each quarter and
at the date certain milestones are achieved, will cause additional substantial
changes in the ultimate amount of such amortization.

Due to lead times required to purchase, install and test equipment, we
typically need to purchase equipment well in advance of the receipt of any
expected revenues. Delays in obtaining this equipment could result in
unexpected revenue shortfalls. Small variations in the timing of the
recognition of specific revenues could cause significant variations in
operating results from quarter to quarter.

7
<PAGE>

Period-to-period comparisons of our operating results are not a good
indication of our future performance. It is likely that our operating results
in some quarters will be below market expectations. In this event, the price of
our common stock is likely to decline.

If we fail to expand our sales and marketing activities, we may be unable to
expand our business

Our ability to increase our revenues will depend on our ability to
successfully recruit, train and retain sales and marketing personnel. As of
February 28, 1999, we had 38 sales and marketing personnel. We plan to continue
to invest significant resources to expand our sales and marketing
organizations. Competition for additional qualified personnel is intense and we
may not be able to hire and retain personnel with relevant experience. We have
recently hired most of our sales and marketing personnel, including our Vice
President of Sales, who joined us in November 1998.

The complexity and implementation of our Internet messaging services require
highly trained sales and marketing personnel to educate prospective customers
regarding the use and benefits of our services. Our current and prospective
customers, in turn, must be able to educate their end-users. With our
relatively brief operating history and our plans for expansion, we have
considerable need to recruit, train, and retain qualified staff. Any delays or
difficulties we encounter in these staffing efforts would impair our ability to
attract new customers and to enhance our relationships with existing customers.
This in turn would adversely impact the timing and extent of our revenues.
Because the majority of our sales and marketing personnel have recently joined
Critical Path and have limited experience working together, our sales and
marketing organizations may not be able to compete successfully against bigger
and more experienced sales and marketing organizations of our competitors. If
we do not successfully expand our sales and marketing activities, our business
could suffer and our stock price could decline.

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

Our customers have in the past experienced some interruptions in our email
service. We believe that these interruptions will continue to occur from time
to time. These interruptions are due to hardware failures, unsolicited bulk
email, or "spam," attacks and operating system failures. For example, in
October 1998, our customers experienced a four-hour service interruption due to
an operating system failure. Our revenues depend on the number of end-users who
use our email services. Our business will suffer if we experience frequent or
long system interruptions that result in the unavailability or reduced
performance of our systems or networks or reduce our ability to provide email
services. We expect to experience occasional temporary capacity constraints due
to sharply increased traffic, which may cause unanticipated system disruptions,
slower response times, impaired quality and degradation in levels of customer
service. If this were to continue to happen, our business and reputation could
suffer dramatically.

We have entered into service agreements with some of our customers that
require certain minimum performance standards, including standards regarding
the availability and response time of our email services. If we fail to meet
these standards, our customers could terminate their relationships with us and
we could be subject to contractual monetary penalties. Any unplanned
interruption of services may adversely affect our ability to attract and retain
customers.

We depend on strategic relationships and other sales channels and the loss of
any of our strategic relationships could harm our business and have an adverse
impact on our revenue

We depend on our strategic relationships to expand our distribution channels
and to undertake joint product development and marketing efforts. Our ability
to increase revenues depends upon

8
<PAGE>

marketing our services through new and existing strategic relationships. We
have entered into written agreements with ICQ, a subsidiary of America Online,
Inc., E*TRADE Group, Inc., Network Solutions, Inc., Sprint Communications
Company L.P. and US West Communications Services, Inc., among others. We depend
on a broad acceptance of outsourced email services on the part of potential
partners and acceptance of us as the supplier for these outsourced email
services. We also depend on joint marketing and product development through our
strategic relationships to achieve market acceptance and brand recognition. For
example, through our relationship with E*TRADE, we can conduct shared
advertising campaigns and include our messaging services in E*TRADE's
international strategic relationships. Our agreements with our strategic
partners typically do not restrict them from introducing competing services and
may be terminated by either party without cause. These agreements typically are
for terms of one to three years, and automatically renew for additional one-
year periods unless either party gives prior notice of its intention to
terminate the agreement. In addition, these agreements are terminable by our
partners without cause, and some agreements are terminable by us, upon 30-120
days' notice. Most of the agreements also provide for the partial refund of
fees paid or other monetary penalties in the event that our services fail to
meet defined minimum performance standards. Distribution partners may choose
not to renew existing arrangements on commercially acceptable terms, or at all.
If we lose any of our strategic relationships, fail to renew these agreements
or relationships or fail to develop new strategic relationships, our business
will suffer. The loss of any of our key strategic relationships would have an
adverse impact on our current and future revenue. For example, E*TRADE
accounted for approximately 62% of our 1998 net revenues, excluding the value
of stock purchase rights received by E*TRADE, and TABNet, a wholly owned
subsidiary of Verio, accounted for approximately 30% of our 1998 net revenues.
In addition to our strategic relationships, we also depend on the ability of
our customers to sell and market our services to their end-users.

We have experienced rapid growth which has placed a strain on our resources and
our failure to manage our growth could cause our business to suffer

We recently began to expand our operations rapidly and intend to continue
this expansion. The number of our employees increased from 17 on December 31,
1997 to 93 on December 31, 1998. As of February 28, 1999, we had 133 employees.
This expansion has placed, and is expected to continue to place, a significant
strain on our managerial, operational and financial resources. To manage any
further growth, we will need to improve or replace our existing operational,
customer service and financial systems, procedures and controls. Any failure by
us to properly manage these system and procedural transitions could impair our
ability to attract and service customers, and could cause us to incur higher
operating costs and delays in the execution of our business plan. We will also
need to continue the expansion of our operations and employee base. Our
management may not be able to hire, train, retain, motivate and manage required
personnel. In addition, our management may not be able to successfully
identify, manage and exploit existing and potential market opportunities. If we
cannot manage growth effectively, our business and operating results could
suffer.

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

The Internet 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 improve the performance, features and reliability of our services,
particularly in response to competitive offerings. Our success depends, in
part, on our ability to enhance our existing email and messaging services and
to develop new services, functionality and technology that

9
<PAGE>

address the increasingly sophisticated and varied needs of our prospective
customers. If we don't properly identify the feature preferences of prospective
customers, or if we fail to deliver email features which meet the standards of
these customers, our ability to market our service successfully and to increase
our revenues could be impaired. The development of proprietary technology and
necessary service enhancements entail significant technical and business risks
and require substantial expenditures and lead-time. We may not be able to keep
pace with the latest technological developments. We may also not be able to use
new technologies effectively or adapt our services to customer requirements or
emerging industry standards. If we cannot, for technical, legal, financial or
other reasons, adapt or respond in a cost-effective and timely manner to
changing market conditions or customer requirements, our business and operating
results would suffer.

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

A fundamental requirement for online communications is the secure
transmission of confidential information over public networks. Third parties
may attempt to breach our security or that of our customers. If they are
successful, they could obtain our customers' confidential information,
including our customers' profiles, passwords, financial account information,
credit card numbers or other personal information. We may be liable to our
customers for any breach in our security and any breach could harm our
reputation. We rely on encryption technology licensed from third parties.
Although we have implemented network security measures, 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. Our failure to prevent
security breaches may have a material adverse effect on our business and
operating results.

We depend on broad market acceptance for outsourced Internet-based email
service

The market for outsourced Internet-based email service is new and rapidly
evolving. Concerns over the security of online services and the privacy of
users may inhibit the growth of the Internet and commercial online services. We
cannot estimate the size or growth rate of the potential market for our service
offerings, and we do not know whether our service will achieve broad market
acceptance. To date, substantially all of our revenues have been derived from
sales of our email service offerings and we currently expect that our email
service offerings will account for substantially all of our revenues for the
foreseeable future. We depend on the widespread acceptance and use of
outsourcing as an effective solution for email. If the market for outsourced
email fails to grow or grows more slowly than we currently anticipate, our
business would suffer dramatically.

We expect the email services market will be very competitive and we will need
to compete successfully in this market

We expect that the market for Internet-based email service will be intensely
competitive. In addition to competing with companies that develop and maintain
in-house solutions, we compete with email service providers, such as USA.NET,
Inc., and iName, and with product-based companies, such as Software.com, Inc.
and Lotus Development Corporation. We believe that competition will increase
and that companies such as Microsoft Corporation and Netscape Communications
Corp., which currently offer email products primarily to Internet service
providers who provide access to the Internet, web hosting companies, World Wide
Web sites intended to be major starting site for users when they connect to the
Internet, commonly referred to as web portals, and corporations, may leverage
their existing relationships and capabilities to offer email services.

10
<PAGE>

We believe competition will increase as our current competitors increase the
sophistication of their offerings and as new participants enter the market.
Many of our current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than we do and may enter into
strategic or commercial relationships with larger, more established and better-
financed companies. Further, any delays in the general market acceptance of the
email hosting concept would likely harm our competitive position. Any such
delay would allow our competitors additional time to approve their service or
product offerings, and also provide time for new competitors to develop email
service solutions and solicit prospective customers within our target markets.
Increased competition could result in pricing pressures, reduced operating
margins and loss of market share, any of which could cause our business to
suffer.

A limited number of customers account for a high percentage of our revenues and
the loss of a major customer or failure to attract new customers could harm our
business

In 1998, E*TRADE accounted for approximately 62% and TABNet, a wholly owned
subsidiary of Verio, accounted for approximately 30% of our net revenues,
excluding the value of stock purchase rights received by customers. We expect
that sales of our services to a limited number of customers will continue to
account for a high percentage of our revenue for the foreseeable future. Our
future success depends on our ability to retain our current customers and
attract new customers in our target markets. The loss of a major customer or
our inability to attract new customers could have a material adverse effect on
our business. Our agreements with our customers have terms of one to three
years with automatic one year renewals and can be terminated without cause upon
30-120 days' notice.

If we do not successfully address service design risks, our reputation could be
damaged and our business and operating results could suffer

We must accurately forecast the features and functionality required by target
customers. In addition, we must design and implement service enhancements that
meet customer requirements in a timely and efficient manner. We may not
successfully determine customer requirements and we may be unable to satisfy
customer demands. Furthermore, we may not be able to design and implement a
service incorporating desired features in a timely and efficient manner. In
addition, if any new service we launch is not favorably received by customers
and end-users, our reputation could be damaged. If we fail to accurately
determine customer feature requirements or service enhancements or to market
services containing such features or enhancements in a timely and efficient
manner, our business and operating results could suffer materially.

We need to upgrade our systems and infrastructure to accommodate increases in
email traffic

We must continue to expand and adapt our network infrastructure as the number
of users and the amount of information they wish to transmit increases, and as
their requirements change. The expansion and adaptation of our network
infrastructure will require substantial financial, operational and management
resources. Due to the limited deployment of our services to date, the ability
of our network to connect and manage a substantially larger number of customers
at high transmission speeds is unknown, and we face risks related to the
network's ability to operate with higher customer levels while maintaining
expected performance.

As the frequency and complexity of messaging increases, we will need to make
additional investments in our infrastructure, which may be expensive. In
addition, we may not be able to accurately project the rate or timing of email
traffic increases or upgrade our systems and

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infrastructure to accommodate future traffic levels. We may also not be able to
achieve or maintain a sufficiently high capacity of data transmission as
customer usage increases. Customer demand for our services could be greatly
reduced if we fail to maintain high capacity data transmission. In addition, as
we upgrade our network infrastructure to increase capacity available to our
customers, we are likely to encounter equipment or software incompatibility
which may cause delays in implementations. We may not be able to expand or
adapt our network infrastructure to meet additional demand or our customers'
changing requirements in a timely manner or at all. If we fail to do so, our
business and operating results could suffer materially.

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

We intend to continue to expand into international markets and to spend
significant financial and managerial resources to do so. If our revenues from
international operations do not exceed the expense of establishing and
maintaining these operations, our business, financial condition and operating
results will suffer. At present, we have a subsidiary in Germany, and we have
plans to commence operations in the United Kingdom and in Asia within the next
twelve months. We have limited experience in international operations and may
not be able to compete effectively in international markets. We face certain
risks inherent in conducting business internationally, such as:

. unexpected changes in regulatory requirements;

. difficulties and costs of staffing and managing international operations;

. differing technology standards;

. difficulties in collecting accounts receivable and longer collection
periods;

. political and economic instability;

. fluctuations in currency exchange rates;

. imposition of currency exchange controls;

. potentially adverse tax consequences; and

. reduced protection for intellectual property rights in certain countries.

Any of these factors could adversely affect our international operations and,
consequently, our business and operating results. Specifically, failure by us
to successfully manage our 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.

Because we provide our email messaging services over the Internet, our business
could suffer if efficient transmission of data over the Internet is interrupted

The recent growth in the use of the Internet has caused frequent
interruptions and delays in accessing the Internet and transmitting data over
the Internet. To date we have not experienced a significant adverse effect from
these interruptions. However, because we provide email messaging services over
the Internet, interruptions or delays in Internet transmissions will adversely
affect our customers' ability to send or receive their email messages. We rely
on the speed and reliability of the networks operated by third parties.
Therefore, our market depends on improvements being made to the entire Internet
infrastructure to alleviate overloading and congestion.

We depend on telecommunications network suppliers such as MCI WorldCom and
Sprint to transmit email messages across their networks. In addition, to
deliver our services, we rely on a number of public and private peering
interconnections, which are arrangements among access

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providers to carry traffic of each other. If these providers were to
discontinue these arrangements, and alternative providers did not emerge or
were to increase the cost of providing access, our ability to transmit our
email traffic would be reduced. If we were to increase our current prices to
accommodate any increase in the cost of providing access, it could negatively
impact our sales. If we did not increase our prices in response to rising
access costs, our margins would be negatively affected. Furthermore, if
additional capacity is not added as traffic increases, our ability to
distribute content rapidly and reliably through these networks will be
adversely affected.

If we encounter system failure, we may not be able to provide adequate service
and our business and reputation could be damaged

Our ability to successfully receive and send email messages and provide
acceptable levels of customer service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware and network
systems. Substantially all of our computer and communications systems are
located in Palo Alto and San Francisco, California and Laurel, Maryland. Our
systems and operations are vulnerable to damage or interruption from fire,
flood, earthquake, power loss, telecommunications failure and similar events.
The occurrence of any of the foregoing risks could subject us to contractual
monetary penalties if we fail to meet our minimum performance standards, and
could have a material adverse effect on our business and operating results and
damage our reputation.

We must recruit and retain our key employees to expand our business

Our success depends on the skills, experience and performance of our senior
management and other key personnel, many of whom have worked together for only
a short period of time. For example, our Chief Executive Officer, Chief
Financial Officer, Vice President of Sales and Vice President and Chief
Information Officer have joined us within the past six months. The loss of the
services of any of our senior management or other key personnel, including our
founder, David Hayden, and our President and Chief Executive Officer, Douglas
Hickey, could materially and adversely affect our business. We do not have
long-term employment agreements with any of our senior management and other key
personnel. Our success also depends on our ability to recruit, retain and
motivate other highly skilled sales and marketing, technical and managerial
personnel. Competition for these people is intense, and we may not be able to
successfully recruit, train or retain qualified personnel. In particular, we
may not be able to hire a sufficient number of qualified software developers
for our email services. If we fail to retain and recruit necessary sales and
marketing, technical and managerial personnel, our business and our ability to
develop new services and to provide acceptable levels of customer service could
suffer.

Unknown software defects could disrupt our services, which could harm our
business and reputation

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

We may need additional capital and raising additional capital may dilute
existing shareholders

We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next

13
<PAGE>

12 months. However, we may be required to raise additional funds due to
unforeseen circumstances. If our capital requirements vary materially from
those currently planned, we may require additional financing sooner than
anticipated. Such financing may not be available in sufficient amounts or on
terms acceptable to us and may be dilutive to existing shareholders.

Our failure to acquire or successfully integrate acquired businesses or
technologies could harm our operating results and our business

We may use a portion of the net proceeds of this offering to acquire or
invest in businesses, products, services and technologies that complement or
augment our current business. However, we have no specific agreements or
commitments and are not currently engaged in any negotiations with respect to
these transactions. Integrating any newly acquired businesses or technologies
may be expensive and time-consuming. To finance any acquisitions, it may be
necessary for us to raise additional funds through public or private
financings, which may be on terms that are not favorable to us and, in the case
of equity financings, may result in dilution to our shareholders. We may not be
able to operate any acquired businesses profitably or otherwise implement our
growth strategy successfully. If we are unable to integrate any newly acquired
entities or technologies effectively, our results of operations could suffer.

We may not be able to protect our intellectual property and proprietary rights

We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success, and rely on trademark
and copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers and partners to protect our
proprietary rights. Despite our precautions, unauthorized third parties may
copy certain portions of our services or reverse engineer or obtain and use
information that we regard as proprietary. End-user license provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program may be unenforceable under the laws of certain jurisdictions
and foreign countries. The status of United States patent protection in the
software industry is not well defined and will evolve as the U.S. Patent and
Trademark Office grants additional patents. We have one patent pending in the
United States and we may seek additional patents in the future. We do not know
if our patent application or any future patent application will be issued with
the scope of the claims we seek, if at all, or whether any patents we receive
will be challenged or invalidated. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as do the laws
of the United States. Our means of protecting our proprietary rights in the
United States or abroad may not be adequate and competitors may independently
develop similar technology.

Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. In addition, other parties may assert infringement
claims against us. Although we have not received notice of any alleged
infringement, we cannot be certain that our products do not infringe issued
patents that may relate to our products. In addition, because patent
applications in the United States are not publicly disclosed until the patent
is issued, applications may have been filed which relate to our software
products. We may be subject to legal proceedings and claims from time to time
in the ordinary course of our business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties. Intellectual property litigation is expensive and time-consuming and
could divert management's attention away from running our business.

We may need to license third party technologies and we face risks in doing so

We also intend to continue to license certain technology from third parties,
including our web server and encryption technology. The market is evolving and
we may need to license additional

14
<PAGE>

technologies to remain competitive. We may not be able to license these
technologies on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate any licensed technology into our services. These
third-party in-licenses may expose us to increased risks, including risks with
the integration of new technology, the diversion of resources from the
development of our own proprietary technology, our inability to generate
revenues from new technology sufficient to offset associated acquisition and
maintenance costs. Our inability to obtain any of these licenses could delay
product and service development until equivalent technology can be identified,
licensed and integrated. Any such delays in services could cause our business
and operating results to suffer.

Governmental regulation and legal uncertainties could impair the growth of the
Internet and decrease demand for our services or increase our cost of doing
business

Although there are currently few laws and regulations directly applicable to
the Internet and commercial email services, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. Further, the growth and development of the market for
online email may prompt calls for more stringent consumer protection laws that
may impose additional burdens on those companies conducting business online.
The adoption of any additional laws or regulations may impair the growth of the
Internet or commercial online services which could decrease the demand for our
services and increase our cost of doing business, or otherwise harm our
business and operating results. Moreover, the applicability to the Internet of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve.

If we do not adequately address "Year 2000" issues, we may incur significant
costs and our business could suffer

The Year 2000 issue is the result of computer programs and embedded hardware
systems having been developed using two digits rather than four to define the
applicable year. These computer programs or hardware that have date-sensitive
software or embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities. As a result, many companies' computer systems
may need to be upgraded or replaced in order to comply with the "Year 2000." We
are in the process of testing our internally developed software. Many of our
customers maintain their Internet operations on commercially available
operating systems, which may be impacted by Year 2000 complications. In
addition, we rely on third-party vendors for certain software and hardware
included within our services, which may not be Year 2000 compliant. Failure of
our internal computer systems or third-party equipment or software, or of
systems maintained by our suppliers, to operate properly with regard to the
year 2000 and thereafter could require us to incur significant unanticipated
expenses to remedy any problems and could cause system interruptions and loss
of data. Any of these events could harm our reputation, business and operating
results. We have not yet developed a comprehensive contingency plan to address
the issues that could result from Year 2000 complications. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Issues."

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

As a provider of email services, we face potential liability for defamation,
negligence, copyright, patent or trademark infringement and other claims based
on the nature and content of the materials transmitted via email. We do not and
cannot screen all of the content generated by our users, and we

15
<PAGE>

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.

Although we carry general liability and umbrella liability insurance, our
insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed. There is a risk that a
single claim or multiple claims, if successfully asserted against us, could
exceed the total of our coverage limits. There is also a risk that 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 may need to be used in order to settle claims. Any imposition of
liability, particularly liability that is not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on our
reputation and our business and operating results, or could result in the
imposition of criminal penalties.

Our stock has not been publicly traded before this offering and our stock price
may be volatile

Our common stock has not been publicly traded, and an active trading market
may not develop or be sustained after this offering. We and the underwriters
will determine the initial public offering price. The price at which our common
stock will trade after this offering is likely to be highly volatile and may
fluctuate substantially due to factors such as:

. actual or anticipated fluctuations in our results of operations;

. changes in or failure by us to meet securities analysts' expectations;

. announcements of technological innovations;

. introduction of new services by us or our competitors;

. developments with respect to intellectual property rights;

. conditions and trends in the Internet and other technology industries;
and

. general market conditions.

In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stocks of technology companies, particularly Internet companies. These
broad market fluctuations may result in a material decline in the market price
of our common stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has often been brought against that company. We may become involved in this
type of litigation in the future. Litigation is often expensive and diverts
management's attention and resources, which could have a material adverse
effect upon our business and operating results.

Future sales of our common stock may depress our stock price

After this offering, we will have 34,115,161 shares of common stock
outstanding. All the shares sold in this offering will be freely tradable. The
remaining 29,615,161 shares of common stock outstanding after this offering are
subject to lock-up agreements that prohibit the sale of the shares for 180 days
after the date of this prospectus. Immediately after the 180 day lockup period,
26,387,909 shares which will be outstanding after the offering will become
available for sale. The remaining shares of our common stock will become
available at various times thereafter upon the expiration of one-year holding
periods. Sales of a substantial number of shares of common stock in the public
market after this offering or after the expiration of the lockup and holding
periods could cause the market price of our common stock to decline.

16
<PAGE>

Purchasers of our common stock will suffer immediate and substantial dilution

The initial public offering price is expected to be substantially higher than
the book value per share of our common stock. Some elements of our market value
do not originate from measurable transactions. Therefore there is not a
corresponding rise in "book" or historical cost accounting, value for our rise
in market value, if any. Examples of these elements include the perceived value
associated with our strategic relationships, perceived growth prospects of our
core commercial market and our perceived competitive position within that
market. Purchasers of our common stock in this offering will experience
immediate dilution of $20.09 in the pro forma net tangible book value per share
of common stock at the public offering price of $24.00 per share. Purchasers
will also experience additional dilution upon the exercise of outstanding stock
options and warrants.

Our directors, executive officers and principal shareholders will be able to
exert significant influence over us

After this offering, our directors, executive officers and our shareholders
who currently own over 5% of our common stock will beneficially own
approximately 51.6% of our outstanding common stock. These shareholders, if
they vote together, will be able to exercise significant influence over all
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also delay or prevent a change in control of Critical Path.

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

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

. authorize the issuance of preferred stock which can be created and issued
by the board of directors without prior shareholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of common stock;

. prohibit shareholder action by written consent; and

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

See "Description of Capital Stock" for additional discussion of these
provisions.

If we do not use the proceeds in a manner beneficial to us, our business could
suffer

We have no current specific plans for the net proceeds from this offering. We
intend generally to use the net proceeds from this offering to expand our sales
and marketing activities, open additional data centers, expand our
international operations and for general corporate purposes, including working
capital and strategic investments. We have not yet determined the actual
expected expenditures and thus cannot estimate the amounts to be used for each
specified purpose. The actual amounts and timing of these expenditures will
vary significantly depending on a number of factors, including, but not limited
to, the amount of cash generated by our operations and the market response to
the introduction of any new service offerings. Depending on future developments
and circumstances, we may use some of the proceeds for uses other than those
described above. Our management will therefore have significant flexibility in
applying the net proceeds of this offering. If the proceeds are not used in a
manner beneficial to Critical Path, our business could suffer and our stock
price could decline.

17
<PAGE>

USE OF PROCEEDS

The net proceeds we will receive from the sale of the 4,500,000 shares of
common stock offered by us are estimated to be $99,640,000 after deducting the
underwriting discounts and commissions and the estimated offering expenses
payable by us.

We have no current specific plans for the net proceeds from this offering. We
generally intend to use the proceeds of this offering for the following:

. expansion of our sales and marketing activities;

. opening of additional data centers;

. expansion of our international operations; and

. working capital and other general corporate purposes.

We have not yet determined the actual expected expenditures and thus cannot
estimate the amounts to be used for each purpose discussed above. The amounts
and timing of these expenditures will vary significantly depending on a number
of factors, including, but not limited to, the amount of cash generated by our
operations and the market response to the introduction of any new service
offerings.

In addition, we may use a portion of the net proceeds of this offering to
acquire or invest in businesses, products, services or technologies
complementary to our current business, through mergers, acquisitions, joint
ventures or otherwise. However, we have no specific agreements or commitments
and are not currently engaged in any negotiations with respect to these
transactions. Accordingly, our management will retain broad discretion as to
the allocation of the net proceeds of this offering. We intend to invest the
net proceeds of this offering in short-term, interest-bearing investment grade
securities pending the above uses.

The principal purposes of this offering are: to create a public market for
our common stock, to increase our visibility and credibility, to facilitate
future access to the public capital markets and to obtain additional capital.

DIVIDEND POLICY

We have never declared or paid dividends on our capital stock and do not
anticipate paying any dividends in the foreseeable future. We currently intend
to retain any future earnings for the expansion and operation of our business.
Furthermore, our line of credit agreement with Silicon Valley Bank prohibits
the payment of dividends.

18
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of Critical Path as of
December 31, 1998: (A) on an actual basis; (B) on a pro forma basis after
giving effect to the conversion of all outstanding shares of preferred stock
into common stock upon completion of this offering and the assumed exercise on
a net basis of certain warrants for the purchase of Series A and Series B
Preferred Stock; and (C) and on a pro forma basis as adjusted to reflect the
sale by Critical Path of 4,500,000 shares of common stock offered hereby at an
initial public offering price of $24.00 per share and the receipt of the
estimated net proceeds therefrom after deducting underwriting discounts and
commissions and estimated offering expenses payable by Critical Path. See "Use
of Proceeds."

<TABLE>
<CAPTION>
December 31, 1998
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Capital lease obligations, less current
portion....................................... $ 2,454 $ 2,454 $ 2,454
-------- -------- --------
Shareholders' equity:
Series A Convertible Preferred Stock, $0.001
par value; 13,288,519 shares authorized,
12,725,864 shares issued and outstanding,
actual; no shares issued and outstanding pro
forma and pro forma as adjusted............. 13 --
Series B Convertible Preferred Stock, $0.001
par value; 10,000,000 shares authorized,
3,636,739 shares issued and outstanding,
actual; no shares issued and outstanding pro
forma and pro forma as adjusted............. 4 --
Common stock, $0.001 par value; 38,636,363
shares authorized; 8,294,338 shares issued
and outstanding, actual; 24,948,641 shares
issued and outstanding, pro forma;
29,448,641 shares issued and outstanding,
pro forma as adjusted(1).................... 8 25 30
Additional paid-in capital................... 46,390 46,390 146,025
Notes receivable from shareholders........... (1,151) (1,151) (1,151)
Unearned compensation........................ (17,371) (17,371) (17,371)
Accumulated deficit.......................... (12,535) (12,535) (12,535)
-------- -------- --------
Total shareholders' equity................. 15,358 15,358 114,998
-------- -------- --------
Total capitalization..................... $ 17,812 $ 17,812 $117,452
======== ======== ========
</TABLE>
- --------
(1) The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1998 and
does not include the following:

. 7,752,556 shares subject to options outstanding as of December 31, 1998
at a weighted average exercise price of $0.86 per share;

. 2,611,462 additional shares that could be issued under Critical Path's
1998 Stock Plan as of December 31, 1998;

. 794,066 shares that could be issued upon exercise of outstanding warrants
and stock purchase rights as of December 31, 1998;

. 600,000 shares that could be issued under Critical Path's Employee Stock
Purchase Plan; and

. 4,283,240 shares that could be issued upon exercise of warrants and
options granted subsequent to December 31, 1998.

19
<PAGE>

DILUTION

Our pro forma net tangible book value as of December 31, 1998 was
$15,358,000, or $0.62 per share of common stock. Pro forma net tangible book
value per share is determined by dividing the amount of our total tangible
assets less total liabilities by the number of shares of common stock
outstanding at that date, assuming conversion of all outstanding shares of
preferred stock and the exercise on a net basis of certain warrants relating to
Series A and Series B Preferred Stock. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in the offering made hereby and the net tangible book
value per share of common stock immediately after the completion of this
offering. After giving effect to the sale of the 4,500,000 shares of common
stock offered by Critical Path hereby (at an initial public offering price of
$24.00 per share and after deducting the underwriting discounts and commissions
and our estimated offering expenses), our pro forma as adjusted net tangible
book value of Critical Path at December 31, 1998 would have been $114,998,000,
or $3.91 per share. This represents an immediate increase in pro forma net
tangible book value of $3.29 per share to the existing shareholder and an
immediate dilution of $20.09 per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $24.00
------
Pro forma net tangible book value per share as of December 31,
1998............................................................ $0.62
Increase in pro forma net tangible book value per share
attributable to this offering................................... 3.29
-----
Pro forma net tangible book value per share after the offering... 3.91
------
Dilution per share to new investors.............................. $20.09
======
</TABLE>

The following table summarizes, on a pro forma basis as of December 31, 1998,
the total number of shares of common stock purchased from Critical Path, the
total consideration paid to Critical Path and the average price per share paid
by existing shareholders and by new investors purchasing shares in this
offering (based upon an initial public offering price of $24.00 per share and
before deducting the underwriting discounts and commissions and our estimated
offering expenses):

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 24,948,641 85% $ 25,926,000 19% $ 1.04
New investors............. 4,500,000 15% 108,000,000 81% $24.00
---------- --- ------------ ---
Total................... 29,448,641 100% $133,926,000 100%
========== === ============ ===
</TABLE>

The foregoing table assumes no exercise of the underwriters' over-allotment
option or of any outstanding stock options or warrants after December 31, 1998.
As of December 31, 1998, there were outstanding options to purchase an
aggregate of 7,752,556 shares of common stock at a weighted average exercise
price of $0.86 per share and warrants to purchase an aggregate of 794,066
shares at a weighted average purchase price of $2.50 per share. To the extent
any of these options or warrants are exercised, there will be further dilution
to new investors. See "Management--1998 Stock Plan" and Notes 6, 7 and 8 of the
Notes to Consolidated Financial Statements.

20
<PAGE>

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The selected consolidated balance sheet data as of December 31, 1997 and 1998
and the selected consolidated statement of operations data for the period from
February 19, 1997 (Inception) to December 31, 1997 and for the year ended
December 31, 1998 have been derived from the Consolidated Financial Statements
of Critical Path, Inc., included elsewhere in this prospectus. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
prospectus (in thousands, except per share data).

<TABLE>
<CAPTION>
Period from
February 19, 1997 Year Ended
(Inception) to December 31,
December 31, 1997 1998
----------------- ------------
<S> <C> <C>
Consolidated Statement of Operations Data:
Net revenues..................................... $ -- $ 897
Cost of net revenues............................. -- (2,346)
------- --------
Gross profit (loss)............................ -- (1,449)
------- --------
Operating expenses:
Research and development........................ 454 2,246
Sales and marketing............................. 244 2,318
General and administrative...................... 358 5,435
------- --------
Total operating expenses....................... 1,056 9,999
------- --------
Loss from operations............................. (1,056) (11,448)
Interest and other income........................ -- 375
Interest expense................................. (18) (388)
------- --------
Net loss......................................... $(1,074) $(11,461)
======= ========
Net loss per share--basic and diluted............ $(0.54) $ (2.94)
======= ========
Weighted average shares--basic and diluted....... 1,994 3,899
======= ========
Pro forma net loss per share (unaudited):
Net loss per share--basic and diluted.......... $ (0.81)
========
Weighted average shares--basic and diluted..... 14,194
========
</TABLE>

<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................................... $ 1 $14,791
Working capital (deficit)..................................... (1,524) 12,524
Total assets.................................................. 550 20,663
Capital lease obligations, long-term.......................... 42 2,454
Shareholders' equity (deficit)................................ (1,021) 15,358
</TABLE>

21
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this prospectus.
The following discussion contains forward-looking statements. Critical Path's
actual results may differ significantly from those projected in the forward-
looking statements. Factors that might cause future results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, those discussed in "Risk Factors" and elsewhere in this
prospectus.

Overview

Critical Path was founded in February 1997 to deliver email hosting solutions
to Internet service providers, web hosting companies, web portals and
corporations. From its inception to October 1997, Critical Path's operating
activities related primarily to the planning and developing of our proprietary
technological solution, recruiting personnel, raising capital and purchasing
operating assets. Critical Path initiated service in October 1997. We have
since continued making investments to improve the quality of our services. In
December 1997, we enhanced our initial service offering, a hosting service
based on Post Office Protocol 3, with the addition of a web mail interface.
Post Office Protocol 3 is a standard protocol for receiving email commonly
referred to "POP3". More recently, in January 1999, we enhanced service with
the addition of an offering based on the Lightweight Directory Access Protocol,
or LDAP, a directory software protocol. At December 31, 1998, Critical Path had
over 100 customers. In early 1999, we intend to further enhance our service
offering with the inclusion of IMAP4. IMAP4 is a new hosting service based on
the Internet Message Access Protocol, a standard protocol for accessing and
storing email from a user's server.

We derive substantially all of our revenues through the sale of email hosting
services. Our service revenues are derived primarily from contractual
relationships providing revenues on a per mailbox basis. These contracts are
typically one to three years in length. Agreements with some of our customers
require minimum performance standards regarding the availability and response
time of our email services. If we fail to meet these standards, our customers
could terminate their relationships with us and we could be subject to
contractual monetary penalties. Service revenues are recognized and billed on a
monthly basis as the service is performed.

We expect to expand our operations and employee base, including our sales,
marketing, technical, operational and customer support resources. In
particular, we intend to expand our sales force to deliver our email
outsourcing services to customers in our four target markets: ISPs, web hosting
companies, web portals and corporations. We also intend to further develop new
and existing strategic relationships to expand our distribution channels and to
undertake joint product development and marketing efforts.

We intend to develop worldwide sales offices and data centers. We currently
have sales offices in the United States and Germany and expect to open
additional data centers in the United States, Europe and Asia.

Future investments in technology may involve the development, acquisition or
licensing of technologies that complement or augment our existing services and
technologies.

During 1998, we recorded aggregate unearned compensation totaling
approximately $19.9 million in connection with the certain sales of stock and
the grant of certain options to employees,

22
<PAGE>

directors and consultants, which amount is being amortized over the four-year
vesting period of such options. These options were issued to create incentives
for continued performance. Of the total unearned compensation, approximately
$366,000, $217,000, $269,000 and $1.7 million were amortized in the quarters
ended March 31, June 30, September 30, and December 31, 1998, respectively. In
January and March 1999, we granted options resulting in an additional $18.1
million of unearned compensation. We expect aggregate per quarter amortization
related to unearned compensation of between $4.9 million and $3.7 million
during 1999, between $3.2 million and $2.1 million during 2000, between $1.7
million and $1.0 million during 2001, and between $742,000 and $331,000 during
2002. These amortization amounts are allocated among the operating expense
categories based upon the primary activity of the individuals who received the
option grants.

In January 1999, we entered into an agreement with ICQ, a subsidiary of
America Online, Inc., pursuant to which we will provide email hosting services
that will be integrated with ICQ's instant messaging service provided to ICQ's
customers. The ICQ instant messaging service is designed to allow users to
communicate in real time over the Internet. As part of the agreement, ICQ
agreed to provide sub-branded advertising for us in exchange for a warrant to
purchase 2,442,766 shares of Series B Preferred Stock, issuable upon attainment
of each of five milestones. We believe that this agreement will have a
significant current and potential future impact on our results of operations.
The following table summarizes the shares underlying each milestone and the
related exercise price:

<TABLE>
<CAPTION>
Shares
Underlying Exercise
Warrant Price
---------- --------
<S> <C> <C>
Milestone 1............................................. 814,254 $ 4.26
Milestone 2............................................. 407,128 5.50
Milestone 3............................................. 407,128 6.60
Milestone 4............................................. 407,128 8.80
Milestone 5............................................. 407,128 11.00
---------
Totals................................................ 2,442,766
=========
</TABLE>

The shares underlying the first milestone were immediately vested on the
effective date of the agreement. The shares underlying the remaining milestones
vest on the dates that ICQ completes registration of the specified number of
sub-branded ICQ mailboxes applicable to each milestone. Using the Black-Scholes
option pricing model and assuming a term of seven years and expected volatility
of 90%, the initial fair value of the warrant on the effective date of the
agreement approximated $16.504 million, which is being amortized to advertising
expense using the straight-line method over four years. The shares underlying
the second through fifth milestones will be remeasured at each subsequent
reporting date until each sub-branded ICQ mailbox registration threshold is
achieved. In the event such remeasurement results in increases or decreases
from the initial fair value, which could be substantial, such increases or
decreases will be recognized immediately, in the event the fair value of the
shares underlying the milestone has been previously recognized, or over the
remaining term. We expect to incur substantial non-cash charges associated with
the grant of the warrant to America Online. In addition to amortization of the
initial fair value of this warrant, which totaled $16.504 million, we expect
that future changes in the trading price of our common stock at the end of each
quarter and at the date certain milestones are achieved, will cause additional
substantial changes in the ultimate amount of such amortization.

We have incurred significant losses since our inception, and as of December
31, 1998 had an accumulated deficit of approximately $12.5 million. We intend
to invest heavily in sales and marketing, continued development of our network
infrastructure and continued technology developments. We expect to continue to
incur substantial operating losses for the foreseeable future.

23
<PAGE>

In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our revenues
and operating results, including our 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 growth rates are indicative of future results.

Results of Operations

The following table sets forth financial data for the year ended December 31,
1998. Data for the inception period are not presented as Critical Path had no
revenues in that period. Further, amounts from the inception period are not
comparable to those for the year ended December 31, 1998 due to the different
duration of the periods and the acceleration of Critical Path's activities and
related expenses throughout 1998. We believe that operating expenses will
continue to increase in the future as we continue to expand our operations.

<TABLE>
<CAPTION>
Year Ended
December 31, 1998
----------------------
(dollars in
thousands)
% of
$ net revenues
-------- ------------
<S> <C> <C>
Net Revenues.......................................... $ 897 100.0%
Cost of revenues...................................... (2,346) (261.5)
-------- --------
Gross profit (loss).................................. (1,449) (161.5)
-------- --------
Operating expenses:
Research and development............................. 2,246 250.4
Sales and marketing.................................. 2,318 258.4
General and administrative........................... 5,435 605.9
-------- --------
Total operating expenses............................ 9,999 1,114.7
-------- --------
Loss from operations.................................. (11,448) (1,276.2)
Interest and other income............................. 375 41.8
Interest expense...................................... (388) (43.3)
-------- --------
Net loss.............................................. $(11,461) (1,277.7%)
======== ========
</TABLE>

Net Revenues

Net revenues include charges relating to the amortization of fair value of
warrants issued to certain customers. In January 1998, we began to recognize
revenues from the sale of our email hosting services. Net revenues for 1998
were $897,000. In early 1998, we executed agreements with E*TRADE, an on-line
brokerage services company, and Verio, a web hosting organization, pursuant to
which we began to derive revenue for providing email services. For 1998,
E*TRADE and Verio accounted for approximately 62% and 30%, respectively, of our
net revenues, excluding the value of stock purchase rights received by
customers. A substantial portion of those revenues occurred during the quarter
ended December 31, 1998. Net revenues during the quarter ended December 31,
1998, were $605,000, or 68% of net revenues for 1998.

Cost of Net Revenues

Cost of net revenues consists primarily of costs incurred in the delivery and
support of our email services, including depreciation of capital equipment used
in our network infrastructure and

24
<PAGE>

personnel costs in our operations and customer support functions. During 1998,
these costs were approximately $2.3 million, or 261.5% of net revenues. We made
significant acquisitions of equipment for our data centers at the beginning of
the quarter ended September 30, 1998, and, as a result, our depreciation
expense increased significantly in the final two quarters of 1998.
Additionally, we significantly increased our headcount in operations and
customer support throughout the year. From January 1, 1998 to December 31,
1998, operations and customer support personnel increased from zero to 25.

Operating Expenses

Research and Development. Our research and development expenses consist
primarily of compensation for our technical staff, payments to outside
contractors, and, to a lesser extent, allocated occupancy costs and related
overhead. We expense research and development expenses as they are incurred.
Research and development expenses amounted to $2.2 million, or 250.4% of net
revenues, during 1998, and increased substantially each quarter throughout the
year as we increased personnel and our use of outside contractors. From January
1, 1998 to December 31, 1998, our research and development personnel increased
from 11 to 27.

Sales and Marketing. Our sales and marketing expenses consist primarily of
compensation for our sales and marketing personnel, advertising, trade show and
other promotional costs, and, to a lesser extent, allocated occupancy costs and
related overhead. Sales and marketing expenses amounted to $2.3 million or
258.4% of net revenue during 1998, and increased substantially in the final two
quarters of the year as we expanded our sales force and significantly increased
the promotion of our email hosting services. Increases in compensation
associated with additional headcount, incentive compensation payments, and
increases in advertising and promotional expenses accounted for the increases
to sales and marketing expense in the second half of 1998. From January 1, 1998
to December 31, 1998, our sales and marketing personnel increased from 2 to 30.

General and Administrative. Our general and administrative expenses consist
primarily of compensation for personnel, fees for outside professional
services, and, to a lesser extent, allocated occupancy costs and related
overhead. General and administrative expenses amounted to $5.4 million, or
605.9% of net revenues, during 1998, and increased substantially in the quarter
ended December 31, 1998. Increases in compensation associated with additional
headcount, higher fees for outside professional services, and the amortization
of unearned compensation related to stock and stock option grants accounted for
this increase. From January 1, 1998 to December 31, 1998, general and
administrative personnel increased from 4 to 11.

Interest and Other Income and Interest Expense

Interest and other income consist primarily of interest earnings on our cash
and cash equivalents. Interest and other income amounted to $375,000 during
1998. We concluded a private placement of equity securities in September 1998.
As a result, interest income increased significantly in the final quarter of
the year. To date, we have incurred interest expense on notes payable and
capital lease obligations. For 1998, interest expense amounted to $388,000.

Income Taxes

No provision for federal and state income taxes was recorded as we incurred
net operating losses from inception through December 31, 1998. At December 31,
1998, we had approximately

25
<PAGE>

$8.8 million of federal and state net operating loss carryforwards available to
offset future taxable income which expire in varying amounts beginning in 2012.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. For example, the amount of net operating losses that we may
utilize in any one year would be limited in the presence of a cumulative
ownership change of more than 50% over a three year period. Because there is
significant doubt as to whether we will realize any benefit from this deferred
tax asset, we have established a full valuation allowance as of December 31,
1998.

Stock-Based Compensation

During 1998, we recorded aggregate unearned compensation in the amount of
$19.9 million in connection with the grant of certain stock options during
1998. Amortization of such compensation is allocated among operating expense
categories based upon the principal activity of the individuals who received
the option grants and totaled $2.5 million during 1998. See Notes 8 and 9 of
Notes to Consolidated Financial Statements.

Quarterly Results of Operations

The following table sets forth certain unaudited quarterly statements of
operations data for the four quarters ended December 31, 1998. This information
has been derived from Critical Path's consolidated unaudited financial
statements, which, in management's opinion, have been prepared on the same
basis as the audited consolidated financial statements, and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the quarters presented. This
information should be read in conjunction with the audited consolidated
financial statements of Critical Path and the notes thereto included elsewhere
in this prospectus. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.

<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
Mar. 31, 1998 June 30, 1998 Sept. 30, 1998 Dec. 31, 1998
------------- ------------- -------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Net revenues............ $ 70 $ 66 $ 156 $ 605
Cost of revenues........ (82) (230) (941) (1,093)
------- ------- ------- -------
Gross profit (loss)... (12) (164) (785) (488)
------- ------- ------- -------
Operating expenses:
Research and
development........... 298 420 590 938
Sales and marketing.... 266 236 660 1,156
General and
administrative........ 594 978 987 2,876
------- ------- ------- -------
Total operating
expenses............. 1,158 1,634 2,237 4,970
------- ------- ------- -------
Loss from operations.... (1,170) (1,798) (3,022) (5,458)
Interest and other
income (expense), net.. (150) 47 (39) 129
------- ------- ------- -------
Net loss................ $(1,320) $(1,751) $(3,061) $(5,329)
======= ======= ======= =======
</TABLE>

Revenues increased substantially in the quarter ended December 31, 1998, as
revenues from E*TRADE rose significantly during this period relative to prior
periods. General and administrative expenses increased substantially during the
quarter ended December 31, 1998, due to increases in compensation associated
with additional headcount, higher fees for outside professional services, and
the amortization of unearned compensation.

26
<PAGE>

Fluctuations in Quarterly Results

We have incurred operating losses since inception, and we cannot be certain
that we will achieve profitability on a quarterly or annual basis in the
future. Critical Path believes that future operating results will be subject to
quarterly fluctuations due to a variety of factors, including, but not limited
to:

. continued growth of the Internet and of email usage;

. demand for outsourced email services;

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

. our ability to upgrade, develop and maintain our systems and
infrastructure;

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

. technical difficulties or system outages;

. the announcement or introduction of new or enhanced services by our
competitors;

. our ability to attract and retain qualified personnel with Internet
industry expertise, particularly sales and marketing personnel;

. the pricing policies of our competitors;

. failure to increase our international sales; and

. governmental regulation surrounding the Internet and email in particular.

In addition to the factors set forth above, our operating results will be
impacted by the extent to which we incur non-cash charges associated with
stock-based arrangements with the employees and non-employees. In particular,
we expect to incur substantial non-cash charges associated with the grant of a
warrant to America Online. In addition to amortization of the initial fair
value of this warrant, which totaled $16.5 million, we expect that future
changes in the trading price of our common stock at the end of each quarter and
at the date certain milestones are achieved, will cause additional substantial
changes in the ultimate amount of such amortization.

Liquidity and Capital Resources

Our cash and cash equivalents increased by approximately $14.8 million during
1998. This net change occurred as we raised approximately $23.4 million in
proceeds from the sale of equity securities, and incurred a net loss of
approximately $11.5 million during the year as we expanded our organization and
operations. Net of depreciation, our investment in property and equipment
increased approximately $4.2 million during 1998. Installation of network
infrastructure equipment in our data centers, purchases of furniture and
equipment for new employees, and leasehold improvements related to office
expansions accounted for this increase.

We have a credit agreement with a bank which provides a line of credit for
working capital advances of up to $1.0 million. There were no borrowings under
this line of credit at December 31, 1998. Outstanding borrowings accrue
interest at a rate equal to the bank's prime rate plus 2.0%. During 1998, we
retired approximately $1.3 million in convertible promissory notes payable by

27
<PAGE>

converting approximately $1.1 million of the outstanding notes into equity
securities and paying cash for the remainder. Capital lease obligations,
including both short-term and long-term portions, increased approximately
$4.0 million during fiscal year 1998 as we secured financing for a substantial
share of our additions to property and equipment. Deferred revenue increased
$500,000 during 1998 as we received payment from one customer as an advance for
future services. Our line of credit and capital lease obligations contain no
provisions that would limit our future borrowing ability.

In January 1999, we completed the second round of the Series B Convertible
Preferred Stock financing through the issuance of approximately 3.2 million
shares, including 454,544 shares issued pursuant to outstanding stock purchase
rights, for gross proceeds of $13.6 million. Also in January 1999, we sold
1,090,909 shares of common stock for gross proceeds of $2.4 million.

We believe that our current cash balances, proceeds from the January equity
sales and cash available under our line of credit will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
12 months. We anticipate that further expansion of our operations will cause us
to incur negative cash flows on a short-term basis, and therefore require us to
consume our cash and other liquid resources to support our growth in
operations.

We believe that the net proceeds from this offering, together with our
current cash balances and cash available under our line of credit, will be
sufficient to meet our working capital and capital requirements beyond the 12
months immediately following this offering. However, our operating and
investing activities on a longer-term basis may require us to obtain additional
equity or debt financing. In addition, although there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products, or technologies, we may, from time to time,
evaluate potential acquisitions of other businesses, products, and
technologies. In order to consummate potential acquisitions, we may need
additional equity or debt financings in the future.

Net of depreciation, our investment in property and equipment increased
approximately $4.2 million during 1998. Installation of network infrastructure
equipment in our data center, purchases of furniture and equipment for new
employees, and leasehold improvements related to office expansions accounted
for this increase. We expect that our investment in property and equipment will
continue to grow as we seek to increase our capacity to provide email hosting
services. As of February 28, 1999, we had purchased or were committed over the
12 months to purchase approximately $2.0 million of property and equipment.

Year 2000 Issues

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations for any company using such computer programs or hardware, including,
among other things, a temporary inability to process transactions, send
invoices or engage in normal business activities. As a result, many companies'
computer systems may need to be upgraded or replaced in order to avoid
"Year 2000" issues.

We are a comparatively new enterprise, and, accordingly, the software and
hardware we use to manage our business has all been purchased or developed by
us within the last 24 months. While this fact pattern does not uniformly
protect us against Year 2000 exposure, we believe we gain some mitigation from
the fact that the information technology ("IT") we use to manage our business
is

28
<PAGE>

not based upon "legacy" hardware and software systems. "Legacy system" is a
term often used to describe hardware and software systems which were developed
in previous decades when there was less awareness of Year 2000 issues.
Generally, hardware and software design within the current decade and the past
several years in particular has given greater consideration to Year 2000
issues. All of the software code we have internally developed to manage our
network traffic, for example, is written with four digits to define the
applicable year.

We are in the process of testing our internal IT and non-IT systems. To date,
we have only completed preliminary testing of our internally developed IT and
non-IT systems. All of the testing we have completed has been performed by our
own personnel; to date, we have not retained any outside service or consultants
to test or review our systems for Year 2000 compliance. Based on the testing we
have performed, we believe that such software is Year 2000 compliant; however,
we intend to complete more extensive testing by mid 1999.

In addition to our internally developed software, we utilize software and
hardware developed by third parties both for our network and internal
information systems. To date, we have not done any testing of such third-party
software or hardware to determine Year 2000 compliance. We have, however,
obtained certifications from our key suppliers of hardware and networking
equipment for our data centers that such hardware and networking equipment is
Year 2000 compliant. Additionally, we have received assurances from the
providers of key software applications for our internal operations that their
software is Year 2000 compliant. Based upon an initial evaluation of our
broader list of software and hardware providers, we are aware that all of these
providers are in the process of reviewing and implementing their own Year 2000
compliance programs, and we will work with these providers to address the Year
2000 issue and continue to seek assurances from them that their products are
Year 2000 compliant.

In addition, we rely on third party network infrastructure providers to gain
access to the Internet. If such providers experience business interruptions as
a result of their failure to achieve Year 2000 compliance, our ability to
provide Internet connectivity could be impaired, which could have a material
adverse effect on our business, results of operations and financial condition.

Our customers' success in maintaining Year 2000 compliance is also
significant to our ability to generate revenues and execute our business plan.
We currently derive revenue either by charging a fixed fee per month for each
mailbox we host, or by sharing advertising revenues with our customers. In
either case, interruptions in our customers' services and on-line activities
caused by Year 2000 problems could have a material, adverse effect on our
revenues to the extent that such interruptions limit or delay our customers'
ability to expand their base of email users.

We have not incurred any significant expenses to date, and we do not
anticipate that any future costs associated with our Year 2000 remediation
efforts will be material. However, if we, our customers, our providers of
hardware and software, or our third party network providers fail to remedy any
Year 2000 issues, our service could be interrupted and we could experience a
material loss of revenues that could have a material, adverse effect on our
business, results of operations, and financial condition. We would consider
such an interruption to be the most reasonably likely unfavorable result of any
failure by us, or failure by the third parties upon whom we rely, to achieve
Year 2000 compliance. Presently, we believe we are unable to reasonably
estimate the duration and extent of any such interruption, or quantify the
effect it may have on our future revenues. We have yet to develop a
comprehensive contingency plan to address the issues which could result from
such an event. We are prepared to develop such a plan if our ongoing assessment
leads us to conclude we

29
<PAGE>

have significant exposure based upon the likelihood of such an event. See "Risk
Factors--We Face Year 2000 Risks."

Recent Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. Critical Path does not
expect that the adoption of SOP No. 98-1 will have a material impact on its
consolidated financial statements.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). Critical Path is required to
adopt SFAS 133 in fiscal 2000. SFAS 133 established methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Critical Path has not yet
determined what the effect of SFAS 133 will be on its operations and financial
position.

30
<PAGE>

BUSINESS

Company Overview

We are a leading provider of email hosting services. Our email services are
designed to allow a wide range of organizations, including Internet service
providers, web hosting companies, web portals and corporations, to reduce costs
and improve customer service by outsourcing their email systems. Our services
are designed to facilitate scalability and reliability, allow access to
advanced technologies and provide greater access with high levels of security.
In addition, our service is designed to allow our customers to enhance their
brand recognition by maintaining their "look and feel" while improving the
functionality of their email service. We intend to build on our expertise in
email services to provide additional Internet messaging services in the future.
At December 31, 1998, we had over 100 customers and intend to further develop
new and existing strategic relationships to expand our distribution channels
and to undertake joint product development and marketing efforts. Our strategic
partners to date include ICQ, a subsidiary of America Online, E*TRADE, Network
Solutions, Sprint and US West.

Industry Background

Growth of the Internet and Email

The Internet has experienced rapid growth and has developed into a
significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
International Data Corporation ("IDC") estimates that there were over
38 million web users in the United States and over 68 million worldwide at the
end of 1997. IDC projects these numbers to increase to over 135 million web
users in the United States and over 319 million worldwide by the end of 2002.
Internet-based businesses have emerged to offer a variety of products and
services over the Internet. Additionally, many traditional businesses now use
the Internet for a growing number of applications, including advertising,
sales, customer service and training. Advances in on-line security and payment
mechanisms have also prompted more businesses and consumers to engage in
electronic commerce. IDC estimates that the number of customers buying goods
and services on the Internet will grow from 17.6 million worldwide in 1997 to
128.4 million worldwide in 2002. The growth of the Internet is the result of a
number of factors, including the extensive and growing installed base of
advanced personal computers in the home and workplace, increasingly faster and
cheaper access to the Internet, improvements in network infrastructure and an
increased awareness of the Internet among consumer and business users.
Alternative access devices, including television set-top boxes, personal
digital assistants, pagers, Internet capable telephones and wireless phones are
also contributing to the increasing use of the Internet. Further, the
development of applications for the Internet platform has helped fuel the
growth of the Internet.

Email, one of the most popular Internet applications, has broadened from a
simple personal messaging tool to a strategic business tool. According to
Electronic Mail & Messaging Systems, there were 263 million electronic
mailboxes worldwide as of September 30, 1998. Electronic Mail & Messaging
Systems estimates that there could be as many as 400 million electronic
mailboxes worldwide by the end of 1999. According to the Gartner Group,
approximately 300 billion electronic mail messages were sent in 1998. Email
messages have increased in volume and functionality, and this trend is expected
to continue. For example, email is expected to become a major vehicle for e-
commerce transactions. Forrester Research predicts that the typical online
consumer will participate

31
<PAGE>

in eight to ten commerce-related exchanges via email per week by 2001.
Furthermore, the electronic mailbox as a locating and delivering device has
enabled additional applications such as directory services, scheduling,
document sharing, work-flow and unified messaging. This increased
functionality, along with the widespread acceptance of email, positions the
electronic mailbox as a platform for other forms of electronic messaging.

Development of Email

Email was initially developed for isolated groups of people working on single
mainframe computers or on small networks of homogeneous computers. Early email
implementations were based on proprietary technologies, incompatible with other
systems and limited to single local area networks ("LANs"). Mail transfer
standards were subsequently developed to carry mail traffic between LANs but
did not allow for communication outside of the user's corporation or service.
While these systems were limited when compared to current email systems, they
became an increasingly important communication tool within many organizations.

Users have migrated to open-standards mail systems, such as Lotus Notes and
Microsoft Exchange, that allow communication with any email user on the
Internet, from proprietary systems, such as Lotus cc:mail and Microsoft Mail.
Simple Mail Transport Protocol ("SMTP"), currently the most widely used mail
standard on the Internet, allows users of proprietary mail systems to
communicate over the Internet by converting messages' internal mail formats to
SMTP before transmission. In addition, new open standards are emerging to
enhance the functionality of email. For example, Post Office Protocol ("POP"),
which has been adopted by most ISPs, allows users to connect to a shared mail
server and download mail to their PC or alternative access device. In addition,
Internet Messaging Access Protocol ("IMAP"), one of the latest email standards,
allows users to access their mailboxes at the server rather than at the desktop
level. This flexibility is particularly valuable for users who access their
mail from a variety of different computers with different email clients such as
Microsoft Outlook, Eudora and HyperText Markup Language ("HTML"), more commonly
known as web-based email.

Current Trends in Email

As the importance of email grows, customers increasingly expect their email
service to meet the same standards of carrier-class reliability and
availability that consumers have traditionally received from their telephone
service providers. For example, email customers expect reliability from their
email service similar to the dial tone they hear when they pick up the
telephone, commonly referred to as web-tone reliability. Similarly, customers
want email access to be as ubiquitous as their telephone access by being able
to download their email from anywhere in the world, at anytime and through a
variety of devices. Just as many individuals have multiple phone numbers for
home and business use, a growing number of people have multiple email accounts.
As a result, domain names, which are the Internet identities that correlate to
unique electronic addresses such as [email protected], are proliferating.
Companies use multiple domains to build awareness of their brands in electronic
communication, and individuals increasingly use domains to express personal
identity.

To address this growth, a wide range of businesses, including ISPs, web
hosting companies, web portals and corporations, are finding that providing
their customers or employees with email access is a necessity. ISPs, web
hosting companies and telecommunication carriers offer email to enhance their
services offerings and to maintain competitiveness with other companies in
their industry. Many web portals offer email service to increase web traffic on
their sites and strengthen their brand due to

32
<PAGE>

repeat traffic from users checking for messages. In addition, corporations
increasingly view email as a means to decrease costs and increase productivity.

Email messages have increased not only in volume but also in complexity. The
use of graphics and multimedia elements is becoming more common and requires
greater functionality on the part of the email service. As organizations and
the numbers of users grow, the ability to accommodate thousands, or millions,
of additional mailboxes in a single domain requires substantial investment in
hardware, software and personnel. Further, in the largest email
implementations, such as ISPs or web portals, the design architecture must
handle complex networking and scale issues across many domains. Web
organizations that implement and host multiple domains for customers incur
substantial additional expenses because of the complexity associated with
hosting multiple domains. There is no unified email service standard, and
online service providers must continually enhance and maintain email
applications for existing standards, as well as seek to develop new features
and functionality for emerging standards. For example, LDAP is an emerging
standard that is the foundation for adding additional applications to login and
access features of email service. Moreover, ISPs and corporations running their
own email must make substantial investments in backup systems and networking
equipment if they are to meet the growing expectation of email service with
carrier class access, availability and reliability.

Today, most organizations are using internal hardware and software solutions
to address their email needs. Many companies attempting to manage expanding and
increasingly sophisticated email systems lack the resources and expertise to
cost-effectively implement, maintain, scale, enhance and service the hardware
and software components of an email system. Businesses often find it difficult
to implement state-of-the-art technology in their own infrastructure and
individuals with the expertise to maintain a sophisticated email system can be
scarce and costly to hire, train and retain. As a result, organizations seeking
to lower their costs and to quicken time to market with complex technologies
are increasingly looking to outsource non-core competencies to maintain
competitiveness.

Critical Path Solution

We deliver advanced email services to ISPs, web hosting companies, web
portals and corporations, giving them the ability to provide a feature-rich
email service to their customers and employees. Our services are designed to
provide the following key benefits:

Lower Total Cost of Ownership

Our customers do not need to lease, buy or continually upgrade existing
hardware and software, or recruit and retain systems engineers and
administrative personnel for their email services. Our service is designed to
reduce customers' administrative burden by eliminating the cycle of purchasing,
installing, testing, debugging and deploying email systems. The software is
maintained at our facilities, not at customer facilities, and we employ a team
of systems administrators to monitor the service 24 hours a day, seven days a
week. By having the capability to host millions of mailboxes, we provide
customers a cost savings over in-house email solutions through economies of
scale.

Scalability; Web-Tone Reliability

Our system's architecture and infrastructure are designed to facilitate
scalability and reliability. While existing email software solutions can scale
to support millions of users at a single domain ([email protected]), we have
designed our architecture to support our service over hundreds of

33
<PAGE>

millions of mailboxes across millions of domains ([email protected],
[email protected], [email protected], etc.), allowing each customer to create
email addresses at his or her own domain. Our hardware and software
infrastructure consists of multiple servers running software in a manner that
balances the use of the servers. This infrastructure allows multiple domain
hosting while reducing the amount of required equipment and capacity. We have
created a global network strategy to provide the type of continuous service
that individuals have come to expect from their telephone service providers. We
provide our customers improved performance through our multiple peering
relationships, agreements with companies with existing peering relationships
and the purchase of additional access to telecommunication paths from national
Internet access providers. For redundancy purposes, we maintain two data
centers in the United States and plan to open additional data centers in the
United States, Europe and Asia.

Leading-Edge Technology

We provide our customers with access to advanced technologies. We eliminate
the need for customers and partners to maintain a core competency in email by
having experts with experience in rapidly deploying new technologies, combating
system failures due to unsolicited commercial email traffic and maintaining
network and system security. Our services include POP3, web-based email and, in
the near future, IMAP4, which enables customers to choose the option that suits
their end-users' needs. Customers rely on us to evaluate, test and implement
the leading features to maintain a leading email solution. Our technological
capabilities enable us to quickly implement competitive new technologies for
our customers and end-users, reducing their time to market for leading
technologies.

Anytime, Anywhere Accessibility

We have designed our services to allow easy access by customers and end-
users. Designed and built on open Internet-based standards, our services are
compatible with leading desktop software such as Microsoft Outlook and Eudora.
In addition, we have developed a web-based email interface that is compatible
with leading web browsers, including Microsoft Internet Explorer and Netscape
Navigator. Our email services are designed to allow administrators and end-
users to access their email system anywhere at any time. Our technology is
designed to support innovations in standards-based access devices, such as
hand-held computers, cellular and personal communications services ("PCS")
telephones and pagers.

Enhanced Security

We have created a custom firewall solution to enhance network and data center
security. Using a combination of licensed software technology, internally
developed software and sophisticated third-party hardware, we reduce the
potential for network breaches. We have network and data center surveillance 24
hours a day, seven days a week to identify and curtail potential security
breaches. We are not aware of any security breaches to our network.

Branding; Customer Control

Our messaging service solution enables our customers to maintain control over
their own brand and desired functionality. Our fully customized web-based
"brandable" email interfaces include customer logos and preserve the existing
"look and feel" of the customers' brands. Our web-based Mail Administration
Center is designed to give customers control via a secure Account Provisioning
Protocol, a software interface into our platform which allows customers to
integrate their existing functionality with our mail system. This enables
customers to add and delete accounts and functionality either at the domain
level, or at the individual end-user level.

34
<PAGE>

Strategy

Our objective is to be the premier provider of comprehensive, advanced
Internet messaging services. We plan to attain this goal by pursuing the
following key strategies:

Extend Technology Leadership in Messaging Applications

We intend to capitalize on our expertise in email services to deliver
industry-leading functionality to other types of electronic messaging. Building
upon our Internet-based email architecture, we plan to deliver industry-leading
functionality, including global and local directories and other capabilities,
and to deliver new applications that will extend the core functionality of
email and integrate smoothly with existing back office applications. Our
services development team regularly meets with customers and participates in
research projects with leading industry groups and analysts to anticipate
future customer needs. We also participate in open standards organizations and
Internet technology leadership groups, such as IETF (Internet Engineering Task
Force), the North American Network Operators Group and the Coalition Against
Unsolicited Commercial Email, a spam control organization.

Develop and Leverage Strategic Relationships

We intend to expand our marketing and distribution channels through strategic
relationships with key ISPs, web hosting companies, web portals and
corporations to increase quickly the number of electronic mailboxes we host.
Our strategic partners include ICQ, a subsidiary of America Online, E*TRADE,
Network Solutions, Sprint and US West. We intend to further develop new and
existing strategic relationships to expand our distribution channels and to
undertake joint product development and marketing efforts, such as integrating
email into e-commerce applications.

Increase Sales and Marketing Efforts

We intend to significantly expand our sales and marketing activities while
focusing on four target markets: ISPs, web hosting companies, web portals and
corporations. In this expansion, we plan to target and hire seasoned sales
professionals with specific expertise and contacts within our focused markets.
We also intend to expand our indirect sales channel by teaming with leading
distributors, resellers and system integrators with strong backgrounds and
market presence. As of February 28, 1999, we had 38 sales and marketing
personnel.

Develop Value-Added Services

We intend to extend our services beyond email by offering additional value-
added services. These services are intended to extend our relationships with
current customers, to attract new customers and to allow us to differentiate
ourselves in the email service provider market. We believe that our email
hosting solution can form the foundation of a wide range of Internet messaging
applications for which we intend to provide solutions. Examples of value-added
services or applications that can be leveraged are secure email, e-commerce and
enterprise services.

Expand International Presence

In addition to expanding our U.S. presence, we believe there is substantial
opportunity for outsourcing messaging services in non-U.S. markets. We intend
to capitalize by developing worldwide sales offices, data centers and strategic
relationships. We have established a sales office in Germany, and we plan to
open additional sales offices and data centers in Europe and Asia. In

35
<PAGE>

addition, we intend to support our worldwide operations by offering localized
web-based email interfaces. For example, we have already developed web-based
email interfaces in Spanish, Portuguese, German, French and English.

Services

We offer multiple email services to ISPs, web hosting companies, web portals
and corporations. Our "all-in" service model pricing includes all enhancements,
upgrades and new standard features. Pricing is based on a per mailbox, per
month charge that varies depending on functionality and volume. Web portal
market pricing is based on a minimal per mailbox, per month charge plus a share
of revenue generated by advertising on the web-based email interface. Our
standard service offering includes our basic services as part of the monthly
mailbox fee. Our add-ons are included in the basic mailbox offering or offered
as an optional premium service. Our premium services are optional add-ons to
the basic mailbox charge and are offered for an additional charge.

Our service offering includes web-based end-user support. Additional support
through customer help desks is provided 24 hours a day, seven days a week by
contractual agreement. Professional implementation and transitioning support
for new customers is also included in the basic offering.

[VALUE-FUNCTIONALITY CHART APPEARS HERE]

36
<PAGE>

Current Services

We have introduced to market a variety of email services. Information
concerning our current email services is summarized in the following table:

<TABLE>
<S> <C> <C> <C> <C>
Class of Target
Service Description Benefits Service Markets
- ----------------------------------------------------------------------------------------------------
Web-Based . Hosting service based on a . Requires no software Basic All
Email web mail interface downloads or configurations
. End-users simply point any
browser
to http://mail.userdomain.com,
enter account name and
password for full email
access

- ----------------------------------------------------------------------------------------------------
POP3 Hosting . Hosting service based . Allows users to connect to a Basic ISPs, web
on Post Office Protocol shared mail server and (Premium hosting,
download email to their add-on corporate
desktop client (Microsoft for
Outlook, Eudora), which portals)
stores the message on the
user's hard drive each time
the inbox is accessed

- ----------------------------------------------------------------------------------------------------
Web-Based . Mail Administration Center . Allows email administrators Basic All
Administration (MAC) to add, delete and modify Add-On
has Secure Socket Layer- accounts online
based brandable web
interface

- ----------------------------------------------------------------------------------------------------
Spam . Utilizes comprehensive . Protects users from Basic All
Blocking/UBE filtering unsolicited bulk email, Add-On
Filtering system commonly referred to as
"spam" or "junk mail"
. Identifies and eliminates
spam

- ----------------------------------------------------------------------------------------------------
Directory . Common directory layer to . Search capabilities Premium All
Services share information between Add-On
(LDAP) various independent
software applications
. LDAP services allow . End-users can update their
publishing of directory own directory entries, and
information for user domain administrators to
communities update, add and delete
entries
. Key component of many
collabora-
tive applications such as
certified delivery and
calendaring

- ----------------------------------------------------------------------------------------------------
Additional . Additional storage in . Provides expandability of Premium All
Data Storage increments of 5 megabytes storage Add-On
space

- ----------------------------------------------------------------------------------------------------
Unified . Private-label unified . Allows users to retrieve Premium Portal
Messaging messaging service through faxes and voice messages by Add-On
JFAX, a company that logging into their email
provides a unified
messaging solution
. Allows users to retrieve
faxes and emails via
voicemail and universal
telephone number
</TABLE>

37
<PAGE>

Planned Services

We intend to develop several new Internet messaging services to complement
our existing services.

<TABLE>
<S> <C> <C> <C> <C>
Class
of Target
Service Description Benefits Service Markets
- ------------------------------------------------------------------------------------------------------
IMAP4 . Hosting service that . Email messages and files hosted Basic All
Hosting bridges the gap between on an IMAP server can be
POP3 functionality and web- manipulated from multiple email
based email accessibility environments without the
need to transfer data

- ------------------------------------------------------------------------------------------------------
Double-Byte . Web mail interface in . Allows display of web-based Basic All
Localization double-byte languages: email interface in double-byte Add-On
and Traffic Chinese and Japanese languages and transfer and
storage of messages
containing double-byte message
data

- ------------------------------------------------------------------------------------------------------
Permanent . Archives up to 5 megabytes of . Stores and backs up daily Basic All
Archiving data per mailbox included archived documents on its Add-On
in basic service servers

- ------------------------------------------------------------------------------------------------------
ETRN . Email access that does not . Allows store and forward Basic ISP,
require a dedicated access service for some or all Add-On Corporate
line to the Internet messages at a specific domain
. Provides ability to send email
through the Internet while
maintaining the existing
groupware functionality of a
local mailserver

- ------------------------------------------------------------------------------------------------------
Mailing List . Supports custom-generated . Allows for user specified list Premium All
Management lists, digest formats, list management Add-On
filters, auto-subscribe and
unsubscribe, and
confirmation of
subscriptions

- ------------------------------------------------------------------------------------------------------
Calendar and . On-line calendars which . Integrates scheduling function Premium Corporate
Schedule provide groupware with the ability to access the Add-On
Functionality functionality user's schedule and those of
colleagues

- ------------------------------------------------------------------------------------------------------
SSL-Based . SSL-based encryption of . Provides enhanced security of Premium All
Email POP3, IMAP4 and web-based email Add-On
email messages messages

- ------------------------------------------------------------------------------------------------------
USENET/ . Public and private . Facilitates participation in Premium All
Newsgroup newsgroups which give the newsgroup in a web-friendly Add-On
enterprise a platform for manner
discussion outside the
mailing list functionality
. Allows access to messages
stored on a news server

- ------------------------------------------------------------------------------------------------------
Digital . Receipt verification . Verifies that message was Premium All
Certificates service received by the authenticated Add-On
recipient
. Sends a confirmation notice to
sender that the intended
recipient has picked up the
message when both sender and
recipient are hosted on our
system

- ------------------------------------------------------------------------------------------------------
Certified . More sophisticated receipt . In addition to verifying that Premium Corporate
Delivery verification service the message was delivered, Add-On
users return encrypted
digital certificates that
identify them as the recipient
</TABLE>

The statements in this prospectus regarding planned service offerings and
anticipated features of such planned service offerings are forward-looking
statements. Actual service offerings and benefits could differ materially from
those projected as a result of a variety of factors, some or all of which may
be out of our control. For a discussion of some of these factors, see "Risk
Factors."

38
<PAGE>

Customers

We currently have the opportunity to offer email services to millions of
mailboxes across our four target markets. The following is a list of companies
with whom we have email services agreements and which have the greatest number
of mailboxes within their respective categories:

<TABLE>
<S> <C>
Internet Service Providers Web Hosting Companies
- -------------------------- ---------------------
DSL Networks CardSecure
Isp.net Data 2 Info
Las Vegas Digital Internet Navisite Network Solutions, Inc.
NetConX TABNet
Surfree.com, Inc. Tonic Domains Corporation
US Online Network True Media Solutions
Verio Texas Ultima Networks
WNC Net Worldport Online
</TABLE>

<TABLE>
<CAPTION>
Web Portals Corporations
- ----------- ------------
<S> <C>
Ancestry.com Bank Law Services
E*TRADE Birkenstock
Gayweb California Family Health Council, Inc.
ifan (San Francisco Giants) CompareNet Inc.
The Mountain Zone ICT Financial
The Password (a division of Password Internet Partech International Ventures C.V.
Publishing)
Raging Bull Photonetics
Starmedia Sprint
Third Age Media, Inc.
US West
</TABLE>

As of February 28, 1999, we delivered email services under agreements with
approximately 73 ISPs, 23 web hosting companies, 50 web portals and 90
corporations.

Target Markets

We intend to expand our marketing and distribution channels through strategic
relationships to rapidly increase the number of electronic mailboxes hosted. We
have developed strategic relationships within four target markets: ISPs, web
hosting companies, web portals and corporations.

Internet Service Providers (ISPs)

Internet service providers are companies that provide access to the Internet.
Email has become an integral part of ISP service offerings. ISPs provide
service via dial-up and ISDN as well as dedicated private-line hookups. For a
monthly fee, customers receive a software package, username, password and
access phone number. Many ISPs offer free home-page hosting to members at the
ISP's domain name (for example, www.ispname.com/~username). Some ISPs are also
providing commercial web hosting (hosting sites at a domain name registered by
the user). ISPs serve large companies by providing a direct connection from the
companies' networks to the Internet.

Web Hosting Companies

Web hosting companies offer corporate customers and individual consumers
hosting of their website on a commercial web server (at a unique domain
registered to the customer). In addition, web hosting companies are
increasingly offering web design, domain name registration service and email
services to their customers. We believe that most business customers are
looking for a full-service web hosting company that can provide domain name
registration, basic website services and enhanced website services including e-
commerce and messaging.

39
<PAGE>

Web Portals

Web portals include online communities and search engines which offer a one-
stop source of information to a broad range of users, and vertical portals,
such as E*TRADE, which cater to the needs of a specific audience. The goal of
portal sites is to develop a sense of community in order to draw large online
audiences, encourage repeat visits, and keep users engaged. Portals are
accomplishing this goal by providing users with value-rich content and services
such as search engines, free individual homepages and free email. The majority
of a portal's revenue comes from advertising targeting its large, demographic-
specific audience and repeat website visits.

Corporations

Email has become a mission-critical application for businesses. Many U.S.-
based corporations of varying sizes use email as a primary form of
communication. In addition, the ability to access Internet-based email from
outside the office has added to email's appeal and utility for corporations. A
large percentage of the corporate market's email is supplied internally via LAN
mail systems. Companies are struggling with aging LAN-based systems designed in
the late 1980s and early 1990s when email was used on a much more casual basis
and by a smaller user population. Until recently, Internet standards-based
email has accounted for only a small portion of corporate messaging systems,
but according to Internet Week, that portion will increase to one-third of the
corporate market by the end of the decade.

Strategic Relationships

A key element of our strategy is to expand our marketing and distribution
channels through strategic relationships with entities that are both commercial
partners and/or equity investors or entities with whom we have contractualized
reseller relationships. We believe that these strategic relationships will
enable us to expand our distribution channels and to undertake joint product
development and marketing efforts. The following are examples of our existing
strategic relationships which we believe will position us to increase quickly
the number of electronic mailboxes we host.

America Online, Inc./ICQ

E*TRADE Group, Inc.

In September 1998, we entered into an agreement with E*TRADE, an on-line
brokerage services company, pursuant to which each party will include the other
in certain advertising campaigns, including E*TRADE's international and
strategic partner relationships. We will also provide email services to users
of E*TRADE's Internet access services. E*TRADE uses our email services to
extend its brand and value-added services to its fast-growing customer base. As
online trading grows, the need for secure transmissions of trade confirmations
grows. In addition, we are in the process of developing an electronic order
confirmation system designed to be SEC compliant, which could allow online
brokerages to conduct most of their customer communications electronically.

40
<PAGE>

Network Solutions, Inc.

In May 1998, we entered into an agreement with Network Solutions, currently
the exclusive registrar of Internet domain names, pursuant to which we provide
email outsourcing services to users of Network Solutions' website. In exchange
for our services, Network Solutions will provide domain name registration
services for our customers. Through this agreement, a Network Solutions
customer is able to extend its brand using its unique domain name for its email
address instead of the domain name of its Internet access provider.

Sprint Communications Company L.P.

In September 1998, we entered into an agreement with Sprint's IP Business
Services pursuant to which we provide email services to Sprint's corporate IP
customers. Sprint has over 7,000 sales representatives who can now offer hosted
email services to their business customers at their own domain name. We provide
a dedicated customer support number and a sales support center to support
Sprint's sales representatives. It is expected that Sprint will integrate our
brand and bill email services under the Sprint name.

US West Communications Services, Inc.

In December 1998, we entered into an agreement with US West pursuant to which
we provide email services to US West's telephone customers. We believe that US
West views web mail as part of its strategy to offer its telephone customers
value-added Internet services. Web mail is a user-friendly, simple vehicle to
transition telephone customers from dial-tone to web-tone. The agreement also
provides for the enhanced email functionality of US West's !nterprise Internet
customers through an email viewer.

Our agreements with our strategic partners typically are for terms of one to
three years, and automatically renew for additional one-year periods unless
either party gives prior notice of its intention to terminate the agreement. In
addition, these agreements are terminable by our partners without cause, and
some of the agreements are terminable by us without cause, upon 30 - 120 days'
notice. Most of the agreements also provide for the partial refund of fees paid
or other monetary penalties in the event that our services fail to meet defined
minimum performance standards. These strategic agreements may be terminated
upon short notice.

Sales and Marketing

Sales Strategy

Our sales efforts target all market segment audiences through direct and
indirect channels. We maintain our own direct sales force to introduce and
educate prospective customers and partners about our service. The direct sales
group targets larger ISPs, telecommunications companies, medium to large
corporate customers, large web hosting companies and high-trafficked web
portals. As of February 28, 1999, we had 21 account executives in the direct
sales group, and we plan to significantly expand this group in the next 12
months. Offices in the United States currently include San Francisco, Irvine,
San Jose, Seattle and New York, and are planned to include Denver and
Washington D.C. We currently have an international office in Munich, Germany.
Within our direct sales group, a subgroup is responsible for retaining and
increasing use by existing customers. This group is critical to ensuring
customer satisfaction and selling existing customers new add-on services as
they become available in our service offering.

41
<PAGE>

A telesales group is being formed and will be located in Tempe, Arizona,
beginning in the first quarter of 1999. The telesales group will generate and
qualify leads for referral to the direct sales group. The target markets of the
telesales group will be smaller ISPs, web hosting companies and corporations.
The vast majority of the activity generated through this channel will result
from phone calls that we initiate to prospective customers. The telesales group
will also handle outbound calls to a specific list of contacts provided by our
marketing organization. In addition, the telesales group will follow up on
leads resulting from web and telephone communication initiated by prospective
customers and qualify those leads by placing additional calls or referring them
to the direct sales group.

The indirect sales channel will use the sales forces of our partners to offer
our services to their end-users. We share revenue with our partners to achieve
this purpose. To gain market presence and market share overseas, we plan to
team with leading distributors, resellers and system integrators that have
strong industry backgrounds and market presence in their respective markets and
geographic regions.

Marketing Strategy

Our marketing strategy includes a media relations and public speaking focus
to develop a reputation as an industry leader for email services and messaging.
We will use narrowly focused, co-branded print and online advertising campaigns
for lead generation. Direct marketing will be used to target specific ISP and
web hosting firms. Co-branded and cooperative direct mail will be the
cornerstone of the direct marketing efforts. Event, forum and trade show
participation will also be used to promote our business-to-business brand
presence.

Enhanced Services Development

Our application management and marketing organizations focus on marketing and
service development. Our application management team monitors new email and
messaging service introductions by our competitors. This in turn assists our
marketing group in determining our application pipeline and feature development
schedules and provides direction for our engineering, operations, sales and
support teams. We also have segment managers for each of our four target
markets who are responsible for defining strategies to address specific needs
within each market. These segment managers work with our technical service
managers, who are in turn responsible for service strategies and development
plans.

Our service management team focuses on provisioning and billing, mail and
directory services and mail center technology. In addition, the services
management team manages cross-departmental service development effort. The
development process also includes quality-control steps such as reviews, walk-
throughs and post-implementation audits. The services development process
incorporates input from a variety of sources, including our current and
potential customers, and refines this information through a business
prioritization process. The service management team prepares a marketing
requirements document, which is reviewed by our change control board. The
change control board, which is attended by a cross-department management team,
prioritizes and schedules our development efforts and assigns resources to the
development project team.

Our services development process involves coordination among our application
management, marketing and service management teams. To support our service
development and marketing functions, we conduct an ongoing analysis of
competitive intelligence, product forecasting, financial analysis and pricing
strategies.

42
<PAGE>

Technology

In offering email services, we employ advanced software and hardware,
combining internal expertise with industry standard technology to create a
proprietary infrastructure.

Mail Center Technology

We have created a proprietary email system, Mail Center Technology ("MCT"),
designed to ensure access to hundreds of millions of mailboxes across millions
of domains. MCT is able to handle high-volume loads for complex and diverse
mail environments such as those required for ISPs, web hosting companies, web
portals and corporations providing email accounts to their end-users for
activities such as trading securities, shopping or participating in online
communities. We have written proprietary load-balancing and email software, and
Oracle Corporation databases are used in account provisioning and management.

MCT is made up of multiple groups of servers and routers acting as a single,
virtual point of contact to customers for email services. Our MCT hardware
consists of Sun Microsystems, Inc. Ultra Enterprise servers, Cisco Systems,
Inc. routers, Network Appliance, Inc. RAID array storage and rackmounted Intel
processor-based servers running Solaris and FreeBSD, a free operating language.
All aspects of MCT are deployed in pairs with the goal of ensuring that if any
process or system goes down, another will be available to handle customer
traffic seamlessly. This behavior is called "transparent failover," and is
designed to increase the availability of email services to the customer. MCT
also includes a dynamic load-balancing system that acts as proxy servers for
firewall safety. The load balancers are configured in parallel to ensure that
if one goes down, the load is transferred to the remaining systems.

MCT currently hosts SMTP, POP3 and web-based email services and will also
host IMAP4 and other services as they are released. Both the hardware capacity
and the services hosted by the mail center can be expanded based on customer
demand.

Simple Mail Transfer Protocol (SMTP)

SMTP is currently the standard mail protocol for the Internet. It allows
hosts on the Internet to route mail from the sender to the destination. All
Internet messages must be sent using SMTP; older proprietary mail systems must
convert their internal mail formats to SMTP in order to communicate effectively
over the Internet.

Post Office Protocol (POP)

With POP, mail is delivered to a shared mail server; users periodically
connect to the server and download all pending mail to their machines.
Thereafter, all mail processing is local to the client machine. POP provides
only the store-and-forward service, moving mail on demand from a mail server to
a single destination machine, usually a PC, Macintosh or UNIX workstation, and
then typically deleting the messages from the POP server.

Web-based Email

Web-based email, also known as HTML (Hyper Text Markup Language) email,
allows users to access their mail from any computer with Web browser and
Internet access. This eliminates the need to maintain a separate program for
accessing email.

43
<PAGE>

Internet Message Access Protocol (IMAP)

IMAP is more sophisticated than the POP3 protocol and provides greater
flexibility at the server level. This enhanced service allows users to sort
mail by sender and subject, search for specific text, and manipulate folders
and mailboxes while the files remain on the server, rather than downloading
them to their local desktop. This flexibility is particularly valuable for
users who travel frequently and access their mail from a variety of different
computers and email clients.

Account Provisioning

We have created a proprietary Account Provisioning Protocol ("APP") for
account creation and maintenance. The APP enables accounts transitioning from
other services or legacy systems to be bulk-loaded, tested, replicated and
deployed on our service automatically. This addresses a critical time to market
issue by enabling organizations to quickly transition to the new standards-
based email service with minimal down-time and degradation to their existing
internal systems. In addition, the APP can be used by customers and partners to
facilitate automatic account sign-ups from websites, typically in less than
three minutes.

Data Centers and Network Access

We maintain data centers in San Francisco and Palo Alto, California and
Laurel, Maryland. The data centers have private peering with all major
backbones to allow high-bandwidth access to the Internet. With multiple high-
speed connections to different backbone providers, we have reduced the
likelihood that our customers will suffer downtime as a result of network
outages. Our backbone architecture and interconnection strategy consists of
clear channel DS-3 and OC-3 connections and direct 100 MB/sec Ethernet
connections.

We currently have bilateral peering arrangements in place with the following
organizations:

<TABLE>
<S> <C> <C>
AboveNet Communications Inc. Exodus Communications Nuri Net
Compaq/Digital Equipment
Corporation Frontier GlobalCenter Pilot Network Services
Concentric Networks GTE Internetworking/Genuity Skybytes
Dacom, Inc. @Home Verio
DataResearch Associates Hurricane Electric Web Professionals
Electric Lightwave, Inc. MAXIM XMISSION
</TABLE>

In addition to our peering connections, we currently purchase additional
Internet access from MCI WorldCom and Sprint, through their relationships with
AboveNet Communications Inc.

Our data centers feature redundant systems for power, fire protection,
seismic reinforcement, and security surveillance 24 hours a day, seven days a
week by both personnel and video monitors. If we experience service
interruptions on either the East Coast or the West Coast due to a natural
disaster, all Critical Path-hosted messages will be automatically rerouted to
the data center that is not affected. We intend to open data centers in Europe
and Asia. These data centers will add further redundancy and create a local
connectivity in those markets.

Network Security

We have created a custom firewall solution to reduce the incidence of network
security breaches, utilizing Cisco Systems, Inc. routers for firewall hardware.
To enhance security for the network, our staff members monitor the network and
hardware 24 hours a day, seven days a week. Any suspicious activity is reported
and investigated immediately.

44
<PAGE>

Our operations and engineering staffs include many active participants in
open Internet security groups. Newsgroups and industry consortium postings are
actively monitored for information regarding reported security flaws. Suspected
flaws in software and hardware products that could compromise security are
investigated thoroughly and fixes are implemented, often within a matter of
hours.

The goals of our security efforts are to prevent intruders from gaining
access to our customers' email messages, passwords or financial information, to
protect our server software and design information from being accessed by
intruders, and to prevent malicious individuals from causing service failure or
slowdown. We accomplish these goals by ensuring that our server clusters are
entirely isolated from the Internet at large except for the specific services
we provide, continuously monitoring the network to detect intrusion attempts,
staying up to date on current security issues, and tracking abuse incidents,
such as "spamming," blocking as necessary, and reporting incidents to the
appropriate originating ISPs.

Spam Blocking

Our basic email and web-based email services include comprehensive spam
prevention at no additional charge. This spam prevention is currently being
used to screen messages for all of our service partners and customers.

Our engineers have written proprietary "learning" software that automatically
screens incoming messages for telltale items in message headers and subject
lines. We have also developed a comprehensive database of commonly forged
addresses and frequently abused domain names. Most additions to the "black
list" have been reported by our end-users, who are encouraged to notify us of
suspected abuse. The black list is actively reviewed to ensure that no
legitimate domains or individual users are blocked from accessing the system or
sending messages.

In addition to filtering technology at the server level, our personnel
monitor incoming messages 24 hours a day, seven days a week. We are part of a
group of key network operators and ISPs working to develop technologies and
other measures aimed at protecting users from junk email. We have
representatives serving on the Coalition Against Unsolicited Commercial Email,
the leading national organization lobbying for anti-spam legislation. Our
Acceptable Use Policy explicitly states that partners and customers may not use
our service to send unsolicited bulk email.

Customer Support

We provide customer support 24 hours a day, seven days a week by contractual
agreement. Our customer support service consists of two tiers. Tier 1 includes
technical support in response to end-user inquiries. Although our customers
typically provide Tier 1 support directly to their end-users, they can
outsource this function to us and we can provide Tier 1 support to their end-
users via email or web-based support. We also provide support information on
our website.

Tier 2 support includes technical support, provided to our ISP, web hosting,
web portal and corporate customers, via toll-free access and email
correspondence managed by our team of trained technical support
representatives. Our technical support representatives include pooled and
dedicated representatives. Pooled representatives are trained to resolve the
majority of inquiries and, where necessary, to escalate and manage inquiries
through to resolution. Dedicated representatives must meet stringent technical
criteria, are assigned to strategic accounts and assist in identifying and
qualifying new features and functionality in addition to advanced problem
solving.

45
<PAGE>

In an effort to further improve customer satisfaction, we are deploying new
tools designed to allow customers to track the status of their open tickets and
access standard reported metrics through a secure web interface. These tools
will also facilitate our ability to track recurring customer issues that will
identify opportunities for service improvements. Our staff of trained technical
representatives, coupled with leading edge monitoring and tracking tools allows
us to successfully serve the needs of our clients.

Competition

The market for Internet-based email service is characterized by companies
that elect to develop and maintain in-house solutions and companies that seek
outsourcing arrangements for their email service. For customers seeking
outsourcing arrangements, we compete with email service providers, such as
USA.NET, and iName, as well as product-based companies, such as Software.com
and Lotus Development Corporation. In addition, companies such as Software.com,
Microsoft, Netscape, Lotus and Sun Microsystems are currently offering email
products directly to ISPs, web hosting companies, web portals and corporations.
These companies could potentially leverage their existing capabilities and
relationships to enter the email service industry by redesigning their system
architecture, pricing and marketing strategies to sell through to the entire
market. In the future, ISPs, web hosting companies and outsourced application
companies may broaden their service offerings to include outsourced email
solutions.

The level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter
the market. In the future, as we expand our service offerings, we expect to
encounter increased competition in the development and delivery of these
services. Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do and may enter into
strategic or commercial relationships with larger, more established and well-
financed companies. Certain of our competitors may be able to enter into such
strategic or commercial relationships on more favorable terms. Further, certain
of our competitors may offer services at or below cost. In addition, new
technologies and the expansion of existing technologies may increase
competitive pressures on us. Increased competition may result in reduced
operating margins and loss of market share. We believe that our service
solution competes favorably with that of other providers with respect to the
following:

. providing cost savings over in-house solutions by relieving customers of
expenses associated with acquiring and maintaining hardware and software
and the associated administrative burden;

. providing greater functionality and access to leading technologies and
protocols, which in turn enables customers to choose the protocol that
best suits their end-users' needs;

. enabling customers to maintain brand control, thereby enhancing their
brand identity; and

. facilitating scalability through an infrastructure designed to support
hundreds of millions of mailboxes across millions of domains.

However, despite our competitive positioning, we may not be able to compete
successfully against current and future competitors, and competitive pressures
we face could have a material adverse effect on our business, operating results
and financial condition.

46
<PAGE>

Intellectual Property

We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success, and rely on trademark
and copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We have no registered trademarks or service marks to date.
It may be possible for unauthorized third parties to copy certain portions of
our products or reverse engineer or obtain and use information that we regard
as proprietary. Certain end-user license provisions protecting against
unauthorized use, copying transfer and disclosure of the licensed program may
be unenforceable under the laws of certain jurisdictions and foreign countries.
We have one patent pending in the United States. We do not know whether this
patent will be granted or, that if granted, that the patent will not be
challenged or invalidated. In addition, the laws of some foreign countries do
not protect proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that our means of protecting our proprietary
rights in the United States or abroad will be adequate or that competing
companies will not independently develop similar technology.

Other parties may assert infringement claims against us. We may also be
subject to legal proceedings and claims from time to time in the ordinary
course of our business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties by us and
our licensees. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.

We also intend to continue to strategically license certain technology from
third parties, including our web server and SSL encryption technology. In the
future, if we add certificate technology to our systems, we may license
additional technology from third-party vendors. We cannot be certain that these
third-party content licenses will be available to us on commercially reasonable
terms or that we will be able to successfully integrate the technology into our
products and services. These third-party in-licenses may expose us to increased
risks, including risks associated with the assimilation of new technology, the
diversion of resources from the development of our own proprietary technology
and our inability to generate revenues from new technology sufficient to offset
associated acquisition and maintenance costs. The inability to obtain any of
these licenses could result in delays in product and service development until
equivalent technology can be identified, licensed and integrated. Any such
delays in services could cause our business, financial condition and operating
results to suffer. See "Risk Factors--We Have Limited Protection of Our
Intellectual Property and Proprietary Rights."

Government Regulation

Although there are currently few laws and regulations directly applicable to
the Internet and commercial email services, it is possible that a number of
laws and regulations may be adopted with respect to the Internet or commercial
email services covering issues such as user privacy, pricing, content,
copyrights, distribution, antitrust and characteristics and quality of products
and services. Further, the growth and development of the market for online
email may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may impair the growth of the
Internet or commercial online services, which could, in turn, decrease the
demand for our products and services and increase our cost of doing business,
or otherwise have a material adverse effect on our business, operating results
and financial condition. Moreover, the applicability to the Internet of
existing laws in various jurisdictions governing issues such as property
ownership,

47
<PAGE>

sales and other taxes, libel and personal privacy is uncertain and may take
years to resolve. Any such new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to
our business or the application of existing laws and regulations to the
Internet could have a material adverse effect on our business, operating
results and financial condition. See "Risk Factors--We Face Risks Associated
with Government Regulation and Legal Uncertainties."

Employees

As of February 28, 1999, we had 133 full-time employees. None of our
employees is covered by collective bargaining agreements. We believe that our
relations with our employees are good.

Facilities

Our principal executive offices are located in San Francisco, California, in
a 31,500 square foot facility under a lease expiring on June 30, 2002, with a
five-year renewal option and a sublease expiring on March 31, 2002. We believe
that our facilities will be adequate for the next 12 months. However, we may
not be able to lease additional space on commercially reasonable terms or at
all.

48
<PAGE>

MANAGEMENT

Directors and Executive Officers

The executive officers, directors and key employees of Critical Path and
their ages as of December 31, 1998 are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Douglas T. Hickey....... 43 President, Chief Executive Officer and Director
David C. Hayden......... 43 Chairman of the Board of Directors
David A. Thatcher....... 43 Executive Vice President and Chief Financial Officer
Wayne D. Correia........ 32 Chief Technology Officer
Joseph Duncan........... 50 Vice President and Chief Information Officer
Judie A. Hayes.......... 51 Vice President of Corporate Communications
Carolyn J. Patterson.... 34 Vice President of Operations
William H. Rinehart..... 34 Vice President of Sales
Marcy Swenson........... 34 Vice President of Software Engineering
Mari E. Tangredi........ 33 Vice President of Marketing and Strategic Planning
Christos M. Cotsakos.... 50 Director
Lisa Gansky(1).......... 40 Director
Kevin R. Harvey(1)...... 34 Director
James A. Smith(2)....... 46 Director
George Zachary(2)....... 33 Director
</TABLE>
- --------
(1) Member of Compensation Committee of the Board of Directors.

(2) Member of Audit Committee of the Board of Directors.

Douglas T. Hickey has served as the President and Chief Executive Officer and
a director of Critical Path since October 1998. From February 1998 to October
1998, Mr. Hickey served as Executive Vice President of Frontier Communications
Corporation, a telecommunications company, and as President of Frontier
GlobalCenter. From July 1996 to February 1998, Mr. Hickey served as President
and CEO of GlobalCenter, Inc., a web hosting company. In February 1998,
GlobalCenter was acquired by Frontier. From December 1994 to July 1996, Mr.
Hickey was President of Internet services at MFS Communications, a provider of
high-speed fiber-optic services. From September 1990 to November 1994, Mr.
Hickey was general manager of North American sales and field operations at
Ardis, a Motorola company. Mr. Hickey received a B.S. in economics from Siena
College.

David C. Hayden founded Critical Path and served as the Chairman, President
and Chief Executive Officer and Secretary from its inception in February 1997
to October 1998. Mr. Hayden has served as Chairman of the Board of Directors of
Critical Path since October 1998. From February 1993 to August 1996, Mr. Hayden
served as Chairman, Chief Executive Officer, and co-founder of The McKinley
Group, Inc., creators of Magellan, an Internet search engine. Mr. Hayden
received a B.A. in political science from Stanford University.

David A. Thatcher has served as Executive Vice President, Chief Financial
Officer and Secretary of Critical Path since December 1998, and served as a
director of Critical Path from May 1997 to March 1998 and from May 1998 to
November 1998. From June 1998 to December 1998, Mr. Thatcher served as
President and Chief Executive Officer of Geoworks Corporation, a provider of
software solutions for the wireless market. Mr. Thatcher joined Geoworks
Corporation in March 1997 as Vice President of Finance and Administration and
Chief Financial Officer and was appointed President and Director in January
1998. From May 1996 to January 1997, Mr. Thatcher served as

49
<PAGE>

Vice President and Chief Financial Officer of Diba, Inc., an Internet software
company, which was later acquired by Sun Microsystems, Inc. From January 1996
to May 1996, Mr. Thatcher served as Vice President and Chief Financial Officer
of The McKinley Group. From March 1993 to November 1995, Mr. Thatcher served as
Vice President and Chief Financial Officer of Peregrine Systems, Inc., a
provider of customer support software. Mr. Thatcher received a B.S. in
accounting from San Diego State University and is a CPA in California.

Wayne D. Correia has served as the Chief Technology Officer since April 1997
and as a director of Critical Path from May 1997 to January 1999. From November
1994 to February 1997, Mr. Correia was President and founder of domainNET, an
Internet strategy, engineering and services company, providing application
hosting and on-demand high-speed wireless Internet connections for mediacasts
and other events. In January 1992, Mr. Correia founded Collaboration
Technologies, a developer of leading-edge computer telephony hardware and
software and was Chief Executive Officer until May 1995. From July 1988 to
October 1993, he worked in the Macintosh Software Architecture Division and
Apple Developer Group at Apple Computer, Inc., a computer manufacturer.

Joseph Duncan has served as Vice President and Chief Information Officer of
Critical Path since December 1998. From December 1997 to December 1998, Mr.
Duncan was founder and Chief Executive Officer of Charybdis Software, a
software company. From June 1993 to November 1997, Mr. Duncan held various
positions at Oracle Corporation, most recently as Senior Vice President for
Groupware Systems and Object-Oriented Tools. Mr. Duncan received a B.A. in
philosophy from the University of Minnesota.

Judie A. Hayes joined Critical Path as Vice President of Corporate
Communications in December 1998. From January 1997 to December 1998, Ms. Hayes
served as Vice President Corporate Marketing and Communications for Frontier
GlobalCenter. From March 1995 to January 1997, Ms. Hayes served as Senior
Director of Corporate Communications for NETCOM On-Line Communication Services,
Inc., an Internet service provider. Ms. Hayes has served as Director of
Marketing Communications for MCI Data Services Division, a telecommunications
company, and Director of Corporate Communications for British Telecom North
America, a telecommunications company. Ms. Hayes received her bachelor's degree
from University of Wisconsin-Whitewater.

Carolyn J. Patterson has served as Vice President of Operations of Critical
Path since January 1999 and as Director of Operations of Critical Path from
August 1998 to January 1999. From January 1998 to July 1998, Ms. Patterson
served as Manager, Strategic Alliances for Sybase Inc. From February 1997 to
January 1998, Ms. Patterson served as General Manager, Data Services Operations
for AT&T Corp. From June 1986 to February 1997, Ms. Patterson worked as a
programmer and later in various AT&T Corp. divisions including sales, product
management, customer care, finance and sales. Ms. Patterson holds a B.S.C. in
decision science from Rider University and an M.B.A. from Monmouth University.

William H. Rinehart joined Critical Path as Vice President, Sales in November
1998. From May 1997 to November 1998, Mr. Rinehart served as Senior Vice
President, General Manager at Frontier GlobalCenter. From July 1996 to June
1997, Mr. Rinehart held a range of positions including Vice President, Product
Development and Vice President, Sales for Genuity, a Bechtel company. He has
also served as Vice President, General Manager at MFS Communications, Internet
Division, from January 1995 to July 1996. From April 1993 to January 1995, Mr.
Rhinehart was a Senior Account Executive at Ardis, a wireless data
communications company. Mr. Rinehart received a B.S. in business administration
from Ball State University.

50
<PAGE>

Marcy Swenson has served as the Vice President of Software Engineering of
Critical Path since June 1997. From May 1995 to June 1997, Ms. Swenson served
as Vice President of Software Development at Providence Systems. In June 1987,
Ms. Swenson co-founded After Hours Software, Inc., which provides custom
software solutions to Fortune 500 customers, and served as Vice President of
Software and Consulting Services until May 1994. Ms. Swenson has completed
advanced studies in Artificial Intelligence at Stanford University, and
received a B.S. in math/computer science from UCLA.

Mari E. Tangredi has served as Vice President, Marketing and Strategic
Planning for Critical Path since February 1998. From June 1995 to November
1997, Ms. Tangredi served as the General Manager/Vice President of Electronic
Commerce of Pacific Bell. From July 1986 to May 1995, Ms. Tangredi worked at
AT&T Corp. as a programmer and later in various positions in sales, emerging
product development and customer care, providing network products and services
to Fortune 500 customers. Ms. Tangredi received a B.S. in M.I.S. from Clarkson
University and an M.B.A in high technology from Northeastern University.

Christos M. Cotsakos has served as a director of Critical Path since May
1998. Mr. Cotsakos has served as President, Chief Executive Officer and a
director of E*TRADE, an on-line brokerage services company, since March 1996.
From March 1995 to January 1996, Mr. Cotsakos served as President, Co-Chief
Executive Officer, Chief Operating Officer and a director of A.C. Nielsen, Inc.
From September 1993 to March 1995, he served as President and Chief Executive
Officer of Nielsen International. From March 1992 to September 1993, he served
as President and Chief Operating Officer of Nielsen Europe, Middle East and
Africa. Mr. Cotsakos serves as a director of National Processing Company, Forte
Software, Inc. and The Fourth Network Communications Network, Inc. Mr. Cotsakos
received a B.A. from William Patterson College and an M.B.A. from Pepperdine
University and is currently pursuing a Ph.D. in economics at the Management
School, University of London.

Lisa Gansky has served as a director of Critical Path since May 1998. Ms.
Gansky has been a Principal at Trading Fours, a venture development company,
since January 1997. From June 1995 to January 1997, Ms. Gansky served as Vice
President of AOL, Inc., an online and Internet services company. From June 1994
to January 1995, Ms. Gansky founded and served as Chief Executive Officer of
Global Network Navigator, Inc., an Internet solutions company.

Kevin R. Harvey has served as a director of Critical Path since April 1998.
Mr. Harvey has been a General Partner of Benchmark Capital, a venture capital
firm, since January 1995. From July 1993 to January 1995, he served as General
Manager for Lotus Development Corporation. In August 1990, Mr. Harvey founded
Approach Software Corporation ("Approach"), a software company, where he served
as the President and Chief Executive Officer until July 1993 when Approach was
sold to Lotus Development Corporation. Prior to founding Approach, Mr. Harvey
founded Styleware, a software company, which was subsequently sold to Claris
Corporation. Mr. Harvey is also a director of Silicon Gaming, Inc., an
entertainment and gaming technology company, and a director of several
privately held companies. Mr. Harvey received a B.S.E.E. degree from Rice
University, 1987.

James A. Smith has served as a director of Critical Path since January 1999.
Mr. Smith has served as the President and Chief Executive Officer of US West
Dex, a provider of Internet directory and database marketing services, since
October 1997. From March 1996 to October 1997, Mr. Smith served as Vice
President of Local Markets for US West. From July 1992 to March 1996, Mr. Smith
served as Vice President and General Manager of Mass Markets for US West. Mr.
Smith received a B.A. from Willamette University and a J.D. from the University
of Washington.

51
<PAGE>

George Zachary has served as a director of Critical Path since April 1998.
Mr. Zachary has been a partner at Mohr, Davidow Ventures II, a venture capital
firm, since January 1996. From March 1993 to December 1997, Mr. Zachary ran the
consumer products business at Silicon Graphics, Inc., a computer workstation
company. Since September 1986 until March 1993, Mr. Zachary has held various
engineering and marketing management positions at Silicon Graphics, Inc., VPL
Research, Inc., Apple Computer, Inc., Texas Instruments Incorporated and C-ATS
Software Inc. Mr. Zachary received a B.S. degree from Massachusetts Institute
of Technology and Massachusetts Institute of Technology Sloan School of
Management.

We have authorized seven (7) directors. All directors are elected to hold
office until our next annual meeting of shareholders and until their successors
have been elected. Officers are elected at the first board of directors meeting
following the shareholders' meeting at which the directors are elected and
serve at the discretion of the board of directors. There are no family
relationships among any of our directors or executive officers.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for our directors, officers and
other employees and administering various incentive compensation and benefit
plans. The Compensation Committee consists of two outside directors. Lisa
Gansky and Kevin Harvey are currently the two outside directors on our
Compensation Committee.

Director Compensation

We reimburse each member of our board of directors for out-of-pocket expenses
incurred in connection with attending board meetings. No member of our board of
directors currently receives any additional cash compensation. In connection
with their joining the board of directors in May 1998, directors Christos
Cotsakos and Lisa Gansky each received an option to purchase 136,363 shares of
common stock vesting monthly over two years at an exercise price of $0.22 per
share.

52
<PAGE>

Executive Compensation

The following table summarizes all compensation earned by or paid to Critical
Path's Chief Executive Officer and to each of Critical Path's four most highly
compensated executive officers other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers"), for services rendered in all capacities to Critical Path
during the fiscal year ended December 31, 1998.

Summary Compensation Table for Last Fiscal Year

<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation(1) Awards
----------------- ------------
Security
Underlying
Name and Principal Position Salary Bonus Options (#)
- --------------------------- -------- -------- ------------
<S> <C> <C> <C>
Douglas Hickey(2)
President and Chief Executive Officer.......... $ 51,136 $ -- 2,549,374(4)
David Hayden(3)
Chairman of the Board of Directors............. 170,833 135,000 1,363,636(5)
Wayne Correia
Chief Technology Officer....................... 140,417 25,000 --
Marcy Swenson
Vice President of Software Engineering......... 127,500 40,000 --
Mari E. Tangredi
Vice President of Marketing and
Strategic Planning............................ 108,056 65,000 431,816(6)
</TABLE>
- --------
(1) Other than the salary and bonus described herein, Critical Path did not pay
any executive officer named in the Summary Compensation Table any fringe
benefits, perquisites or other compensation in excess of 10% of such
executive officer's salary and bonus during fiscal 1998.

(2) Mr. Hickey became President and Chief Executive Officer in October 1998.

(3) Prior to October 1998, Mr. Hayden served as Critical Path's Chief Executive
Officer and President as well as its Chairman.

(4) In October 1998, Mr. Hickey received two options to purchase shares of
common stock (an option to purchase 478,468 and 2,070,906 shares at an
exercise price of $0.84, each of which vest in equal installments over 48
months.

(5) Option to purchase 1,363,636 shares of common stock at an exercise price of
$.02 per share vests as to 25% of the shares on the first anniversary of
Mr. Hayden's employment with Critical Path and 1/48th each full month
thereafter.

(6) Includes options to purchase 68,181, 45,454, 227,272 and 90,909 shares at
exercise prices of $0.02, $0.22, $0.84 and $2.20 per share, respectively.
All options vest as to 25% of the shares on the first anniversary of Ms.
Tangredi's employment with Critical Path and 1/48th each full month
thereafter.

53
<PAGE>

Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percentage of Annual Rates of Stock
Total Options Price Appreciation for
Granted to Exercise or Option Term(3)
Options Employees in Base Price Expiration ----------------------
Name Granted Fiscal Year(1) ($/Share)(2) Date 5% 10%
- ---- --------- -------------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Douglas Hickey.......... 478,468(4) 4.50% $0.84 10/18/08 18,303,062 29,382,633
2,070,906(5) 19.5 0.84 10/18/08 79,219,343 127,173,963
David Hayden............ 1,363,636(6) 12.9 0.02 3/2/03 53,281,992 84,858,822
Wayne Correia........... -- -- -- -- -- --
Marcy Swenson........... -- -- -- -- -- --
Mari Tangredi........... 68,181(7) 0.64 0.02 3/2/08 2,664,068 4,242,891
45,454(7) 0.43 0.22 6/15/08 1,766,955 2,819,503
227,272(7) 2.14 0.84 9/29/08 8,693,943 13,956,732
90,909(7) 0.86 2.20 12/29/08 3,353,949 5,459,069
</TABLE>
- --------
(1) Based on options to purchase an aggregate of 10,595,453 shares of common
stock granted during fiscal 1998. Under the terms of Critical Path's 1998
Stock Plan, the committee designated by the board of directors to
administer the 1998 Stock Plan retains the discretion, subject to certain
limitations within the 1998 Stock Plan, to modify, extend or renew
outstanding options and to reprice outstanding options. Options may be
repriced by canceling outstanding options and reissuing new options with an
exercise price equal to the fair market value on the date of reissue, which
may be lower than the original exercise price of such canceled options. See
"Stock Plans."

(2) The exercise price on the date of grant was equal to 100% of the fair
market value on the date of grant as determined by the board of directors.

(3) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent Critical Path's
estimate or projection of the future common stock price. There can be no
assurance that any of the values reflected in the table will be achieved.

(4) This incentive stock option has a 10-year term, subject to earlier
termination in certain events related to termination of employment, and
vests as to 1/48th of the shares per month over a four-year period. This
option provides for partial acceleration of vesting upon change of control
of Critical Path, and an early exercise provision.

(5) This non-statutory stock option has a 10-year term, subject to earlier
termination in certain events related to termination of employment, and
vests as to 1/48th of the shares per month over a four-year period. This
option provides for partial acceleration of vesting upon change of control
of Critical Path, and an early exercise provision. In November 1998 this
option was exercised as to 1,274,687 shares.

(6) This incentive stock option has a five-year term, subject to earlier
termination in certain events related to termination of employment, and
vests as to 25% of the shares on the first anniversary of the vest start
date, and vests ratably on a monthly basis thereafter, becoming fully
vested on the fourth anniversary of the vest start date.

(7) These incentive stock options have a ten-year term, subject to earlier
termination in certain events related to termination of employment, and
vest as to 25% of the shares on the first anniversary of the vest start
date, and vest ratably on a monthly basis thereafter, becoming fully vested
on the fourth anniversary of the vest start date.

54
<PAGE>

Aggregated Option Exercises in Last Fiscal
Year And Fiscal Year-End Option Values

<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Shares Options at Options at
Acquired Fiscal Year-End Fiscal Year-End(3)
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- --------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Douglas Hickey(1)....... 1,274,687(2) $-- 1,274,687/0 $29,521,750/--
David Hayden............ -- -- 653,409/710,227 15,668,747/17,031,243
Wayne Correia........... -- -- -- --
Marcy Swenson........... -- -- -- --
Mari Tangredi........... -- -- --/431,816 --/9,961,311
</TABLE>
- --------
(1) Mr. Hickey's option agreements allow for early exercise subject to
repurchase by Critical Path over the vesting period. A portion of the
shares acquired by Mr. Hickey upon exercise of his option remain subject to
vesting.

(2) Includes 9,090 shares which are held in trust for benefit of minor
children.

(3) Assumes a per share fair market value equal to the initial public offering
price of $24.00.

1998 Stock Plan

Our 1998 Stock Plan was adopted by the board of directors on January 21,
1998, amended on December 15, 1998 and will be amended and restated effective
upon completion of this offering. Our 1998 Stock Plan provides for awards or
sales of shares and options (including incentive stock options ("ISOs") and
nonstatutory stock options ("NSOs")). Employees, consultants and advisors of
Critical Path are eligible for all awards except ISOs. Only employees are
eligible for the grant of ISOs. A total of 12,288,741 shares of common stock
has been reserved for issuance under our 1998 Stock Plan and this amount is
increased by 5% each January 1, commencing January 1, 2000.

Our 1998 Stock Plan is administered by our compensation committee and our
non-insider option committee. Our compensation committee consists of at least
two directors who are "non-employee directors," as defined in Rule 16b-3. The
board of directors may amend our 1998 Stock Plan as desired without further
action by Critical Path's shareholders except as required by applicable law.
Our 1998 Stock Plan will continue in effect until terminated by the board or
for a term of 10 years from its original adoption date, whichever is earlier.

The consideration for each award under our 1998 Stock Plan will be
established by the compensation committee, but in no event will the option
price for ISOs be less than 100% of the fair market value of the stock on the
date of grant. Awards will have such terms and be exercisable in such manner
and at such times as the compensation committee may determine. However, each
ISO must expire within a period of not more than 10 years from the date of
grant.

Our 1998 Stock Plan provides that, in the event of a merger or reorganization
of Critical Path, outstanding options and restricted shares shall be subject to
the agreement of merger or reorganization.

As of February 28, 1999, 11,498,862 awards had been granted under our 1998
Stock Plan. Such options have exercise prices ranging from $0.02 to $3.39 per
share and a weighted average per share exercise price of $0.95, and were held
by 157 persons. Options to purchase 2,230,401 shares have been exercised.

55
<PAGE>

Employee Stock Purchase Plan

The board of directors adopted our Employee Stock Purchase Plan in January
1999, to be effective upon completion of this offering. A total of 600,000
shares of common stock have been reserved for issuance under our Employee Stock
Purchase Plan and this amount will be increased by 5% each January 1 commencing
January 1, 2000, up to a maximum of 1,000,000 shares per year. Our Employee
Stock Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, is administered by the board of
directors or by a committee appointed by the board. Employees (including
officers and employee directors of Critical Path but excluding 5% or greater
shareholders) are eligible to participate if they are customarily employed for
at least 20 hours per week and for more than five months in any calendar year.
Our Employee Stock Purchase Plan permits eligible employees to purchase common
stock through payroll deductions, which may not exceed 15% of an employee's
compensation.

Our Employee Stock Purchase Plan will be implemented in a series of
overlapping 24 month participation periods. The initial participation period
commences on the effectiveness of this offering and ends on April 30, 2001.
Subsequent 24 month participation periods will commence on November 1, 1999 and
each May 1 and November 1 thereafter. Purchases will occur on each April 30 and
October 31 (the "purchase dates") during each participation period, excluding
April 30, 1999. If on any purchase date during a participation period the fair
market value of a share of common stock is less than the fair market value on
the commencement of the participation period, the participation period shall be
terminated immediately following such purchase date. The employees who had
enrolled in the terminated participation period shall automatically be enrolled
in the participation period commencing on the day after the purchase date.

The purchase price of the common stock under our Employee Stock Purchase Plan
will be equal to 85% of the fair market value per share of common stock on
either the start date of the offering period or on the purchase date, whichever
is less. Employees may end their participation in an offering period at any
time during that period, and participation ends automatically on termination of
employment with Critical Path. In the event of a proposed dissolution or
liquidation of Critical Path, the offering periods terminate immediately prior
to the consummation of the proposed action, unless otherwise provided by the
board. If there is a proposed sale of all or substantially all of Critical
Path's assets or the merger of Critical Path with or into another corporation,
then the offering period in progress will be shortened and a new exercise date
will be set that is before the sale or merger. The offering period in progress
shall end on the new exercise date. Each participant shall be notified at least
ten business days prior to the new exercise date, and unless such participant
ends his or her participation, the option will be exercised automatically on
the new exercise date. Our Employee Stock Purchase Plan will terminate in 2009,
unless sooner terminated by the board of directors.

401(k) Plan

Critical Path has established a tax-qualified employee savings and retirement
plan (the "401(k) Plan") for which all of Critical Path's employees are
eligible except for employees subject to a collective bargaining agreement and
nonresident aliens with no U.S. source income. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the lower of
16% or the statutorily prescribed limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits additional
discretionary matching contributions by Critical Path. To date, Critical Path
has made no such matching contributions. The 401(k) Plan is intended to qualify
under

56
<PAGE>

Section 401 of the Internal Revenue Code of 1986, as amended, so that
contributions by employees or by Critical Path to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions by Critical Path, if any, will be
deductible by Critical Path when made.

Employment Agreement and Change in Control Arrangements

Critical Path does not currently have any employment contracts in effect with
any of the Named Executive Officers other than Douglas T. Hickey, its
President, Chief Executive Officer and director.

Critical Path and Mr. Hickey are parties to a letter agreement dated October
1, 1998 governing his employment with Critical Path. The agreement sets forth
Mr. Hickey's compensation level and eligibility for salary increases, bonuses,
benefits and option grants under the 1998 Stock Plan. In the event of a change
of control, Mr. Hickey is entitled to receive, for each of his shares of common
stock and each vested option, a bonus equal to the difference between the value
of the consideration per share to be received by Critical Path's Series B
Preferred shareholders and the value of the consideration per share to be
received by Critical Path's common shareholders, up to a maximum amount equal
to $8 million less the consideration payable in the transaction with respect to
Mr. Hickey's shares. Mr. Hickey's right to receive this bonus will terminate
upon the closing of this offering. The agreement also provides for accelerated
vesting of a portion of Mr. Hickey's options in the event of a change of
control. Mr. Hickey also received a loan in the amount of $500,000, bearing
interest at the applicable federal rate. The loan will be due on the earlier of
five years or 30 days following termination of his employment and is non-
recourse unless Mr. Hickey terminates his employment voluntarily. Mr. Hickey's
employment under the letter agreement is at-will and may be terminated by
Critical Path or Mr. Hickey at any time, with or without cause and with or
without notice.

Limitation of Liability and Indemnification Matters

Critical Path's articles of incorporation limit the liability of directors to
the maximum extent permitted by California law. This limitation of liability is
subject to exceptions including intentional misconduct, obtaining an improper
personal benefit and abdication or reckless disregard of director duties.
Critical Path's articles of incorporation and bylaws provide that Critical Path
may indemnify its directors, officers, employees and other agents to the
fullest extent permitted by law. Critical Path's bylaws also permit it to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.

Critical Path has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in Critical
Path's bylaws. These agreements, among other things, provide for
indemnification of Critical Path's directors and executive officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action
by or in the right of Critical Path, arising out of such person's services as a
director or executive officer of Critical Path, any subsidiary of Critical Path
or any other company or enterprise to which the person provides services at the
request of Critical Path. Critical Path believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.

57
<PAGE>

CERTAIN TRANSACTIONS

Transactions with Management and Others

In 1997, Critical Path sold 2,272,727 shares of common stock to David Hayden,
the founder and Chairman of the Board of Critical Path at a purchase price of
$0.01 per share. Critical Path has also entered into a stock option agreement
with Mr. Hayden pursuant to which it granted options to purchase 1,363,636
shares of common stock to Mr. Hayden at a purchase price of $0.02. These
options vest over a four-year period, with a portion vesting in the event of a
merger, reorganization or similar change in the voting control of Critical
Path.

In October 1998, Critical Path entered into a stock option agreement with Mr.
Hickey pursuant to which it granted incentive stock options to purchase 478,468
shares of common stock to Mr. Hickey at a purchase price of $0.84. Also in
October 1998, Critical Path entered into a stock option agreement with Mr.
Hickey pursuant to which it granted non-statutory stock options to purchase
2,070,906 shares of common stock to Mr. Hickey at a purchase price of $0.84.
These options vest over a four-year period, with a portion vesting in the event
of a merger, reorganization or similar change in the voting control of Critical
Path.

During 1998, Critical Path entered into four stock option agreements with
Mari Tangredi pursuant to which it granted incentive stock options to purchase
an aggregate of 431,816 shares of common stock to Ms. Tangredi at purchase
prices of between $0.02 and $2.20. These options vest over a four-year period.

In May 1998, Critical Path entered into a stock option agreement with Mr.
Cotsakos pursuant to which it granted a non-statutory stock option to purchase
136,363 shares of common stock to Mr. Cotsakos at a purchase price of $0.22.
This option vests over a two-year period.

In May 1998, Critical Path entered into a stock option agreement with Lisa
Gansky pursuant to which it granted a non-statutory stock option to purchase
136,363 shares of common stock to Ms. Gansky at a purchase price of $0.22. This
option vests over a two-year period.

Between April 1998 and February 1999, Critical Path sold and issued
19,603,712 shares of its preferred stock for an aggregate consideration of
$38,433,214. Critical Path sold 12,707,851 shares of Series A Preferred Stock
in April 1998 at a sale price of $0.72 per share. In addition, 31,870 shares of
Series A Preferred Stock were purchased at a sale price of $0.72 per share
pursuant to the exercise of warrants. Critical Path sold an aggregate of
6,863,991 shares of Series B Preferred Stock in September 1998 and January 1999
at a sale price of $4.26 per share. Each share of Series A Preferred Stock and
Series B Preferred Stock converts into one share of common stock.

58
<PAGE>

The following table summarizes purchases, valued in excess of $60,000, of
shares of preferred stock and of common stock by directors, executive officers
and 5% shareholders of Critical Path:

<TABLE>
<CAPTION>
Shares
-----------------------------
Common Series A Series B
--------- --------- ---------
<S> <C> <C> <C>
Directors and Executive Officers
Douglas Hickey.................................... 1,256,504 -- --
The Cotsakos Revocable Trust, UAD 9/3/87.......... 136,363 -- 39,885
David Hayden...................................... 2,272,727 151,104 --
Lisa Gansky....................................... 159,090 83,146 --
5% Shareholders
E*TRADE Group, Inc................................ -- 346,452 3,519,424
US West Data Investments, Inc..................... 1,090,909 -- 1,313,918
Mohr, Davidow Ventures V, L.P..................... -- 4,330,654 234,628
Benchmark Capital Partners II, L.P................ -- 4,330,654 234,628
CMG@Ventures II, L.L.C............................ -- 1,385,809 351,942
</TABLE>

In December 1998, Critical Path entered into an agreement with US West
pursuant to which Critical Path agreed to provide email services and certain
related development services to US West. In exchange for such services, US
West, through the use of its sales channels, will provide Critical Path
assistance in selling advertising for the email sites of certain customers of
Critical Path. The agreement also provides for the joint development of certain
services and features from time to time.

Certain Business Relationships

In April 1998, Critical Path entered into an agreement with E*TRADE pursuant
to which each party will include the other party in certain advertising
campaigns, including E*TRADE's international and strategic partner
relationships. Critical Path will also provide email services to users of
E*TRADE's Internet access services. In addition, under the terms of the
agreement, Critical Path agreed to develop certain features for its email
services which Critical Path may make available to other customers in addition
to E*TRADE. E*TRADE accounted for approximately 62% of our revenues in 1998.
Christos Cotsakos, the Chief Executive Officer of E*TRADE is a director of
Critical Path. Mr. Cotsakos is the trustee of The Cotsakos Revocable Trust, UAD
9/3/87.

The shares held by Mohr, Davidow Ventures V, L.P. include 4,245,713 shares
held by it and 319,570 shares held by Mohr, Davidow Ventures V, L.P. as nominee
for MDV Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P. George Zachary, a member of Mohr, Davidow Ventures V, L.P.,
is a director of Critical Path.

The shares held by Benchmark Capital Partners II, L.P. are held by it as
nominee for Benchmark Capital Partners II, L.P., Benchmark Founders' Fund II,
L.P., Benchmark Founders Fund II-A, L.P. and Benchmark Members' Fund II, L.P.
Kevin Harvey, a managing member of Benchmark Capital Partners II, L.P., is a
director of Critical Path.

Indebtedness of Management

In November 1998, Critical Path loaned Douglas Hickey, the Chief Executive
Officer of Critical Path, $500,000 pursuant to a five-year promissory note
bearing interest at the rate of 4.51% (the applicable federal rate) per annum.
In November 1998, Mr. Hickey exercised an option to purchase 1,274,687 shares
of common stock by execution of a five-year promissory note in the principal
amount of $1,065,638.94 bearing interest of 4.51% annually.

59
<PAGE>

In January 1999, Critical Path loaned William Rinehart $65,000 pursuant to a
promissory note bearing interest at the rate of 4.64% per annum. Mr. Rinehart
is an executive officer of Critical Path.

Critical Path believes that the foregoing transactions were in its best
interests. It is Critical Path's current policy that all transactions by
Critical Path with officers, directors, 5 percent shareholders and their
affiliates will be entered into only if such transactions are approved by a
majority of the disinterested independent directors, are on terms no less
favorable to Critical Path than could be obtained from unaffiliated parties and
are reasonably expected to benefit Critical Path.

For information concerning indemnification of directors and officers, see
"Management--Limitation of Liability and Indemnification Matters."

60
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of common stock as of February 28, 1999, on a pro forma basis to
reflect the automatic conversion upon completion of this offering of the
outstanding shares of Series A Preferred Stock and Series B Preferred Stock
into common stock and the conversion of outstanding warrants into common stock
for a total of 29,615,161 shares of common stock, by:

. each person or entity known to Critical Path to own beneficially more
than 5% of Critical Path's common stock;

. each of Critical Path's directors;

. each of Critical Path's Named Executive Officers; and

. all executive officers and directors as a group.

<TABLE>
<CAPTION>
Percentage of
Common Stock(2)
-----------------
Name and Address of Total Shares Before After
Beneficial Owner(1) Beneficially Owned(2) Offering Offering
- ------------------- --------------------- -------- --------
<S> <C> <C> <C>
Benchmark Capital
Partners II, L.P.(3)
2480 Sand Hill Road
Menlo Park, CA 94025... 4,565,283 15.4% 13.4%
Mohr, Davidow Ventures
V, L.P.(4)
2775 Sand Hill Road,
Suite 240
Menlo Park, CA 94025... 4,565,283 15.4 13.4
CMG@Ventures II, L.L.C.
2420 Sand Hill Road
Menlo Park, CA 94025... 1,737,752 5.9 5.1
E*TRADE Group, Inc.
Four Embarcadero
2400 Geng Road
Palo Alto, CA 94306.... 3,865,877 13.1 11.3
US West Data
Investments, Inc.
1999 Broadway, Suite
500
Denver, CO 80202....... 2,404,827 8.1 7.1
Douglas T. Hickey(5).... 1,316,315 4.4 3.9
David Hayden(6)......... 3,219,283 10.6 9.2
Wayne Correia........... 2,500,000 8.4 7.3
Marcy Swenson........... 1,113,636 3.8 3.3
Mari Tangredi(7)........ 99,427 * *
Christos M.
Cotsakos(8)............ 176,248 * *
Lisa Gansky(9).......... 242,236 * *
Kevin R. Harvey(10)..... 4,565,283 15.4 13.4
James A. Smith.......... 0 * *
George Zachary(11)...... 4,565,283 15.4 13.4
All directors and
executive officers
as a group (15
persons)(12)........... 18,147,303 59.1% 51.6%
</TABLE>
- --------
*Less than 1%.

(1) Unless otherwise indicated, the address for the following shareholders is
c/o Critical Path, Inc., 320 1st Street, San Francisco, California 94105.

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<PAGE>

(2) Assumes no exercise of the underwriters' over-allotment option. Applicable
percentage ownership is based on 29,615,161 shares of common stock
outstanding as of February 28, 1999 and 34,115,161 shares outstanding
immediately following completion of this offering. Beneficial ownership is
determined in accordance with the rules and regulations of the Securities
and Exchange Commission. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of
common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of the date of this prospectus
are deemed outstanding. These shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of any other
person. Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each shareholder named in the table
has sole voting and investment power with respect to the shares set forth
opposite such shareholder's name.

(3) These shares are held by Benchmark Capital Partners II, L.P. as nominee
for Benchmark Capital Partners II, L.P., Benchmark Founders Fund II, L.P.,
Benchmark Founders Fund II-A, L.P. and Benchmark Members' Fund II, L.P.

(4) Includes 4,245,713 shares held by Mohr, Davidow Ventures V, L.P. and
319,570 shares held by Mohr, Davidow Ventures V, L.P. as nominee from MDV
Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P.

(5) Includes 1,034,009 shares of common stock subject to Critical Path's right
of repurchase as of April 29, 1999. Also includes 18,181 shares held in
the name of Mr. Hickey's minor children's name.

(6) Includes 767,043 shares subject to options exercisable within 60 days
after February 28, 1999.

(7) Includes 99,427 shares subject to options exercisable within 60 days after
February 28, 1999.

(8) Represents shares held by The Cotsakos Revocable Trust, UAD 9/3/87 of
which Mr. Cotsakos is the trustee and includes 73,872 shares of common
stock subject to Critical Path's right of repurchase as of April 29, 1999.

(9) Includes 73,872 shares of common stock subject to Critical Path's right of
repurchase as of April 29, 1999.

(10) Represents shares held by Benchmark Capital Partners II, L.P., of which
Mr. Harvey is a managing partner. Mr. Harvey disclaims beneficial
ownership of all such shares except to the extent of his pecuniary
interest therein.

(11) Represents shares held by Mohr, Davidow Ventures V, L.P., of which Mr.
Zachary is a member. Mr. Zachary disclaims beneficial ownership of all
such shares except to the extent of his pecuniary interest therein.

(12) Includes 1,087,916 shares subject to options exercisable within 60 days
after February 28, 1999, of which 1,255,625 shares of common stock is
subject to Critical Path's right of repurchase as of April 29, 1999.

62
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, our authorized capital stock, after giving
effect to the conversion of all outstanding preferred stock into common stock,
conversion of outstanding warrants and the amendment of our articles of
incorporation, will consist of 150,000,000 shares of common stock, par value
$0.001 and 5,000,000 shares of preferred stock, par value $0.001.

The following summary of certain provisions of our common stock, preferred
stock, amended and restated articles of incorporation and bylaws, as in effect
upon completion of this offering, assumes that our shareholders will approve of
the amended and restated articles of incorporation and bylaws.

Common Stock

As of February 28, 1999, there were 29,615,161 shares of common stock
outstanding, held by approximately 102 shareholders of record.

Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders, including the
election of directors, and will not have cumulative voting rights when Critical
Path becomes a "listed company" as defined under Section 301.5(d) of the
California Corporations Code. Subject to preferences that may be applicable to
any then outstanding preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared by the board of
directors out of funds legally available therefor. See "Dividend Policy." Upon
a liquidation, dissolution or winding up of Critical Path, the holders of
common stock will be entitled to share ratably in the net assets legally
available for distribution to shareholders after the payment of all debts and
other liabilities of Critical Path, subject to the prior rights of any
preferred stock then outstanding. Holders of common stock have no preemptive or
conversion rights or other subscription rights and there are no redemption or
sinking funds provisions applicable to the common stock. All outstanding shares
of common stock are, and the common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.

Preferred Stock

Upon the closing of this offering, there will be no shares of preferred stock
outstanding. Our board of directors has the authority, without further action
by the shareholders, to issue from time to time the preferred stock in one or
more series and to fix the number of shares, designations, preferences, powers
and relative, participating, optional or other special rights and the
qualifications or restrictions thereof. The preferences, powers, rights and
restrictions of different series of preferred stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions and purchase funds and
other matters. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to holders of common stock or
affect adversely the rights and powers, including voting rights, of the holders
of common stock, and may have the effect of delaying, deferring or preventing a
change in control of Critical Path. We currently do not plan to issue any
shares of preferred stock.

Registration Rights

The holders of the Series A Preferred Stock and B Preferred Stock, who own
19,603,712 shares of Series A Preferred Stock and Series B Preferred Stock, and
holders of 6,037,468 shares of common stock have the right to cause us to
register the shares of common stock issuable upon

63
<PAGE>

conversion of the Series A Preferred Stock and Series B Preferred Stock and the
common stock under the Securities Act of 1933, as amended (the "Securities
Act"), as follows:

. Demand Registration Rights: Six months after this offering, the holders
can send a written request to Critical Path to register their shares with
respect to all or a part of their registrable securities having an
aggregate proceeds, net of underwriting discounts and expenses, exceeding
$12,500,000 and an initial offering price of at least $2.88 per share (as
adjusted for splits or the like). The initial offering price of $2.88 per
share is equal to four times the price per share of the Series A
Preferred Stock, which was $0.72. The $12,500,000 aggregate proceeds
threshold was negotiated as part of the Series A Preferred Stock
financing.

. Piggyback Registration Rights: The holders can request to have their
shares registered anytime Critical Path is filing a registration
statement to register any of our securities for our own account. Such
registration opportunities are unlimited but the number of shares that
can be registered may be eliminated entirely or cut back in certain
situations by the underwriters.

. S-3 Registration Rights: The holders of at least 20% of the registrable
securities can request Critical Path to register their shares if Critical
Path is eligible to use Form S-3 and if the aggregate price of the shares
to the public is at least $1,000,000. The Form S-3 registration
opportunities are not limited.

All of the holders of registrable securities may sell their shares pursuant
to Rule 144 after the 180 day lockup period ends, with the exception of
3,227,252 shares held by Series B holders who purchased these shares in the
second closing of the Series B financing. All of these shares are subject to a
180 day lockup and will be eligible for resale under Rule 144 after January
2000.

The registration rights terminate the earlier of 5 years following the
closing of this offering or when Rule 144 becomes available for the sale of all
of the registrable shares during any 90 day period.

Antitakeover Effects of Provisions of Articles of Incorporation and Bylaws

Our articles of incorporation and bylaws authorize us to indemnify our
current and former directors, officers, employees or agents to the fullest
extent permitted by law. Our articles of incorporation eliminate a director's
liability for monetary damages to the fullest extent permitted by the
California Corporations Code. We believe that these provisions will assist us
in attracting or retaining qualified individuals to serve as directors and
officers.

Articles of Incorporation

Under our articles of incorporation, the board of directors has the power to
authorize the issuance of up to 5,000,000 shares of preferred stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without further vote or action by the
shareholders. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, may delay, defer or prevent a change in control of Critical Path, may
discourage bids for the common stock at a premium over the market price of the
common stock and may adversely affect the market price of and the voting and
other rights of the holders of the common stock. These provisions are intended
to:

. enhance the likelihood of continuity and stability in the composition of
the board of directors and in the policies formulated by the board of
directors,

64
<PAGE>

. discourage certain types of transactions that may involve an actual or
threatened change of control of Critical Path

. reduce the vulnerability of Critical Path to an unsolicited acquisition
proposal and

. discourage certain tactics that may be used in proxy fights. These
provisions, however, could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may
inhibit fluctuations in the market price of our shares that could result
from actual or rumored takeover attempts. These provisions also may have
the effect of preventing changes in our management.

Our articles of incorporation provide that our bylaws may be repealed or
amended only by a two-thirds vote of the board of directors or a two-thirds
shareholder vote and that all shareholder action be taken at a shareholders'
meeting. These provisions of the articles of incorporation may only be amended
or repealed by the holders of at least two-thirds of the voting power of all
the then-outstanding shares of stock entitled to vote generally for the
election of directors voting together as a single class.

Bylaws

Our bylaws provide for a board that consists of a range of authorized
directors from four to seven, which exact number can be set and amended from
time to time by our board. The directors will be elected at the annual meeting
of shareholders or any special meeting of shareholders and each director so
elected will hold office until the next annual meeting or until his successor
is duly elected and qualified or until his earlier resignation or removal. The
shareholders may not cumulate their votes in the election of directors when we
become a listed company under Section 301.5(d) of the California Corporations
Code. Unless otherwise restricted by statute, our articles of incorporation or
our bylaws, any director or the entire board may be removed, with or without
cause, by the holders of at least two-thirds of the shares entitled to vote at
an election of directors. Vacancies may be filled by a majority of the
directors then in office or by a sole remaining director.

Special meetings of shareholders may be called by the board of directors, the
chairman of the board, the chief executive officer and president, or by the
holders of shares entitled to cast no less than 10% of the votes at the
meeting. The notice of any special meeting must specify the general nature of
the business to be transacted and no other business may be transacted at such
meeting.

The bylaws may be amended or repealed by the affirmative vote of two-thirds
of the outstanding shares entitled to vote or by the board of directors. The
provisions described above, together with the ability of the board of directors
to issue preferred stock as described above, may deter a hostile takeover or
delay a change in control or management of Critical Path. See "Risk Factors--
Antitakeover Effects of Our Articles of Incorporation and Bylaws."

Transactions Involving Interested Parties Under California Law

Section 1203 of the California Corporations Code requires delivery of a
report of an independent appraiser to shareholders in certain reorganizations,
tender offers and cash-for-asset sales proposed by an interested party. The
report must include an opinion as to the fairness of the consideration. An
interested party is a person who indirectly or directly controls the subject
corporation, is directly or indirectly controlled by an officer or director of
the subject corporation or is an entity in which a material financial interest
is held by any director or executive officer of the corporation.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is American Securities
Transfer & Trust.

65
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering there has been no public market for our common stock.
No predictions can be made regarding the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. As described below, only a limited number of
shares will be available for sale shortly after this offering due to certain
contractual and legal restrictions on resale. Nevertheless, sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price.

Upon completion of this offering, we will have 34,115,161 shares of common
stock outstanding based on 29,615,161 shares outstanding at February 28, 1999
and assuming no exercise of the underwriters' over-allotment option. The
4,500,000 shares of common stock being sold hereby will be freely tradable,
other than by our "affiliates" as such term is defined in the Securities Act,
without restriction or registration under the Securities Act. The 29,615,161
remaining shares were issued and sold by us in private transactions are
restricted shares and are eligible for public sale if registered under the
Securities Act or sold in accordance with Rule 701 under the Securities Act.

All restricted shares are subject to lock-up agreements with the underwriters
under which the holders of the restricted shares have agreed they will not sell
any common stock owned by them without the prior written consent of the
representatives of the underwriters for a period of 180 days from the effective
date of the Registration Statement of which this prospectus is a part.

The following table indicates approximately when the shares of our common
stock that are not being sold in the offering but which will be outstanding
after the offering is completed will be eligible for sale into the public
market.

Eligibility for Resale into Public Market of Restricted Shares

<TABLE>
<CAPTION>
Time Number of Shares
---- ----------------
<S> <C>
Effective Date 0
180 days after Effective Date 26,387,909
</TABLE>

The remaining shares of our common stock, including 3,227,252 shares of
common stock issuable upon conversion of the Series B Preferred Stock issued in
January 1999, will be eligible for sale into the public market at various times
after the expiration of one-year holding periods. Most of the restricted shares
that will be available for public resale after 180 days after the effective
date will be subject to volume and other resale restrictions pursuant to Rule
144 because the holders are affiliates of Critical Path.

Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisers prior to the closing of this offering, pursuant to
written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to stock options granted by
us before this offering, along with the shares acquired upon exercise of these
options. Securities issued in reliance on Rule 701 are deemed to be restricted
shares and, beginning 90 days after the date of this prospectus, unless subject
to the contractual restrictions described above, may be sold by persons other
than affiliates subject only to the manner of sale provisions of Rule 144 and
by affiliates under Rule 144 without compliance with its two-year minimum
holding period requirements.

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<PAGE>

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person deemed to be our affiliate, or a person
holding restricted shares who beneficially owns shares that were not acquired
from us or our affiliate within the previous two years, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:

. 1% of the then outstanding shares of common stock, approximately 341,152
shares immediately after this offering, or

. the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission.

Sales under Rule 144 are subject to certain requirements relating to manner
of sale, notice and availability of current public information about us.
However, if a person (or persons whose shares are aggregated) is not deemed to
have been our affiliate at any time during the 90 days immediately preceding
the sale, he or she may sell his or her restricted shares under Rule 144(k)
without regard to the limitations described above if at least three years have
elapsed since the later of the date the shares were acquired from us or from
our affiliate. The foregoing is a summary of Rule 144 and is not intended to be
a complete description of it.

We intend to file a registration statement under the Securities Act covering
approximately 12,288,741 shares of common stock reserved for issuance under the
1998 Stock Plan. This registration statement is expected to be filed soon after
the date of this prospectus and will automatically become effective upon
filing. Shares registered under this registration statement will be available
for sale in the open market, unless the shares are subject to vesting
restrictions with us or the contractual restrictions described above.

We also intend to register an aggregate of 600,000 shares of common stock
reserved for issuance under our 1999 Employee Stock Purchase Plan.

67
<PAGE>

UNDERWRITING

The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC, Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated, and FAC/Equities, a division
of First Albany Corporation, have severally agreed with Critical Path, subject
to the terms and conditions set forth in the underwriting agreement, to
purchase from Critical Path the number of shares of common stock set forth
opposite their names below. The underwriters are committed to purchase and pay
for all such shares if any are purchased.

<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc............................... 1,628,000
Hambrecht & Quist LLC........................................... 1,628,000
Dain Rauscher Wessels........................................... 814,000
First Albany Corporation........................................ 150,000
Lehman Brothers Inc. ........................................... 100,000
Morgan Stanley & Co. Incorporated............................... 100,000
Moors & Cabot, Inc. ............................................ 80,000
---------
Total......................................................... 4,500,000
=========
</TABLE>

Critical Path has been advised by the representatives of the underwriters
that the underwriters propose to offer the shares of common stock to the public
at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession of not in
excess of $1.00 per share, of which $0.10 may be reallowed to other dealers.
After the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No such reduction
shall change the amount of proceeds to be received by Critical Path as set
forth on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.

The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Over-allotment Option

Critical Path has granted to the underwriters an option, exercisable during
the 30-day period after the date of this prospectus, to purchase up to 675,000
additional shares of common stock at the same price per share as Critical Path
will receive for the 4,500,000 shares that the underwriters have agreed to
purchase. To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of common stock
to be purchased by it shown in the above table represents as a percentage of
the shares offered hereby. If purchased, such additional shares will be sold by
the underwriters on the same terms as those on which the 4,500,000 shares are
being sold. Critical Path will be obligated, pursuant to the option, to sell
shares to the extent the option is exercised. The underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the shares of common stock offered hereby. If such option is exercised in full,
the total public offering price, underwriting discounts and commissions and
proceeds to Critical Path will be $124,200,000, $8,694,000 and $115,506,000,
respectively.

Indemnity

The underwriting agreement contains covenants of indemnity among the
underwriters and Critical Path against certain civil liabilities, including
liabilities under the Securities Act and

68
<PAGE>

liabilities arising from breaches of representations and warranties contained
in the underwriting agreement.

Lock-up Agreements

Each of Critical Path's executive officers, directors, director-nominees,
shareholders of record, optionholders, warrantholders and holders of
convertible notes has agreed with the representatives of the underwriters, for
a period of 180 days after the date of this prospectus, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common
stock, any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus or thereafter acquired directly by such holders
or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of BancBoston Robertson Stephens
Inc. However, BancBoston Robertson Stephens Inc. may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to the lock-up agreements. There are no agreements between the
representatives and any of Critical Path's shareholders providing consent by
the representatives to the sale of shares prior to the expiration of the lock-
up period.

Future Sales

In addition, Critical Path has agreed that during the lock-up period Critical
Path will not, without the prior written consent of BancBoston Robertson
Stephens Inc., subject to certain exceptions,

. consent to the disposition of any shares held by shareholders subject to
lock-up agreements prior to the expiration of the lock-up period or

. issue, sell, contract to sell, or otherwise dispose of, any shares of
common stock, any options to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares
of common stock other than Critical Path's sale of shares in this
offering, the issuance of common stock upon the exercise of outstanding
options, and the issuance of options under existing stock option and
incentive plans provided such options do not vest prior to the expiration
of the lock-up period. See "Shares Eligible for Future Sale."

Listing

The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "CPTH."

No Prior Public Market

Prior to this offering, there has been no public market for the common stock
of Critical Path. Consequently, the initial public offering price for the
common stock offered hereby will be determined through negotiations between
Critical Path and the representatives of the underwriters. Among the factors to
be considered in such negotiations are prevailing market conditions, certain
financial information of Critical Path, market valuations of other companies
that Critical Path and the representatives believe to be comparable to Critical
Path, estimates of the business potential of Critical Path, the present state
of Critical Path's development and other factors deemed relevant.

Stabilization

The representatives of the underwriters have advised Critical Path that,
pursuant to Regulation M under the Securities Act, certain persons
participating in this offering may engage in

69
<PAGE>

transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the common stock on behalf of
the underwriters to reduce a short position incurred by the underwriters in
connection with this offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with this offering if the common
stock originally sold by such underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
representatives have advised Critical Path that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

Directed Share Program

At the request of Critical Path, the underwriters have reserved up to five
percent of the shares of common stock to be issued by Critical Path and offered
hereby for sale, at the initial public offering price, to directors, officers,
employees, business associates and related persons of Critical Path. The number
of shares of common stock available for sale to the general public will be
reduced to the extent such individuals purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered hereby.

Prior Transactions

In September 1998 and January 1999, Hambrecht & Quist LLC acted as the
placement agent for a private placement of Critical Path's Series B Preferred
Stock. As compensation for its services as placement agent, Hambrecht & Quist
LLC received a cash fee of approximately $1.0 million and warrants to purchase
an aggregate of 121,654 shares of Series B Preferred Stock at an exercise price
of $4.26 per share, the same price per share paid by all investors who
participated in the private placement. Some entities affiliated with Hambrecht
& Quist LLC also invested in the private placement, purchasing an aggregate of
351,942 shares of Series B Preferred Stock on the same terms and conditions as
the other investors in the private placement, including price per share. Of the
foregoing securities, 184,300 shares of Series B Preferred Stock and a warrant
to purchase an additional 51,364 shares of Series B Preferred Stock have been
deemed by the NASD to be underwriters' compensation.

Prior to the closing of this offering, Hambrecht & Quist LLC will exercise
each of the warrants described above. In addition, Hambrecht & Quist LLC and
persons associated with it have entered into written agreements with Critical
Path, whereby Hambrecht & Quist LLC and these associated persons have agreed
that, for a period of three years from the effective date of the registration
statement, they will not sell or otherwise transfer any of the shares of Series
B Preferred Stock purchased by them in the private placement that are deemed to
be underwriting compensation or any shares of Critical Path's common stock
received upon conversion of any of these shares of Series B Preferred Stock.
Hambrecht & Quist LLC has provided an undertaking to the NASD that prior to the
closing of the offering it will sell back to Critical Path at $4.26 per share
an aggregate of 53,293 shares held by Hambrecht & Quist LLC or its affiliates.
The $4.26 per share price is equal to the price at which the shares were
originally sold to Hambrecht & Quist LLC and its affiliates.

In February 1999, BancBoston Robertson Stephens made a $2,000,000 loan to
David C. Hayden, our Chairman, pursuant to a promissory note bearing interest
at prime plus .25% per annum for the purchase of a personal residence.

70
<PAGE>

LEGAL MATTERS

Certain legal matters with respect to the validity of the common stock
offered hereby are being passed upon for Critical Path by Pillsbury Madison &
Sutro LLP, Palo Alto, California. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California. Certain partners of
Pillsbury Madison & Sutro LLP beneficially own an aggregate of 138,747 shares
of common stock.

EXPERTS

The consolidated financial statements of Critical Path, Inc. as of December
31, 1997 and 1998 and for the period from February 19, 1997 (Inception) through
December 31, 1997 and for the year ended December 31, 1998 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 with respect
to the common stock offered hereby. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are
part of the registration statement. For further information with respect to
Critical Path and the common stock, reference is made to the registration
statement and the exhibits and schedules thereto. You may read and copy any
document we file at the SEC's public reference room in Washington, DC. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. Our SEC filings are also available to the public from the SEC's website
at http://www.sec.gov.

Upon completion of this offering, Critical Path will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference rooms, Critical Path's website and the website of the SEC
referred to above. Information on our website does not constitute a part of
this prospectus.

71
<PAGE>

CRITICAL PATH, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Operations....................................... F-4
Consolidated Statement of Shareholders' Equity (Deficit)................... F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>

F-1
<PAGE>

Report of Independent Accountants

To the Board of Directors and Shareholders
of Critical Path, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Critical Path, Inc. and its subsidiary at December 31, 1997 and 1998, and the
results of their operations and their cash flows for the period from February
19, 1997 (Inception) to December 31, 1997 and the year ended December 31, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
January 28, 1999, except
for Note 9, which is as of March 26, 1999

F-2
<PAGE>

CRITICAL PATH, INC.

CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
Pro Forma
Shareholders'
December 31, Equity at
----------------- December 31,
1997 1998 1998
------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 1 $ 14,791
Restricted cash............................. -- 325
Accounts receivable, net.................... -- 121
Other current assets........................ 4 138
------- --------
Total current assets...................... 5 15,375
Note receivable from officer.................. -- 500
Property and equipment, net................... 501 4,687
Other assets.................................. 44 101
------- --------
$ 550 $ 20,663
======= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................ $ 593 $ 423
Accrued expenses............................ 34 426
Deferred revenue............................ -- 500
Convertible promissory notes payable........ 420 --
Convertible promissory notes payable--
related party.............................. 427 --
Capital lease obligations, current.......... 55 1,502
------- --------
Total current liabilities................. 1,529 2,851
Capital lease obligations, long-term.......... 42 2,454
------- --------
1,571 5,305
------- --------
Commitments (Note 6)
Shareholders' equity (deficit):
Series A Convertible Preferred Stock, $0.001
par value; 13,288 shares authorized, 12,725
shares issued and outstanding, no shares
pro forma (unaudited)...................... -- 13 $ --
Series B Convertible Preferred Stock, $0.001
par value; 10,000 shares authorized, 3,637
shares issued and outstanding, no shares
pro forma (unaudited)...................... -- 4 --
Common Stock, $0.001 par value, 38,636
shares authorized; 2,394 and 8,294 shares
issued and outstanding, 24,949 (unaudited)
shares issued and outstanding pro forma.... 2 8 25
Additional paid-in capital.................. 51 46,390 46,390
Notes receivable from shareholders.......... -- (1,151) (1,151)
Unearned compensation....................... -- (17,371) (17,371)
Accumulated deficit......................... (1,074) (12,535) (12,535)
------- -------- --------
Total shareholders' equity (deficit)...... (1,021) 15,358 $ 15,358
------- -------- ========
$ 550 $ 20,663
======= ========
</TABLE>

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

F-3
<PAGE>

CRITICAL PATH, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
Period from
February 19,
1997
(Inception) to Year Ended
December 31, December 31,
1997 1998
-------------- ------------
<S> <C> <C>
Net revenues........................................ $ -- $ 897
Cost of net revenues................................ -- (2,346)
------- --------
Gross profit (loss)............................... -- (1,449)
------- --------
Operating expenses:
Research and development.......................... 454 2,246
Sales and marketing............................... 244 2,318
General and administrative........................ 358 5,435
------- --------
Total operating expenses........................ 1,056 9,999
------- --------
Loss from operations................................ (1,056) (11,448)
Interest and other income........................... -- 375
Interest expense.................................... (18) (388)
------- --------
Net loss............................................ $(1,074) $(11,461)
======= ========
Net loss per share--basic and diluted .............. $ (0.54) $ (2.94)
======= ========
Weighted average shares--basic and diluted.......... 1,994 3,899
======= ========
Pro forma net loss per share (unaudited):
Net loss per share basic and diluted ............. $ (0.81)
========
Weighted average shares--basic and diluted........ 14,194
========
</TABLE>

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

F-4
<PAGE>

CRITICAL PATH, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)

<TABLE>
<CAPTION>
Convertible
Preferred Notes Total
Stock Common Stock Additional Receivable Shareholders'
------------- ------------- Paid-in from Unearned Accumulated Equity
Shares Amount Shares Amount Capital Shareholders Compensation Deficit (Deficit)
------ ------ ------ ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inception, February 19,
1997
Issuance of Common
Stock.................. -- $-- 2,394 $ 2 $ 51 $ -- $ -- $ -- $ 53
Net loss................ -- -- -- -- -- -- -- (1,074) (1,074)
------ --- ----- --- ------- -------- -------- -------- --------
Balance at December 31,
1997................... -- -- 2,394 2 51 -- -- (1,074) (1,021)
Issuance of Common
Stock.................. -- -- 3,975 4 82 (85) -- -- 1
Exercise of stock
options................ -- -- 1,925 2 1,104 (1,066) -- -- 40
Issuance of Series A
Preferred Stock, net... 12,725 13 -- -- 9,111 -- -- -- 9,124
Issuance of Series B
Preferred Stock, net... 3,637 4 -- -- 15,437 -- -- -- 15,441
Issuance of warrants and
stock purchase rights.. -- -- -- -- 723 -- -- -- 723
Unearned compensation... -- -- -- -- 19,882 -- (19,882) -- --
Amortization of unearned
compensation........... -- -- -- -- -- -- 2,511 -- 2,511
Net loss................ -- -- -- -- -- -- -- (11,461) (11,461)
------ --- ----- --- ------- -------- -------- -------- --------
Balance at December 31,
1998................... 16,362 $17 8,294 $ 8 $46,390 $(17,371) $(17,371) $(12,535) $ 15,358
====== === ===== === ======= ======== ======== ======== ========
</TABLE>

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

F-5
<PAGE>

CRITICAL PATH, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Period from
February 19,
1997
(Inception) to Year Ended
December 31, December 31,
1997 1998
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(1,074) $(11,461)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts................ -- 50
Depreciation and amortization.................. 26 1,019
Common stock issued for services............... 3 --
Amortization of warrants and stock purchase
rights........................................ -- 473
Amortization of unearned compensation.......... -- 2,511
Changes in assets and liabilities:
Accounts receivable.......................... -- (171)
Other assets................................. (48) (86)
Accounts payable............................. 593 (170)
Accrued expenses............................. 34 392
Deferred revenue............................. -- 500
------- --------
Net cash used in operating activities...... (466) (6,943)
------- --------
Cash flows from investing activities:
Notes receivable from officer.................... -- (500)
Property and equipment purchases................. (409) (491)
Restricted cash.................................. -- (325)
------- --------
Net cash used in investing activities...... (409) (1,316)
------- --------
Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred
Stock, net...................................... -- 23,445
Proceeds from equipment lease line............... -- 198
Proceeds from issuance of Common Stock........... 50 41
Proceeds from convertible promissory notes
payable......................................... 847 500
Repayment of convertible promissory notes
payable......................................... -- (227)
Principal payments on lease obligations.......... (21) (908)
------- --------
Net cash provided by financing activities.. 876 23,049
------- --------
Net increase in cash and cash equivalents.......... 1 14,790
Cash and cash equivalents at beginning of period... -- 1
------- --------
Cash and cash equivalents at end of period......... $ 1 $ 14,791
======= ========
Supplemental cash flow disclosure:
Cash paid for interest........................... $ 1 $ 244
Non-cash investing and financing activities
Property and equipment leases.................... $ 118 $ 4,714
Common Stock issued for notes receivable......... $ -- $ 1,151
Conversion of notes payable into Convertible
Preferred Stock................................. $ -- $ 1,120
</TABLE>

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

F-6
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The Company

Critical Path, Inc. (the "Company") was incorporated in California on
February 19, 1997 to deliver advanced email hosting services.

Use of estimates

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

Basis of presentation

The financial statements include the accounts of the Company and its wholly
owned subsidiary. All significant intercompany balances and transactions have
been eliminated in consolidation.

Cash equivalents and restricted cash

The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Cash equivalents consist
primarily of deposits in money market funds. Restricted cash comprises amounts
held on deposit which is required as collateral for Company provided credit
cards.

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents, restricted cash and
accounts receivable. Cash and cash equivalents and restricted cash are
deposited with financial institutions that management believes are
creditworthy. The Company's accounts receivable are derived from transactions
with companies throughout the United States. The Company maintains an allowance
for doubtful accounts receivable based upon the expected collectibility of
accounts receivable.

During the year ended December 31, 1998, approximately 62% and 30% of
revenues before charges related to amortization of the fair value of warrants
issued to customers were derived from the delivery of email services to two
customers.

Fair value of financial instruments

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

F-7
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Property and equipment

Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the shorter of the estimated
useful lives of the assets, generally three to five years, or the lease term,
if applicable. The Company periodically assesses the recoverability of the
carrying amount of property and equipment and provides for any possible
impairment loss based upon the difference between the carrying amount and the
fair value of such assets. Since February 19, 1997 (Inception) through December
31, 1998, no impairment losses have been identified.

Revenue recognition

The Company derives revenue through the sale of email hosting services.
Payments for such services are based either on contractual rates per active
mailbox per month, non-refundable fixed payments or as a percentage of customer
generated email advertising revenues. Revenues from contracts specifying a
contractual rate per active mailbox per month are recognized monthly for each
active mailbox covered by the respective contract. Revenues from contracts that
provide non-refundable fixed payments are not dependent upon the active number
of mailboxes and are therefore recognized ratably over the contract term.
Revenues based upon a percentage of customer generated email advertising
revenues are recognized when such revenues are earned and reported by the
customer. Amounts billed or received in advance of service delivery are
recorded as deferred revenue.

In connection with certain customer contracts, the Company granted warrants
or options to purchase Series B Convertible Preferred Stock to such customers.
The fair value of such warrants or options, determined using the Black-Scholes
option pricing model, is being recognized ratably as a sales discount over the
terms of the respective agreements. See Note 7--Shareholders' Equity.

Research and development

Research and development costs include expenses incurred by the Company to
develop and enhance its email service offerings and to develop new electronic
messaging services. Research and development costs are expensed as incurred.

Advertising expense

Advertising costs are expensed as incurred and totaled $0 and $135,000 during
the period from February 19, 1997 (Inception) through December 31, 1997 and the
year ended December 31, 1998, respectively.

Stock-based compensation

The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price of
the option. The Company accounts for equity instruments issued to nonemployees
in accordance with the provisions of SFAS No. 123 and Emerging Issues Task
Force ("EITF") 96-18.

F-8
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Income taxes

Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax assets and liabilities for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax assets and liabilities are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.

Net loss per share

Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
per Share" and Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98,
basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and potential common shares outstanding during the period if their effect is
dilutive. Potential common shares comprise restricted Common Stock and
incremental common and preferred shares issuable upon the exercise of stock
options and warrants and upon conversion of Series A and Series B Convertible
Preferred Stock. At December 31, 1998, 28,607,997 potential common shares are
excluded from the determination of diluted net loss per share as the effect of
such shares on a weighted average basis is anti-dilutive.

Pro forma net loss per share (unaudited)

Pro forma net loss per share for the year ended December 31, 1998 is computed
using the weighted average number of common shares outstanding, including the
pro forma effects of the automatic conversion of the Company's Series A and
Series B Convertible Preferred Stock into shares of the Company's Common Stock
as if such conversion occurred on January 1, 1998, or at date of original
issuance, if later. The resulting pro forma adjustment includes an increase in
the weighted average shares used to compute basic and diluted net loss per
share of approximately 10,295,000 shares for the year ended December 31, 1998.
The pro forma effects of these transactions are unaudited and have been
reflected in the accompanying pro forma consolidated statement of operations.

Pro forma shareholders' equity (unaudited)

Effective upon the closing of the Company's planned initial public offering
("Offering"), the outstanding shares of Series A and Series B Convertible
Preferred Stock, with the exception of 53,293 shares of preferred stock that
Critical Path intends to repurchase at $4.26 per share prior to the closing of
the offering, will automatically convert into 12,725,864 and 3,636,739 shares,
respectively, of Common Stock. In addition, warrants relating to 233,887 shares
of Series A Preferred and 57,813 shares of Series B Preferred Stock are
expected to be exercised on a net basis immediately prior to the close of the
Offering. The pro forma effects of these transactions are unaudited and have
been reflected in the accompanying pro forma consolidated balance sheet at
December 31, 1998.

Comprehensive income

Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income

F-9
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. To date, the Company has not had any transactions that are required to
be reported in comprehensive income other than its net loss.

Segment information

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. In accordance with the provisions of SFAS No. 131, the
Company has determined that it does not have separately reportable operating
segments.

Recent accounting pronouncements

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company does not expect
that the adoption of SOP No. 98-1 will have a material impact on its
consolidated financial statements.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Company is required to adopt SFAS 133
in fiscal 2000. SFAS 133 established methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities.

NOTE 2--BALANCE SHEET COMPONENTS:

<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
---- -------
(in
thousands)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable......................................... $ -- $ 171
Less: Allowance for doubtful accounts..................... -- (50)
---- -------
$ -- $ 121
==== =======
Property and equipment, net:
Computer equipment and software............................. $440 $ 5,247
Furniture and fixtures...................................... 34 74
Leasehold improvements...................................... 53 411
---- -------
527 5,732
Less: Accumulated depreciation and amortization........... (26) (1,045)
---- -------
$501 $ 4,687
==== =======
</TABLE>

F-10
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Property and equipment includes $118,000 and $4,832,000 of assets under
capital leases at December 31, 1997 and 1998, respectively. Accumulated
depreciation of assets under capital leases totaled $3,000 and $765,000 at
December 31, 1997 and 1998, respectively.

<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Accrued liabilities:
Compensation related....................................... $ 18 $ 89
Other...................................................... 16 337
------ -------
$ 34 $ 426
====== =======
</TABLE>

NOTE 3--RELATED PARTY TRANSACTIONS:

Notes receivables from shareholders

At December 31, 1998, the Company had notes receivable from shareholders and
officers of the Company related to purchases of Common Stock in the amount of
$85,000 and $1,066,000 which accrue interest at 5.69% and 4.51% per annum,
respectively. The notes are full recourse and secured by Common Stock. The
notes are due and payable in February 2003 or, for the $1,066,000 note, 90 days
following termination of the officer.

At December 31, 1998, the Company held a note receivable from an officer
totaling $500,000. The note accrues interest at the rate of 4.51% per annum, is
secured by all shares of the Company's Common Stock held by this individual,
and is due and payable in November 2003 or 30 days following termination.

Revenues

In April 1998, the Company entered into an email services agreement with a
significant customer, who is also a holder of the Company's Series B Preferred
Stock. Net revenues from this shareholder approximated $605,000 in 1998.

NOTE 4--INCOME TAXES:

No provision for income taxes was recorded due to the net losses for the
periods from February 19, 1997 (Inception) to December 31, 1998.

At December 31, 1998, the Company had deferred tax assets of approximately
$4,001,000. Management believes that, based on a number of factors, it is more
likely than not that the deferred tax assets will not be realized, such that a
full valuation allowance has been recorded. Deferred tax assets relate
primarily to net operating loss carryforwards.

At December 31, 1998, the Company had approximately $8,803,000 of federal and
state net operating loss carryforwards available to offset future taxable
income which expire in varying amounts beginning in 2012 and 2005,
respectively. Under the Tax Reform Act of 1986, the amounts

F-11
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of and benefits from net operating loss carryforwards may be impaired or
limited in certain circumstances. Events which cause limitations in the amount
of net operating losses that the Company may utilize in any one year include,
but are not limited to, a cumulative ownership change of more than 50%, as
defined, over a three year period.

NOTE 5--BORROWINGS:

Line of credit

At December 31, 1998, the Company maintained a revolving line of credit with
a bank that provides for borrowings of up to $1,000,000. The line of credit
expires in November 1999 and accrues interest on outstanding borrowings at a
rate equal to the bank's prime rate plus 2.0% (9.75% at December 31, 1998). The
line of credit requires the Company to meet certain financial tests and to
comply with certain other covenants. Borrowings are secured by substantially
all of the assets of the Company. At December 31, 1998, there were no
borrowings outstanding and the Company was in compliance with all restrictive
covenants.

Convertible promissory notes

At December 31, 1997, the Company had obligations totaling $420,000 under 7%
convertible promissory notes payable to individual investors. In April 1998,
the principal amount of the notes was converted into 582,040 shares of Series A
Convertible Preferred Stock at $0.72 per share.

In January and February 1998, the Company issued an additional $430,000 of 7%
convertible promissory notes to individual investors. In April 1998, the
principal amount of the notes was converted into 595,897 shares of Series A
Convertible Preferred Stock at $0.72 per share.

Convertible promissory notes--related parties

At December 31, 1997, the Company had obligations totaling $427,000 under 7%-
10% convertible promissory notes payable to the Company's founder and an
individual associated with the founder. In April 1998, $200,000 of the
principal amount of the notes was converted into 277,162 shares of Series A
Convertible Preferred Stock at $0.72 per share and the remaining balance of
$227,000 was repaid in cash.

In January and February 1998, the Company issued an additional $70,000 of 7%
convertible promissory notes to a member of the Board of Directors and an
individual associated with the Company's founder. In April 1998, the principal
amount of the notes was converted into 97,006 shares of Series A Convertible
Preferred Stock at $0.72 per share.

NOTE 6--COMMITMENTS:

Leases

The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2002. Rent expense for
the period from February 19,

F-12
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1997 (inception) to December 31, 1997 and the year ended December 31, 1998,
totaled $33,000 and $220,000, respectively.

Future minimum lease payments under noncancelable operating and capital
leases, including operating lease commitments entered into subsequent to
December 31, 1998, are as follows:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
Year Ending December 31, ------- ---------
(in thousands)
<S> <C> <C>
1999...................................................... $1,792 $358
2000...................................................... 1,779 222
2001...................................................... 979 213
2002...................................................... 3 103
------ ----
Total minimum lease payments.............................. 4,553 $896
====
Less: Amount representing interest........................ (453)
Unamortized discount.................................... (144)
------
Present value of capital lease obligations................ 3,956
Less: Current portion..................................... (1,502)
------
Long-term portion of capital lease obligations............ $2,454
======
</TABLE>

Equipment lease lines

In April 1998, the Company entered into a financing agreement that provides
for the acquisition of equipment up to $1,000,000. Amounts available under this
agreement are limited to specific acquisitions through March 2001 and are
collateralized by the related equipment. Such amounts are payable over a three-
year period in monthly installments of principal and interest, with interest
accruing at a rate of 6.3% per annum.

In April 1998, the Company entered into another financing agreement which
provides for the acquisition of equipment up to $2,000,000. Amounts available
under this agreement are limited to specific acquisitions between May 1, 1998
and April 30, 1999. Such amounts are payable over a three-year period in
monthly installments of principal and interest, with interest accruing at the
rate of 7.0% per annum. As part of this agreement, the Company issued warrants
to purchase 97,006 shares of Series A Preferred Stock at a purchase price of
$0.72 per share. The Company estimated the fair value of these warrants at date
of issuance was approximately $53,000 which is being amortized as interest
expense over the term of the lease obligation.

In May 1998, the Company entered into a financing agreement which provides
for the acquisition of equipment up to $3,500,000 and software and tenant
improvements up to $1,500,000. Amounts available under this agreement are
limited to specific acquisitions between March 1, 1998 and May 1, 1999. Such
amounts are payable over a three-year period in monthly installments of
principal and interest, with interest accruing at the rate of 7.0% per annum.
As part of this agreement, the Company issued warrants to purchase 242,516
shares of Series A Preferred Stock at a purchase price of $0.72 per share. The
Company estimated the fair value associated with these warrants at date of
issuance was approximately $133,000 which is being amortized as interest
expense over the term of the lease obligation.

F-13
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Email service commitments

Net revenues are derived from contractual relationships which typically have
one to two 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.

NOTE 7--SHAREHOLDERS' EQUITY:

As of December 31, 1998, the Company's Articles of Incorporation authorized
the Company to issue 38,636,363 shares of Common Stock at $0.001 par value, and
13,288,519 and 10,000,000 shares of Series A and Series B Convertible Preferred
Stock ("Preferred Stock"), respectively, at $0.001 par value.

Preferred Stock

On April 1, 1998, the Company completed its Series A Convertible Preferred
Stock ("Series A") financing through the issuance of 12,707,851 shares at a
price per share of $0.72 for net cash proceeds of $7,991,000, and the
conversion of convertible promissory notes payable totaling $1,120,000. The
Company issued an additional 18,013 shares of Series A Preferred Stock to the
convertible promissory note holders upon the exercise of their warrants for
proceeds of $13,000.

In September 1998, the Company issued 3,636,739 shares of its Series B
Convertible Preferred Stock ("Series B") at $4.26 per share for net proceeds of
approximately $15,441,000.

The holders of Preferred Stock have various rights and preferences as
follows:

Voting

Each share of Preferred Stock has voting rights equal to an equivalent number
of shares of Common Stock into which it is convertible and votes together as
one class with Common Stock.

As long as at least 2,954,545 shares of Preferred Stock remain outstanding,
the Company must obtain approval from a majority of the holders of Preferred
Stock to declare or pay any dividend on Common Stock; redeem, purchase or
otherwise acquire any Common Stock other than shares subject to right of
repurchase by the Company; cause the acquisition, reorganization, merger or
consolidation of the Company that results in a transfer of 50% or more of the
voting control of the Company; authorize or issue another equity security
having a preference over, or being on parity with, the Series A and Series B;
or increase the number of directors of the Company.

As long as at least 681,818 shares of Preferred Stock remain outstanding, the
Company must obtain approval from a majority of the holders of Preferred Stock
to alter the Articles of Incorporation as it relates to the Preferred Stock or
change the authorized number of shares of Preferred Stock.

F-14
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Dividends

Holders of Series A and Series B are entitled to receive noncumulative
dividends at the per annum rate of $0.0577 and $0.34 per share, respectively,
when and if declared by the Board of Directors. The holders of Preferred Stock
will also be entitled to participate in dividends on Common Stock, when and if
declared by the Board of Directors, based on the number of shares of Common
Stock held on an as-if converted basis. No dividends on Preferred Stock or
Common Stock have been declared by the Board of Directors.

Liquidation

In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners
of the Company's Common Stock and Preferred Stock own less than 51% of the
resulting voting power of the surviving entity, the holders of Series A and
Series B are entitled to receive an amount of $0.72 and $4.26 per share,
respectively, plus any declared but unpaid dividends prior to and in preference
to any distribution to the holders of Common Stock. The remaining assets, if
any, shall be distributed ratably among the holders of Common Stock. Should the
Company's legally available assets be insufficient to satisfy the liquidation
preferences, the funds will be distributed ratably among the holders of
Preferred Stock.

Conversion

Each share of Preferred Stock is convertible, at the option of the holder,
according to a conversion ratio, subject to adjustment for dilution. Each share
of Preferred Stock automatically converts into the number of shares of Common
Stock into which such shares are convertible at the then effective conversion
ratio upon: (1) the closing of a public offering of Common Stock at a per share
price of at least $15.50 per share with gross proceeds of at least $30,000,000,
or (2) the consent of the holders of the majority of Convertible Preferred
Stock. The initial conversion ratio of Preferred Stock for Common Stock is 1 to
1.

Warrants and Stock Purchase Rights

In May 1998, the Company issued a right to purchase 454,544 shares of Common
Stock or Preferred Stock in a subsequent financing to a customer as part of an
email services agreement. Under the agreement, the price shall be 80% of the
price at which the stock is sold in the subsequent financing for the initial
227,272 shares and 100% of such price for the remaining 227,272 shares. In
September 1998, the Company completed its initial Series B financing at a per
share price of $4.26. The Company has estimated the fair value of the purchase
right to be $194,000, which will be recognized as a sales discount over the
term of the services agreement. Approximately $136,000 was recognized in 1998.
No warrants were exercised as of December 31, 1998.

In May 1998, the Company issued to a different customer, a warrant to
purchase up to $250,000 of Preferred Stock in the Company's next financing
round. The warrant is exercisable until December 31, 2001 and the exercise
price per share will equal the price per share at which the Preferred Stock is
sold by the Company. In September 1998, the warrants were exercised in

F-15
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

connection with the Series B financing at a per share price of $4.26. The
Company has estimated the fair value of the warrants approximated $143,000,
which will be recognized as a sales discount over the term of the services
agreement. Approximately $95,000 was recognized in 1998.

In connection with various financing agreements described in Note 6, the
Company issued warrants to purchase 339,522 share of Series A at $0.72 per
share. The warrants are exercisable for seven years from May 1, 1998, or five
years from the effective date of the Company's initial public offering,
whichever is shorter. As of December 31, 1998, no warrants were exercised.

In connection with the issuance of certain convertible promissory notes
described in Note 5, the Company issued warrants to purchase 113,636 shares of
Common Stock at $0.02 per share and 241,123 shares of Series A at $0.72 per
share. These warrants are exercisable for one and three years, respectively.
The warrants to purchase Common Stock were exercised in September 1998. At
December 31, 1998, warrants to purchase 18,013 shares of Series A had been
exercised. The Company estimated the fair value of the warrants issued at
approximately $119,000 which is being amortized as interest expense.

In connection with the initial Series B financing, the Company issued
warrants to purchase 70,290 shares of Series B at $4.26 per share to the
placement agent. As of December 31, 1998, no warrants were exercised.

Common Stock purchase agreements

In February 1998, the Company entered into stock purchase agreements with
three founders and sold 3,863,635 shares of the Company's Common Stock at $0.02
per share. Under the terms of the stock purchase agreements, the Company has
the right to purchase the shares of Common Stock at the original issue price in
the event any one of the founders ceases to be an employee of the Company. The
repurchase rights lapse 25% on the first anniversary of the vesting start date
and ratably each month thereafter for 36 months. In the event of a change in
control of the Company or the closing date of an Initial Public Offering, as
defined, repurchase rights with respect to 50% of the then unvested shares of
Common Stock will lapse. At December 31, 1998, 2,130,680 of these shares of
Common Stock were subject to repurchase rights. In connection with the issuance
of these shares, the Company recorded unearned compensation of $1,306,000 which
is being recognized over the periods in which the Company's repurchase rights
lapse.

In November 1998, the Company entered into stock purchase agreement with an
officer who exercised stock options to purchase 1,274,687 shares of the
Company's Common Stock at a price of $0.84 per share. Under the terms of the
stock purchase agreement, the Company has the right to purchase the shares of
Common Stock at the original issue price in the event the officer ceases to be
an employee of the Company. The repurchase rights lapse 25% on the first
anniversary of the vesting start date and ratably each month thereafter for 36
months. In the event of a change in control of the Company or the closing date
of an Initial Public Offering, as defined, repurchase rights with respect to
50% of the then unvested shares of Common Stock will lapse. At December 31,
1998, 1,274,687 of these shares of Common Stock were subject to repurchase
rights. In connection with the option grant preceding this transaction, the
Company recognized unearned compensation totaling $3.8 million which is
included in the aggregate unearned compensation charges disclosed in Notes 8
and 9 to these consolidated financial statements.

F-16
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 8--STOCK OPTIONS:

In January 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan. The Plan provides for the granting of up to 12,288,741 stock
options to employees and consultants of the Company. Options granted under the
Plan may be either incentive stock options ("ISO") or nonqualified stock
options ("NSO"). ISOs may be granted only to Company employees (including
officers and directors who are also employees). NSOs may be granted to Company
employees and consultants.

Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO may not be less than 100% of the estimated fair
value of the shares on the date of grant, and (ii) the exercise price of an ISO
granted to a 10% shareholder may not be less than 110% of the estimated fair
value of the shares on the date of grant. Options generally vest 25% per year
and are exercisable for a maximum period of ten years from the date of grant.

The following table summarizes activity under the Plan for the year ended
December 31, 1998:

<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------
Weighted
Average
Exercise
Shares Price
---------------- ---------------
<S> <C> <C>
Granted..................................... 10,595,453 $0.74
Exercised................................... (1,924,723) 0.58
Canceled.................................... (918,174) 0.16
----------------
Outstanding at end of period................ 7,752,556 0.86
================
Options exercisable at period end........... 939,522 0.02
================
Weighted average minimum value of options
granted during period...................... 1.56
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding at December 31, 1998 at December 31, 1998
------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Price Outstanding Life Price Exercisable Price
----------------------- -------------- -------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.02-$0.55 2,850,201 9.2 years $ 0.08 939,522 $0.02

$0.84-$2.20 4,902,355 9.8 years 1.30 -- --

-------------- -------
7,752,556 9.5 years 0.89 939,522 0.02
============== =======
</TABLE>

F-17
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Fair value disclosures

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

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Risk-free interest rates......................... 6.0% 5.9%
Expected lives (in years)........................ 4.0 4.0
Dividend yield................................... 0.0% 0.0%
Expected volatility.............................. 0.0% 0.0%
</TABLE>

The compensation cost associated with the Company's stock-based compensation
plans, determined using the minimum value method prescribed by SFAS No. 123,
did not result in a material difference from the reported net loss for the year
ended December 31, 1998.

Unearned stock-based compensation

In connection with certain stock option grants and common stock issuances
during the year ended December 31, 1998, the Company recognized unearned
compensation totaling $19,882,000 which is being amortized over the vesting
periods of the related options. Amortization expense recognized during the year
ended December 31, 1998 totaled approximately $2,511,000.

NOTE 9--SUBSEQUENT EVENTS:

Reverse Stock Split

On March 1, 1999, the Company's Board of Directors approved a 1:2.2 reverse
stock split of the Company's outstanding shares which became effective on March
19, 1999. All share and per share information included in these consolidated
financial statements have been retroactively adjusted to reflect this reverse
stock split.

Series B Convertible Preferred Stock Financing

In January 1999, the Company completed the second round of the Series B
financing through the issuance of 2,772,708 shares at $4.26 per share for gross
proceeds of approximately $11,817,000. In connection with this financing, the
Company issued warrants to purchase 51,364 shares of Series B at $4.26 per
share to the placement agent.

Exercise of Stock Purchase Rights

In January 1999, a customer exercised stock purchase rights granted in May
1998 to purchase 454,544 shares of Series B for cash proceeds of approximately
$1,744,000.

Employee Stock Purchase Plan

In January 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan") effective on the date of the Offering. The
Purchase Plan reserves 600,000 shares

F-18
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

for issuance thereunder. Employees generally will be eligible to participate in
the Purchase Plan if they are customarily employed by the Company for more than
20 hours per week and more than five months in a calendar year and are not 5%
or greater shareholders. Under the Purchase Plan, eligible employees may select
a rate of payroll deduction up to 15% of their compensation subject to certain
maximum purchase limitations. The Purchase Plan will be implemented in a series
of overlapping twenty-four month offering periods and beginning on the
effective date of the Offering and subsequent offering periods will begin on
the first trading day on or after May 1 and November 1 of each year. Purchases
will occur on each April 30 and October 31 (the "purchase dates") during each
participation period. Under the Purchase Plan, eligible employees will be
granted an option to purchase shares of Common Stock at a purchase price equal
to 85% of the fair market value per share of Common Stock on either the start
date of the offering period or the date on which the option is exercised,
whichever is less. If the fair market value of the Common Stock on any purchase
date (other than the final purchase date) is lower than the fair market value
on the start date of that offering period, then all participants in that
offering period will be automatically withdrawn from such offering period and
re-enrolled in the offering period immediately following.

Stock Option Grants

In January and March 1999, the Company granted incentive stock options to
employees to purchase 1,789,110 shares of Common Stock at exercise prices
ranging between $3.39 and $7.13 per share. In connection with such option
grants, the Company recognized unearned compensation totaling $18,108,000 which
is being amortized over the four year vesting period of the related options.

Sale of Common Stock

In January 1999, the Company sold 1,090,909 shares of Common Stock at a price
of $2.20 per share to a customer that also agreed to provide marketing related
services. In connection with the transactions, the Company recognized a charge
totaling $2,247,000 that will be attributed to sales and marketing expense over
the one year term of the agreement.

Repurchase of Preferred Stock

Prior to the closing of the offering, the Series B placement agent has agreed
to sell back to the Company at $4.26 per share an aggregate of 53,293 shares
held by the placement agent or its affiliates.

F-19
<PAGE>

CRITICAL PATH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Common Stock Warrant Issued for Services

In January 1999, the Company entered into an agreement with ICQ, Inc., a
subsidiary of America Online, Inc., pursuant to which it will provide email
hosting services that will be integrated with ICQ's instant messaging service
provided to ICQ's customers. The ICQ instant messaging service is designed to
allow users to communicate in real time over the Internet. As part of the
agreement, ICQ agreed to provide sub-branded advertising for the Company in
exchange for a warrant to purchase 2,442,766 shares of Series B, issuable upon
attainment of each of five milestones. The following table summarizes the
shares underlying each milestone and the related exercise price:

The shares underlying the first milestone were immediately vested on the
effective date of the agreement. The shares underlying the remaining milestones
vest on the dates that ICQ completes registration of the specified number of
sub-branded ICQ mailboxes applicable to each milestone. Using the Black-Scholes
option pricing model and assuming a term of seven years and expected volatility
of 90%, the initial fair value of the warrant on the effective date of the
agreement approximated $16.5 million, which is being amortized to advertising
expense using the straight-line method over four years. The shares underlying
the second through fifth milestones will be remeasured at each subsequent
reporting date until each sub-branded ICQ mailbox registration threshold is
achieved. In the event such remeasurement results in increases or decreases
from the initial fair value, which could be substantial, such increases or
decreases will be recognized immediately, in the event the fair value of the
shares underlying the milestone has been previously recognized, or over the
remaining term.

F-20
<PAGE>

INSIDE BACK COVER

the
brand
behind
the
brand

[pictures of Critical Path
customer branded
web mail interfaces
appears here]
<PAGE>

Until April 23, 1999, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

[LOGO OF CRITICAL PATH, INC.]