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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended: December 31, 2004

OR

For the transition period from              to            .

Commission File Number 000-25331

CRITICAL PATH, INC.

(Exact name of Registrant as specified in its charter)

(415) 541-2500

(Registrant’s telephone number, including area code)

None

(Securities registered pursuant to Section 12(b) of the Act)

Common Stock, Series C

Participating Preferred Stock Purchase Rights

(Securities registered pursuant to Section 12(g) of the Act and Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

The aggregate market value of voting and non-voting common stock held by non-affiliates of the Registrant was approximately $28,189,916 as of June 30, 2004, based on the closing price of the Common Stock as reported on the Nasdaq National Market for that date. Shares of common stock held as of June 30, 2004 by each director and executive officer of the Registrant, as well as shares held by each holder of more than 10% of the common stock known to the Registrant, have been excluded for purposes of the foregoing calculation. This determination of affiliate status is not a conclusive determination for other purposes.

There were 29,784,123 shares of the Registrant’s Common Stock issued and outstanding on March 1, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement (the “Proxy Statement”) to be mailed to shareholders in connection with its 2005 annual meeting of shareholders are incorporated by reference into Part III of this report. Except as expressly incorporated by reference, the Registrant’s Proxy Statement shall not be deemed to be part of this report.

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Critical Path, Inc.

Index to Annual Report on Form 10-K

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

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

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

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PART I

ITEM 1. BUSINESS

Overview

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

Messaging. Our messaging applications are typically licensed by telecommunications carriers, service providers and government agencies, and some highly distributed enterprises for deployment in their data centers. These licenses are usually sold as a perpetual license on a per-user basis, one for each person who might access the capabilities provided by the software. We also offer our messaging solutions as hosted services, where we provide access to and host email, personal information management such as calendar and contacts, resource scheduling, and “newsgroups” over the Internet and wireless networks for enterprises, telecommunications operators, and, for certain services, consumers. Unlike with licensed software, customers of these services do not need to install or maintain their own copies of the software. Instead, customers pay initial setup fees and regular monthly, quarterly or annual subscriptions for the services they would like to be able to access.

Identity management. Our identity management software is typically licensed by large enterprises, government agencies, and telecommunications carriers and is deployed on site in their data centers. Our identity management software is usually sold as a perpetual license according to the number of data elements and different business systems being managed. These layered applications are usually licensed per user.

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

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

Critical Path’s Products and Services

Our messaging solutions are designed to provide integrated access to a broad range of communication and collaboration applications from wireless devices, web browsers, desktop clients and voice systems. Our messaging solutions can integrate with third-party applications and systems, enabling customers to protect existing investments and maintain flexibility to adapt to future needs. Our target markets for our messaging solutions include fixed line, broadband and wireless providers as well as some enterprises and government agencies.

In 2004, we began to focus our marketing and product development efforts in the messaging market on consumer messaging solutions for service providers. In order to communicate this focus to the marketplace, we

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introduced a new brand of solutions and new brand image in February 2005. The new brand—Memova^™ —will be used with our messaging solutions, including Memova^™ Messaging, Memova^™ Mobile and Memova^™ Anti-Abuse. The new Memova brand is intended to bring with it a more innovative, consumer-oriented image for us, better differentiating ourselves from our competitors and strengthening the market’s perception of the company as a provider of mobile and broadband messaging solutions for the consumer mass market.

Our identity management solutions are designed to extend these benefits of lower helpdesk costs, increased security and easier implementation of regulatory compliance to an organization’s applications, databases, directories and systems. Identity data, such as names, user ids, passwords, email addresses, phone numbers, group affiliations, roles and access rights, that are scattered throughout disparate data systems in an organization are consolidated according to highly customizable business rules into a consistent, accurate profile of each user. Then, using customer-specified policies, appropriate portions of this clean identity data are automatically distributed to all applications and systems that depend upon having accurate, up-to-date information about each user. This reduces the need for manual processes, reducing errors and delays that can add costs and make organizations less secure. Our target markets for our identity management solutions include enterprises, governments, carriers and service providers.

Messaging Solutions

Our messaging solutions include:

Our messaging solutions are comprised of integrated messaging application products that work together to share data in order to deliver an improved user experience and provide intelligent processing of messages. For example, a meeting in someone’s calendar can automatically trigger an alert that is dynamically routed to the user via email, wireless, or instant message, depending upon the time of day, subject, or other user-configured attributes. After reading the alert, the user can send messages to co-workers listed in his or her personal address book, the same one used by our other messaging applications. Providing these capabilities on an integrated basis can reduce the complexity of deployments, simplifies on-going support and reduces the total cost of ownership.

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Our messaging application products include:

Our messaging solutions are built upon an integrated technology base called the Critical Path Communications Platform. This platform is designed for high scalability and reliability as well as easy integration, deployment and flexibility. The Critical Path Communications Platform provides a wide range of functions that manage connectivity of web, wireless, and voice devices to applications. The following are the key components of the Critical Path Communications Platform:

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Our messaging solutions are available as both licensed software for on-premise deployment, and as hosted services. Our licensed software and professional consultants help customers integrate our products into their other applications and systems and offer a wide range of options for customization. Our hosted services are designed to enable customers to outsource implementation and operation of advanced messaging services. These services also offer standards-based email service for carriers and service providers, Web hosting companies, Web portals and corporate enterprises providing accounts to their end-users for activities such as trading securities, shopping or participating in online communities. Specifically, our hosted messaging services include an extensive suite of messaging services, including email, calendaring, centralized address books, shared files, dynamic alerts and synchronization, that co-exist and interoperate with existing messaging systems. The benefits of this service includes predictable monthly costs, consistent reliability and professional billing, provisioning and reporting are designed to minimize the hassles of operations and to scale smoothly as the number and needs of users grow. Our hosted services can also be used as a backup for internal mail systems, enabling rapid restoration of mission-critical email connectivity in the event of a failure of a primary mail system.

Identity Management Solutions

Our identity management solutions include:

Our identity management solutions are comprised of identity management application products that organize and manage user identity information, such as names, user ids, passwords, email addresses, telephone numbers, group affiliations, roles and access rights, for applications, databases, directories and operating systems. They offer high scalability, capable of supporting millions of entries with a single deployment.

Our identity management products include:

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Target Markets, Customers and Strategic Alliances

Customers and Target Markets

We offer messaging and identity management solutions to enterprises, wireless carriers and telecommunications providers, broadband companies and service providers, and government agencies and postal authorities.

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Strategic Alliances

A key element of our sales strategy is to expand distribution channels through strategic reseller or joint sales relationships. These alliances can provide access to a greater range of markets and customers by increasing the breadth of offerings that incorporate our products and services:

Information regarding customers and sales by geographic area is included in Note 17—Product and Geographic Information in the Notes to Consolidated Financial Statements.

Sales and Marketing

Sales Strategies

Direct Sales. We maintain a direct sales force to introduce prospective customers and channel partners to our products and services and to work in tandem with our business partners. Our worldwide direct sales team is organized around our target markets in each of our key geographic regions. Currently, we have sales staff located in domestic offices in or near San Francisco, Dallas, Chicago, Atlanta and a variety of other cities that cover North America. Internationally we have members of our sales organization located in Brazil, Denmark, France, Germany, India, Ireland, Italy, the Netherlands, Spain, Sweden, Switzerland, Indonesia, Australia and the United Kingdom that cover Southeast Asia, China, Europe, Africa and Latin America.

Channel Sales. We actively embrace sales alliances with specialized technology and service firms in a variety of channels in order to increase our presence and share in our target markets. Our flexible, customizable solutions are well suited for these firms and channel delivery, offering numerous opportunities for adding value through consulting services and integration with complementary products. We team with global system integrators, or SIs, independent software vendors, or ISVs, original equipment manufacturers, or OEMs, and hardware vendors.

Marketing Strategies. Our global marketing team is focused on product definition, lead generation, sales support and public relations to better equip our sales force and companies with whom we have sales alliances and to educate our key markets about the business value of our messaging and identity management solutions. We intend to continue to focus on targeted industry events, particularly in conjunction with our strategic alliances, to promote our brand presence and acquire customers.

Competition

Although we are not aware of any one company that directly competes with every one of our products and services, we face a different set of competitors in each of our lines of business. Our messaging solutions compete against offerings from Openwave Systems Inc., Sun Microsystems’ Sun ONE software division (formerly iPlanet), Microsoft Corporation, Mirapoint Inc. and IronPort Systems, Inc., as well as with a variety of smaller

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product suppliers. In the identity management market, we compete primarily with Sun Microsystems’ Sun ONE software division (formerly iPlanet), IBM Corporation, Microsoft Corporation, Novell Corporation, Siemens Corporation and Computer Associates, as well as various small identity management application vendors. In the market for outsourced hosted email services, we compete with such corporations as Outblaze Limited, BlueTie, Inc. and other smaller application service providers offering hosted Microsoft Exchange services.

While these competitors and others exist in each of our individual lines of business, we believe our overall solution of products and services serves as a competitive advantage. Our products and services are designed to help customers easily integrate our broad range of products into their infrastructure, selecting multiple products and services from us as their requirements demand. In addition, our ability to deliver our messaging solutions either as licensed software or as hosted solutions enables our customers to choose the most efficient model for different parts of their business.

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

The relative importance of each of these factors depends upon the specific customer environment. Although we believe that our products and services currently compete favorably with respect to such factors, we may not be able to maintain our competitive position against current and potential competitors.

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

Technology

Messaging

The Critical Path Communications Platform includes a range of tools and software development kits, or SDKs, that provide extensive customization and easy integration with third-party technologies. These components can be used on a standalone basis or together in many combinations, enabling us to deliver flexible solutions. The Critical Path Communications Platform operates on Sun Microsystems’ Solaris, Red Hat’s distribution of the Linux operating systems and HP’s HP-UX operating systems, with additional support for various components on IBM’s AIX and Microsoft’s Windows NT/2000.

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We separate the construction and presentation of user interfaces for each application into a separate, highly extensible application server framework called Presentation Server. This approach enables the creation of customized, personalized application user interfaces to the Critical Path Communications Platform components and third party technologies through a powerful SDK. It offers mixed mode communications, so that services can be accessed from a multitude of devices ranging from the desktop, laptop, PDA, mobile handset or telephone using text, voice, and video. The Presentation Server is based on Java 2 Enterprise Edition, or J2EE, and Java Server Pages, or JSP, technologies, and supports Hypertext Markup Language, or HTML, Wireless Markup Language, or WML, VoiceXML and a range of other interface markup languages.

Our SyncML Server is a flexible engine for synchronizing information between server-based applications such as our messaging applications and client devices such as wireless phones. Our Short Message Service Access Server is a powerful application framework that enables the development of premium text messaging applications that send Short Message Service, or SMS, messages. The SMS Access Server includes an application development SDK, or SMASI, that applications can use to drive SMS traffic through all of the major SMS Center, or SMSC, operations software systems. Our SMS Access Server also includes WAP Push support to enable next generation wireless applications like premium Multimedia Messaging Service, or MMS, services.

Our Messaging Server is a scalable, standards-based, messaging server with a powerful native IMAP mail store and SMTP relay. Its advanced architecture allows single or multiple domains to be split over multiple servers, distributed geographically as well as setup as clusters. It also has support for security features including secure-socket-layer, or SSL as well as anti-virus and anti-spam filtering.

Our hosted messaging service is comprised of multiple groups of servers and routers acting as a single, virtual point of contact to customers for messaging services. All aspects of our hosted messaging service are, in turn, deployed in a redundant configuration with the goal that if any process or system goes down, another will be available to handle customer traffic seamlessly. This behavior is called “transparent failover” and is designed to increase the availability of messaging services to the customer. Our hosted messaging service also includes a dynamic load-balancing system that acts as proxy servers for firewall safety. The load balancers are configured in parallel so that if one goes down, the load is transferred to the remaining systems. We have created a proprietary account provisioning protocol for account creation and maintenance. This enables account transitioning from other services or legacy systems to be bulk-loaded, tested, replicated and deployed on our service automatically. This protocol addresses a critical time to market issue by helping organizations to quickly transition to new email systems based on standards promulgated by the Internet Engineering Task Force, including Internet Message Access Protocol, or IMAP, Post Office Protocol version 3, or POP3, and Simple Mail Transfer Protocol, or SMTP.

Our data centers provide high-speed connections to diverse backbone providers and robust network architecture and feature redundant systems for power; raised floors; seismically braced racks; fire protection; and physical security and surveillance 24 hours a day, seven days a week. In addition, we have a diverse set of firewall solutions that are specifically tailored for each of our hosted services. To enhance security for our network, we monitor the network hardware 24 hours a day, seven days a week. One of the important features of our messaging service is sophisticated spam blocking to help guard against unsolicited commercial email and virus scanning to help prevent the spread of Internet viruses and worms.

Identity Management

The Critical Path Directory Server provides a common store of user or resource information that can be accessed via standard LDAP and X.500 protocols. The Directory can be used to store user profiles, digital certificates from PKI software and eBusiness systems. The Directory can be distributed over multiple systems to provide improved performance and ease of replication and updates.

At the core of our Meta-Directory technology is an engine for gathering data about users from a variety of business systems, including the various components of the Critical Path Communications Platform. Our Meta-Directory comes with plug-in “connectors” for a wide range of systems including Sybase’s SQL Server,

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Microsoft’s Exchange, Lotus Notes, and products from Oracle Corporation, Peoplesoft Corporation, Siebel Systems and mainframe applications. It also connects to all of the major directory systems on the market, including Critical Path’s Directory Server, Microsoft’s Active Directory, Novell’s eDirectory and iPlanet’s Directory Server. Meta-Directory also includes a powerful SDK that enables the development of custom connectors using Perl, Java, XML and SOAP, freeing customers from having to learn proprietary scripting languages. Critical Path’s Directory and Meta-Directory both incorporate security technology like SSL for secure transport and authentication.

We also offer a layered application called Critical Path Password Management. This software provides easy-to-use graphical interfaces for managing multiple passwords from a centralized location.

Research and Development

Our products and services are primarily based on systems that were internally developed or acquired through acquisitions.

We invested $19.6 million, $19.0 million and $21.0 million in research and development in 2002, 2003, and 2004, respectively. In addition, we incurred stock-based compensation expense of $1.2 million, $15,000 and $37,000 related to research and development during 2002, 2003, and 2004, respectively. We anticipate that we will continue to devote significant resources to product development in the future as we add new features and functionality to our products and services. The market in which we compete is characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing customer demands. Accordingly, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our products and services. The failure to adapt to such changes would harm our business. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to undertake substantial expenditures to modify or adapt our services or infrastructure.

Intellectual Property

We regard the protection of our trade secrets, patents, patent applications, copyrights and trademarks as critical to our success. We rely on a combination of statute, common law and contractual restrictions to establish and protect our proprietary rights and developed intellectual property in our product and service offerings. We have entered into proprietary information and invention assignment agreements with our employees, contractors and consultants, and nondisclosure agreements with customers, partners and third parties to whom we disclose confidential and proprietary information. Despite our efforts in this regard, former employees or third parties may infringe or misappropriate our proprietary rights that could harm our business. The validity, enforceability and scope of protection of our intellectual property can be tested and in some areas is still evolving.

We have registered “Critical Path” as a trademark and applied for registration of “Memova” in the United States. We have also registered and used “Critical Path” and are using and in the process of registering “Memova” in a variety of foreign countries where we have operations or do business. We plan to continue to enforce those marks and other trademarks in both the United States and internationally, although protection of the marks cannot be assured.

We license our software and proprietary service offerings and despite all efforts to protect that property and ensure the quality of our brand and patented or copyrighted products or processes, current or future licensees could take actions that might harm the value of our intellectual property portfolio, our brand or reputation.

We have been involved in claims by third parties of patent, copyright and trademark infringement against us in the past. Any claim like this, regardless of the merits, could be time consuming to defend, result in costly and

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distracting litigation, cause delays in rollouts of services, products or updates or require us to enter into licensing agreements with third parties. Such licensing agreements may include payment of significant royalties or may not be available to us on commercially reasonable terms. Additionally, enforcing our intellectual property rights could entail significant expense, with such costs also potentially harming our results of operations.

Employees

At December 31, 2004, we had 355 employees, including 150 in services and operations, 57 in sales and marketing, 94 in research and development and 54 in general corporate and administration. Our future success depends, in significant part, upon the continued service of our key technical and senior management personnel and our continuing ability to attract and retain highly qualified and experienced technical, sales and managerial personnel. Competition for such personnel can be intense, and we cannot guarantee that we can retain our key technical and managerial employees or that we will be able to attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

Government Regulation

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

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

Geographic Information

A summary of domestic and international financial data is set forth in Note 17—Product and Geographic Information in the Notes to the Consolidated Financial Statements in Item. 8 of this Annual Report on Form 10-K, which is incorporated herein by reference. A discussion of factors potentially affecting our domestic and international operations is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Additional Factors that May Affect Future Operating Results,” in Item. 7 of this Annual Report on Form 10-K, which is incorporated herein by reference.

SEC Filings and Other Available Information

We were incorporated in California in 1997. We file reports with the United States Securities and Exchange Commission, or SEC, including without limitation annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read and copy any materials we file with the SEC

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at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, we are an electronic filer. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC at the website address located at http://www.sec.gov.

Our telephone number is 415-541-2500 and our website address is located at http://criticalpath.net. The information contained in our website does not form any part of this Annual Report on Form 10-K. However, we make available free of charge through our website our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. In addition, we also make available on http://criticalpath.net our Code of Ethics and Business Conduct for Employees, Officers and Directors. This Code is also available in print without charge to any person who requests it by writing to:

Critical Path, Inc.

Corporate Secretary

350 The Embarcadero

San Francisco, CA 94105

ITEM 2. PROPERTIES

The following table sets forth the materially important facilities that we currently lease:

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In addition to the facilities listed above, we also lease other facilities in the United States and Europe. In the United States we lease other facilities in the states of California, New Jersey, Georgia, Utah and Washington D.C. which are used primarily for selling, marketing and general and administrative purposes. In Europe, we lease other facilities in Britain, France, Germany, Italy, Spain and Sweden which are used primarily for selling, marketing, research and development and general and administrative purposes.

ITEM 3. LEGAL PROCEEDINGS

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

Action in the Superior Court of San Diego. In December 2003, we were named in a lawsuit filed by former shareholders of Remedy Corporation against current and former officers and directors of Peregrine Systems, Inc., Peregrine’s former accountants, some of Peregrine’s customers, including us, and various other unnamed defendants. The operative complaint alleges that we, as Peregrine’s customer, engaged in a fraudulent transaction with Peregrine that was not accounted for by Peregrine in conformity with generally accepted accounting principles (GAAP) and that this substantially inflated the value of Peregrine securities issued as consideration in Remedy’s merger with Peregrine approximately one year later in August 2001. The operative complaint alleges causes of action against us for fraud and deceit, violations of California Corporations Code provisions regarding aiding and abetting securities fraud, common law conspiracy to commit fraud, and common law aiding and abetting the commission of fraud. The complaint seeks an unspecified amount of compensatory and punitive damages, along with rescission of the Peregrine securities purchased in the Remedy merger, interest and attorneys fees. Effective as of January 2005, the Company entered into a settlement agreement providing that the claims against us would be dismissed immediately without prejudice. Thereafter, upon our satisfaction of certain conditions, the plaintiffs are obligated to dismiss the claims with prejudice. Such conditions consist principally of informal discovery such as, for example, providing access to employees and consultants who may have knowledge relevant to the plaintiff’s continuing case against the remaining defendants and providing documents which may be relevant to such case. The settlement involved no cash or other financial consideration. We had not recorded a liability against this claim as of December 31, 2004.

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

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complaints seek an unspecified amount in damages on behalf of persons who purchased our common stock during the specified period. Similar complaints have been filed against 55 underwriters and more than 300 other companies and other individuals. The over 1,000 complaints have been consolidated into a single action. We have reached an agreement in principle with the plaintiffs to resolve the cases. The proposed settlement involves no monetary payment by us and no admission of liability. However, the settlement is subject to approval by the Court. We had not recorded a liability against this claim as of December 31, 2004.

Cable & Wireless Liquidating Trust. In August 2004, we received a demand letter from the Cable & Wireless Liquidating Trust, or the Trust, notifying us of the Trust’s claim that Cable & Wireless, USA, Inc. made a preferential payment to us of approximately $1.1 million within the 90-day preference period before Cable & Wireless filed for bankruptcy protection. We do not believe that we received any preferential payments from Cable & Wireless and communicated our position to the Trust in a letter dated September 3, 2004. To our knowledge, no formal proceedings have been commenced based on this dispute. However, we intend to defend ourselves vigorously if the Trust pursues this claim. We had not recorded a liability against this claim as of December 31, 2004.

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

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

On November 16, 2004, we held our Annual Meeting of Shareholders to vote upon the following proposals:

(1) Elect six directors to serve until the next Annual Meeting or until their successors have been duly elected and qualified;

(2) Approve (a) a capital restructuring proposal to permit the Board of Directors, in its sole discretion, to amend our Amended and Restated Articles of Incorporation to effect a reverse stock spit of Common Stock at a specific ratio to be determined by the Board of Directors within a range from 1-for-2 to 1-for-20; and (b) the form of the Certificate of Amendment to the Amended and Restated Articles of Incorporation by which the Board of Directors may consummate such action;

(3) Ratify the audit committee’s appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the 2004 fiscal year; and

Each of the proposals listed above passed with the following votes as set forth in the tables below:

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Mr. Tom Tinsley’s term as a director continued after the meeting as the designee of the Series D Cumulative Redeemable Convertible Preferred Stock (Series D preferred stock).

There were no broker non-votes for any of the proposals.

Executive Officers and Other Key Employees

The executive officers and other key employees of Critical Path and their ages as of March 15, 2005 are as follows:

Mark J. Ferrer has served as Chief Executive Officer since the end of March 2004, as a director since May 2004 and as Chairman since February 2005. Prior to joining Critical Path, Mr. Ferrer served as president and chief executive officer of Vastera, Inc. from February 2002 to November 2003 and prior to that as its president and chief operating officer from December 1999 to November 2003. From April 1998 to December 1999, Mr. Ferrer held various management positions with the Baan Company, serving as president of Baan Americas and as chief operating officer of Aurum Software. From June 1982 to April 1998, Mr. Ferrer served in various roles at IBM Corporation. Mr. Ferrer serves on the board of directors of Plateau Systems, a private company, and as chairman for Teach for America, DC, a not-for-profit corporation.

James A. Clark has served as Executive Vice President and Chief Financial Officer since February 2004. Prior to joining Critical Path, from January 2002 to October 2003, he was the chief financial officer at Diversified Healthcare Services, Inc., which was acquired by Fair Isaac Corporation. Before that, he was the chief financial officer at several software and services businesses, including StellarNet, Inc. from February 2001 to January 2002, Netopia, Inc. from November 1994 to February 2001 and Integral Systems, Inc from November 1985 to November 1994. He is a certified public accountant.

Michael J. Zukerman has served as Executive Vice President, General Counsel and Secretary since June 2001. From July 1999 to June 2001, he was vice president of business development for Driveway Corporation, a provider of web-based file storage services. Prior to that, Mr. Zukerman was senior vice president of business development, general counsel and secretary at Sega.com, Inc., from October 1996 to June 1999. From 1989 to October 1996, Mr. Zukerman was vice president and general counsel at Netopia, Inc. Prior to that, Mr. Zukerman was an attorney with Brobeck, Phleger & Harrison LLP.

Menelaos (Michael) Serbinis has served as Chief Technology Officer since February 2001. Mr. Serbinis joined Critical Path as its Chief Security Officer in March 2000 and served in this capacity until February 2001. From November 1997 to March 2000, Mr. Serbinis was the chief technology officer of The docSpace Company, which he co-founded in November 1997. From September 1996 to October 1997, Mr. Serbinis was a software engineer for Total Control, a subsidiary of General Electric. From April 1996 to August 1996, Mr. Serbinis was responsible for search engine engineering at Zip2 Corporation.

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Barry Twohig has served as Executive Vice President, Engineering since October, 2002 and as Vice President, Messaging since November 2000, after joining the Company as a result of the acquisition of ISOCOR Corporation, where he held Director of Engineering and other engineering management positions, since February 1995. From August 1988 to January 1995, Mr. Twohig served in various roles at Retix Corporation.

Mark Palomba joined Critical Path in May 2004 as Executive Vice President, Worldwide Services, Support and Asia Pacific. Prior to joining Critical Path, Mr. Palomba served as Senior Vice President, Global Operations at Vastera, Inc. from February 2000 to December 2003. Prior to joining Vastera, Mr. Palomba served as Senior Vice President of Consulting for Baan Americas, a software company from January 1999 to February 2000 and as Vice President of Consulting, Client Services for Aurum Software from July 1998 to January 1999. From 1982 to July 1998, Mr. Palomba held numerous positions with the IBM Corporation.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been traded on the Nasdaq National Market under the symbol “CPTH” since March 1999. For the periods indicated, the following table presents the high and low sale price per share of our common stock (as adjusted to reflect the reverse stock split of our authorized and outstanding common stock in August 2003) as reported on the Nasdaq National Market.

Holders

We have only one class of common stock and as of March 1, 2005, there were approximately 1,162 holders of record of our common stock. Most shares of our common stock are held by brokers and other institutions on behalf of our shareholders.

Dividend Policy

We have never declared or paid any dividends on our common stock nor do we anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance the operations and any expansion of our business. Currently, our credit facility with Silicon Valley Bank prohibits the declaration of dividends absent their consent and an affirmative vote of the holders of a majority of the outstanding Series D preferred stock and holders of a majority of the outstanding Series E Redeemable Convertible Preferred Stock (Series E preferred stock) shall be a prerequisite for the payment of dividends on our common stock. In addition, we are required to pay all accrued and unpaid dividends of our Series D preferred stock and Series E preferred stock before declaring or paying dividends on our common stock. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will depend upon our financial condition, operating results, capital requirements and other factors our Board of Directors deems relevant.

Sales of Unregistered Securities and Purchases of Equity Securities

During the three months ended December 31, 2004, we did not sell any equity securities that were not registered under the Securities Act nor did we repurchase any of our equity securities. However, during the fiscal year ended December 31, 2004, the period covered by this report, we had sales of unregistered equity securities and made repurchases of our equity securities. These transactions are disclosed in our quarterly reports on Form 10-Q as filed with the SEC.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data during the five fiscal years ended December 31, 2000, 2001, 2002, 2003 and 2004 and selected consolidated balance sheet data at December 31, 2000, 2001, 2002, 2003 and 2004 have been derived from our audited consolidated financial statements. The 2003 and 2004 consolidated balance sheet data and the 2002, 2003 and 2004 consolidated statement of operations data are derived from the audited consolidated financial statements presented herein. The data set forth below should be read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

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

We generate revenues from four primary sources:

Software license sales. Our messaging applications are usually sold as a perpetual license on a per-user basis, one for each person who might access the capabilities provided by the software. Our identity management software is usually sold as a perpetual license according to the number of data elements and different business systems being managed. These layered applications are usually licensed per user.

Hosted messaging services. For our hosted messaging services, customers pay initial setup fees and regular monthly, quarterly or annual subscriptions for the services they would like to be able to access.

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

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

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

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Restructuring Initiatives

We have operated at a loss since our inception and as of December 31, 2004, we had an accumulated deficit of approximately $2.3 billion, inclusive of a $1.3 billion charge for impairment of goodwill and other long-lived assets that we recorded in fiscal year 2000. We have undertaken numerous restructuring initiatives in an effort to align our operating structure not only to the business and economic environments through which we have operated but also in response to our changing business in an effort to generate net income. For example:

In September 2004, we received a notice from the landlord of our headquarters facility in San Francisco, California notifying us that the landlord had found a new tenant for our offices located at 350 The Embarcadero per the landlords substitution right in the First Amendment to Lease between SRI Hills Plaza Venture, LLC and Critical Path, Inc. (the Amendment). On March 15, 2005, we received the Substitution Notice from the landlord as required per the Amendment. In accordance with the Substitution Notice, we expect to vacate our facilities at 350 The Embarcadero and move into new office space provided for us at 2 Harrison Street, Suite #200 by no later than June 29, 2005. In connection with the landlord’s substitution right and our relocation, we will be required to make a lease termination payment totaling approximately $1.3 million on June 1, 2005; however, the annual rent, on a cash basis, for our headquarters facility will decline from approximately $2.5 million per year to an amount that, although still under negotiation, we expect to be less than $0.6 million per year. Additionally, we will incur costs related to the physical move and build out of the new facility; however, we cannot currently estimate these costs as we have not yet engaged a moving company nor completed a detailed leasehold improvement plan. We currently believe that the $1.3 million lease termination payment will be accrued as a charge to our statement of operations during the three months ended March 31, 2005.

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

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Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in Note 1—The Company and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements as of and for the year ended December 31, 2004. We believe our most critical accounting policies and estimates include:

Revenue recognition. Our revenues are derived from four primary sources: software license sales, hosted messaging services, professional services and maintenance and support services. Revenues are recognized once the related products or services have been delivered and collection of the associated fees is considered probable.

We also sell our license software products through resellers. Revenues from reseller agreements may include a nonrefundable, advance royalty which is payable upon the signing of the contract and license fees based on the contracted value of our products purchased by the reseller. Additionally, revenues from reseller agreements may include nonrefundable fees related to software license products and related services for an identified customer of the reseller. Guaranteed license fees from resellers, where no right of return exists, are recognized when persuasive evidence of an arrangement exists, delivery of the licensed software has occurred and the collection of a fixed or determinable license fee is considered probable. Non-guaranteed per-copy license fees from resellers are initially deferred and are recognized when they are reported as sold to end-users by the reseller.

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We also enter into arrangements that include multiple products and services where the services are deemed essential to the functionality of a delivered element, under such circumstances we normally recognize the entire arrangement fee using the percentage of completion method. Under this method, individual contract revenues are recorded based on the percentage relationship of the contract input hours incurred as compared to management’s estimate of the total input hours to complete the contract.

Estimating allowance for doubtful accounts and contingencies. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingencies at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. For this reason, actual results could differ from those estimates. Management must make estimates surrounding their ability to collect revenues and related accounts receivable. Management specifically analyzes accounts receivable, historical and current economic trends, previous bad debts, customer concentrations, credit worthiness of customers, and payment terms of customer accounts, when evaluating adequacy of the allowance for doubtful accounts.

Management estimates liabilities and contingencies at the end of each period. The current financial statement presentation reflects management’s best estimates of liabilities and pending litigation which are probable and where the amount and range of loss can be estimated. We record the minimum liability related to those claims where there is a range of loss. Because of the uncertainties related to the probability of loss and the amount and range of loss on the pending litigation, management may not be able to make an accurate estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will continue to assess the potential exposure related to our pending litigation and update our estimates and related disclosures. Such future revisions in our estimates could materially impact our financial results.

Valuation and impairment of long-lived assets and identifiable intangible assets. Finite-lived intangible assets are presented at cost, net of accumulated amortization. Amortization is calculated using the straight-line method over estimated useful lives of the assets, which has historically been between 3 and 5 years. We will record an impairment charge on finite-lived intangibles or long-lived assets when we determine that the carrying value of intangibles and long-lived assets may not be recoverable. Factors considered important which could trigger impairment, include, but are not limited to:

Based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.

Stock-based compensation. We have historically applied the intrinsic value method of accounting provided under Accounting Principles Board (APB) Opinion No. 25 and related interpretations. Under APB 25, issuing stock options to employees generally resulted in recognition of no compensation cost. Our stock-based employee compensation plans are described more fully in Note 14—Shareholders’ Equity (Deficit) in the Notes to Consolidated Financial Statements.

Stock-based employee compensation cost is reflected in net loss, as some options granted under those plans had an exercise price less than the fair value of the underlying common stock on the date of grant and the shares of restricted stock granted under such plans have no exercise price. Such stock-based compensation is amortized using the straight-line method over the remaining vesting periods of the related restricted stock and options, which is generally two to four years.

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Pro forma information regarding net loss and net loss per share can be found in Note 1—The Company and Summary of Significant Accounting Policies “Stock Based Compensation” in the Notes to Consolidated Financial Statements.

Beginning on July 1, 2005, we are required to adopt the provisions of SFAS No. 123R which eliminates the alternative to use APB 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. SFAS 123R will require entities to measure and recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period. See section captioned “Recent Accounting Pronouncements” below.

Liquidity and Capital Resources

We have focused on capital financing initiatives in order to maintain current and planned operations. We have operated at a loss since inception and our history of losses from operations and cash flow deficits, in combination with our cash balances, raise concerns about our ability to fund our operations. Consequently, in the fourth quarter of 2003 and first quarter of 2004 we secured additional funds through several rounds of financing that involved the sale of senior secured notes, in the third quarter we completed a rights offering and in the fourth quarter of 2004 we drew $11.0 million from an $18.0 million round of debt financing. In March 2005, we drew down the remaining $7.0 million from the $18.0 million round of debt financing. We are not required to make any payments of principal or interest under this $18.0 million debt financing until maturity in December 2007. If we are unable to increase our revenues or if we are unable to reduce the amount of cash used by our operating activities during 2005, we may be required to undertake additional restructuring alternatives, or seek additional debt financing although our ability to incur additional indebtedness is subject to certain limitations as discussed in the section below captioned “Ability to incur additional indebtedness.” We do not believe equity financing on terms reasonably acceptable to us is currently available.

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

With our history of operating losses and cash used to support our operating activities, our primary sources of capital have come from both debt and equity financings that we have completed over the past several years. Our principal sources of liquidity include our cash and cash equivalents. As of December 31, 2004, we had cash and cash equivalents available for operations totaling $23.2 million, of which $6.7 million was located in accounts outside the United States and which is not readily available for our domestic operations. However, we intend to pursue the investigation of restructuring our foreign subsidiaries which, if successful, may provide us easier access to the repatriation of a greater portion of the cash located in accounts outside the United States. Additionally, we are currently evaluating the newly enacted American Jobs Creation Act of 2004 (the AJCA) and are not yet in a position to decide whether, or to what extent, the AJCA will enable us to repatriate foreign earnings that have not yet been remitted to the United States. Accordingly, our readily available cash resources in the United States as of December 31, 2004 were $16.5 million, which included $11.0 million we drew from an $18.0 million round of debt financing completed in December 2004. As of December 31, 2004, we had cash collateralized letters of credit totaling approximately $2.7 million. This cash is recorded as restricted cash on our balance sheet and is not readily available for our operations; however, we believe that we will be able to reduce our letters of credit upon relocating our headquarters facility.

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Based on our financing activities in the fourth quarter of 2004 and the draw in March 2005 of the remaining $7.0 million of the $18.0 million debt financing, we believe that we have sufficient cash to meet our cash operating requirements for the next 12 months, including the $1.3 million lease termination payment discussed above in the section captioned “Restructuring Initiatives” along with the $5.6 million repayment of our outstanding 5 ³/4% Convertible Subordinated Notes (the 5 ³/4% Notes) due on April 1, 2005 as well as the investments in capital equipment to support the transition our hosted messaging environment from an out-sourced model to one that we perform in-house and to support our on-going research and development efforts. For the long-term, we believe that our operating activities will be able to provide the liquidity and capital resources sufficient to support our business.

At December 31, 2004 we had no borrowings under our credit facility with Silicon Valley Bank because the borrowing availability had been eliminated and we were required to cash collateralize our letters of credit, totaling approximately $2.7 million. For additional information with respect to the credit facility, see Note 9—Credit Facility in the Notes to Consolidated Financial Statements.

Cash and cash equivalents

The following table sets forth a summary of our primary sources and uses of cash along with our cash and cash equivalents balance as of the dates indicated:

Total cash and cash equivalents increased from 2003 to 2004 primarily as a result of our financing activities, partially offset by cash used to support our operating and investing activities.

Net cash used by operating activities. Our operating activities used $32.3 million of cash during fiscal year 2004. This cash was used to support our net loss of $52.0 million, adjusted for non-cash items such as: a $12.8 million loss on the extinguishment of debt, depreciation and amortization of $10.3 million, decreases in the fair value of a preferred stock instrument of $(4.3) million, stock-based expenses of $1.9 million, a charge of $2.0 million to fully reserve a former officers note receivable and a ($1.6) million reduction in our restructure accrual; which totaled $31.1 million. Our net loss attributable to common shareholders was primarily a result of our operating costs, including both cost of revenues and operating expenses which are primarily comprised of employee costs, third party contractor costs and restructuring costs, being greater than our revenues.

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

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DSOs increased from 2003 to 2004 primarily due to customers deferring payment as a result of their year-end cash management efforts as well as an increasing proportion of revenue from customers outside the United States to whom we generally offer payment terms customary to the region in which the customers are located. While these payment terms are normal within the region in which they are provided, they are generally longer than the terms offered to customers in the United States. We believe that our DSOs are within industry norms, given the regions in which we operate. However, to the extent our international revenues increase as a proportion of total revenues, our DSOs may also increase which would negatively impact our liquidity and capital resources.

A number of non-cash items, such as: depreciation and amortization, changes in the value of a preferred stock instrument, stock-based expenses, accretion related to our preferred stock, loss on extinguishment of debt and certain restructuring charges, have been charged to expense and impacted our net losses during the fiscal year ended December 31, 2004. To the extent these non-cash items increase or decrease in amount and increase or decrease our future operating results, there will be no corresponding impact on our cash flows. Our operating cash flows will be impacted in the future based on our operating results, our ability to collect our accounts receivable on an efficient basis, and the timing of payments to our vendors for accounts payable.

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

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

Net cash provided (used) by investing activities. Our investing activities used $6.6 million of cash during the fiscal year ended December 31, 2004 primarily due to purchases of equipment totaling $4.2 million primarily used to support hosted messaging operations infrastructure and the $2.7 million cash used to collateralize our letters of credit for certain facility leases. We will be required to continue to make investments in capital equipment during 2005 as we transition our hosted messaging environment from an out-sourced model to one that we perform in-house and to support our on-going research and development efforts. We expect to fund these purchases through the use of our available cash resources or through leasing arrangements if available on terms we find acceptable. Additionally, we intend to fund through the use of our available cash resources leasehold improvements for the new office space into which we will be moving our headquarters facility in 2005.

Cash provided by financing activities. Our financing activities provided $42.6 million of cash during the fiscal year ended December 31, 2004 primarily as a result of gross proceeds totaling $45.0 million from a combination of proceeds we received from the issuance of convertible notes and our rights offering and $1.0 million of proceeds from the issuance of our common stock through a combination of employee stock option exercises and activities under our employee stock purchase plan (ESPP) partially offset by $2.3 million of payments on our credit facility, $7.3 million of costs incurred in connection with our financing activities and $1.1 million of payments on our capital equipment leases.

We receive cash from the exercise of stock options and the sale of stock under our ESPP. While we expect to continue to receive these proceeds in future periods, the timing and amount of such proceeds is difficult to

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predict and is contingent on a number of factors including the price of our common stock, the number of employees participating in the stock option plans and our employee stock purchase plan and general market conditions.

During the fiscal year ended December 31, 2004, we raised gross proceeds of approximately $48.5 million of cash in connection with the following financing transactions:

In January 2004, we issued $15.0 million in principal amount of the Senior Notes to Permal U.S. Opportunities Limited, Zaxis Equity Neutral, L.P., Zaxis Institutional Partners, L.P., Zaxis Offshore Limited, Zaxis Partners, L.P. and Passport Master Fund, L.P.

In March 2004, we issued $18.5 million in principal amount of the Senior Notes to investment entities affiliated with Crosslink Capital, Criterion Capital Management, Heights Capital Management and Apex Capital.

At a special meeting of shareholders in July 2004, we received approval from our shareholders to convert the Senior Notes plus all accrued and unpaid interest, into Series E preferred stock at $1.50 per share. As a result of the conversion, there was no outstanding principal or interest outstanding related to the Senior Notes at December 31, 2004.

In August 2004, we consummated a rights offering pursuant to which we issued 2.6 million shares of Series E preferred stock with a purchase price of $1.50 per share, representing approximately $4.0 million in gross proceeds excluding underwriter discounts and commissions and other costs incurred in connection with the rights offering.

In December 2004, we issued $11.0 million in principal amount of the 13.9% Notes, out of a total of $18.0 million, to General Atlantic Partners 74, L.P., Gapstar, LLC, GAP Coinvestment Partners II, L.P., GAPCO GmbH & Co. KG., Cenwell Limited, Campina Enterprises Limited, Great Affluent Limited, Dragonfield Limited, Lion Cosmos Limited and Richmond III, LLC. In March 2005, we issued the remaining $7.0 million of these notes. The 13.9% Notes accrue interest at a rate of 13.9% per annum, however; we are not obligated to make interest payments on these notes prior to the maturity date of December 2007.

Ability to incur additional indebtedness

Under the terms of our line of credit, we are required to obtain the consent of Silicon Valley Bank to incur additional indebtedness. Additionally, under the terms of the Series D preferred stock and Series E preferred stock, we must seek the consent of the holders of a majority of our Series D preferred stock and the holders of a majority of our Series E preferred stock in order to incur any additional indebtedness.

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

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Contractual Obligations and Commitments

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

Results of Operations

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

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The following table sets forth our results of operations for the fiscal years ended December 31, 2002, 2003 and 2004.