**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

 

**FORM10-Q**

 
| **(Mark One)**                        |
|---------------------------------------|
|                                  |   |   |
| **x**                                 |   | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                  |   |   |
|                                  |   | **For the quarterly period ended March 31, 2003 or** |
|                                  |   |   |
| **o**                                 |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                  |   |   |
|                                  |   | **For the transition period from                     to                   ** |
|                                  |   |   |
| **Commission file number: 000-27871** |

 

| **GRIC  COMMUNICATIONS, INC.**                             |
|-----------------------------------------------------------------|
| (Exact Name of Registrant as Specified in Its Charter)          |
|                                                            |   |   |
| **Delaware**                                                    |   | **77-0368092** |
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |   |
| **1421 McCarthy Blvd.,  Milpitas, California**                  |   | **95035** |
| (Address of Principal Executive Offices)                        |   | (Zip Code) |
|                                                            |   |   |
| **408-955-1920**                                                |
| (Registrant’s Telephone Number, Including Area Code)       |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days.

 

Yes  ý    No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 

Yes  o    No ý

 

The number of shares of theregistrant’s common stock outstanding as of April 30, 2003 was 21,061,464shares.

 

 

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**GRIC COMMUNICATIONS, INC.**

**INDEX**
| **PART IFINANCIAL INFORMATION**    |
|------------------------------------|
|                               |   |
| Item 1.                            | Financial Statements: |
|                               | Condensed Consolidated Balance Sheets As of  March 31, 2003 and  December 31, 2002 |
|                               | Condensed Consolidated Statements of  Operations for the Three Months Ended March 31, 2003 and 2002 |
|                               | Condensed Consolidated Statements of Cash  Flows for the Three Months Ended March 31, 2003 and 2002 |
|                               | Notes to Condensed Consolidated Financial  Statements |
| Item 2.                            | Management’s Discussion and Analysis of Financial Condition and  Results of Operations |
| Item 3.                            | Quantitative and Qualitative Disclosures About Market Risk |
| Item 4.                            | Controls and Procedures |
|                               |
| **PART IIOTHER INFORMATION**       |
|                               |   |
| Item 1.                            | Legal Proceedings |
| Item 2.                            | Changes in Securities and Use of Proceeds |
| Item 3.                            | Defaults Upon Senior Securities |
| Item 4.                            | Submission of Matters to a Vote of Security Holders |
| Item 5.                            | Other Information |
| Item 6.                            | Exhibits and Reports on Form 8-K |
| SIGNATURE                          |
| “OFFICER” CERTIFICATIONS |
|                                    |  |  |

 

2

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# **PART I**.FINANCIAL INFORMATION

 

## **ITEM 1**. FINANCIAL STATEMENTS

 

**GRIC COMMUNICATIONS, INC.**

# **Condensed Consolidated**Balance Sheets

**(in thousands, except per share amounts)**

 
|                                                                                                                                                                                                            |   | **Mar 31,  2003** |   | **Dec 31,  2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|-------------------|------------|
|                                                                                                                                                                                                            |   | **(unaudited)**   |   |              | ** ** |
| **ASSETS**                                                                                                                                                                                                      |   |              |   |              |       |
| ***Current assets:***                                                                                                                                                                                           |   |              |   |              |       |
| Cash and  cash equivalents                                                                                                                                                                                      |   | $                 | 4,222  |              | $          | 7,314 |   |
| Short-term  investments                                                                                                                                                                                         |   | 18,164            |   | 15,765            |       |
| Accounts  receivable, net of allowances of $336 and $249 at March 31, 2003 and December  31, 2002, respectively                                                                                                 |   | 4,632             |   | 3,978             |       |
| Prepaid  expenses and other current assets                                                                                                                                                                      |   | 1,676             |   | 1,108             |       |
| Total  current assets                                                                                                                                                                                           |   | 28,694            |   | 28,165            |       |
| Property and  equipment, net                                                                                                                                                                                    |   | 1,510             |   | 1,778             |       |
| Other assets                                                                                                                                                                                                    |   | 580               |   | 667               |       |
| Total assets                                                                                                                                                                                                    |   | $                 | 30,784 |              | $          | 30,610 |   |
|                                                                                                                                                                                                            |   |              |   |              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                   |   |              |   |              |       |
| ***Current liabilities:***                                                                                                                                                                                      |   |              |   |              |       |
| Accounts  payable                                                                                                                                                                                               |   | $                 | 4,583  |              | $          | 4,331 |   |
| Accrued  compensation and benefits                                                                                                                                                                              |   | 608               |   | 596               |       |
| Deferred  revenue                                                                                                                                                                                               |   | 549               |   | 276               |       |
| Other  current liabilities                                                                                                                                                                                      |   | 344               |   | 343               |       |
| Total  current liabilities                                                                                                                                                                                      |   | 6,084             |   | 5,546             |       |
| Long-term  liabilities                                                                                                                                                                                          |   | 18                |   | 88                |       |
| Commitments  and contingencies                                                                                                                                                                                  |   |              |   |              |       |
| Stockholders’  equity:                                                                                                                                                                                     |   |              |   |              |       |
| Series A  redeemable convertible preferred stock, $0.001 par value: 12,801 shares  authorized, 8,720 and 9,036 shares issued and outstanding at March 31, 2003  and December 31, 2002, respectively             |   | 11,340            |   | 11,752            |       |
| Preferred  stock, 5,000 shares authorized at March 31, 2003 and December 31, 2002: no  shares issued and outstanding                                                                                            |   | —            |   | —            |       |
| Common  stock, $0.001 par value; 50,000 shares authorized at March 31, 2003 and  December 31, 2002: 20,903 and 20,337 shares issued and outstanding at  March 31, 2003 and December 31, 2002, respectively |   | 21                |   | 20                |       |
| Additional  paid-in capital                                                                                                                                                                                     |   | 142,526           |   | 141,829           |       |
| Deferred  stock-based compensation                                                                                                                                                                              |   | (24               | )      | (65               | )          |
| Accumulated  deficit                                                                                                                                                                                            |   | (129,181          | )      | (128,560          | )          |
| Total  stockholders’ equity                                                                                                                                                                                |   | 24,682            |   | 24,976            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                |   | $                 | 30,784 |              | $          | 30,610 |   |

 

See accompanying notes

 

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**GRIC COMMUNICATIONS, INC.Condensed Consolidated Statements of Operations**

**(in thousands, except per share amounts)****(unaudited)**

 
|                                                         |   | **Three Months Ended** | ** ** |
|--------------------------------------------------------------|--------|------------------------|------------|
|                                                         |   | **Mar. 31,  2003**     |       | **Mar. 31,  2002** | ** ** |
| Revenues                                                     |   | $                      | 9,491      |   | $ | 7,384 |   |
| Costs and expenses:                                          |   |                   |       |   |   |
| Cost of revenues                                             |   | 4,365                  |       | 3,352 |   |
| Network and operations                                       |   | 947                    |       | 1,097 |   |
| Research and development                                     |   | 645                    |       | 787 |   |
| Sales and marketing                                          |   | 2,697                  |       | 3,138 |   |
| General and administrative                                   |   | 1,400                  |       | 1,457 |   |
| Amortization of stock-based compensation(1)                  |   | 41                     |       | 44 |   |
| Restructuring benefit                                        |   | —                 |       | (464 | ) |
| Total costs and expenses                                     |   | 10,095                 |       | 9,411 |   |
| Operating loss                                               |   | (604                   | )          | (2,027 | ) |
| Interest income and other, net                               |   | (9                     | )          | 36 |   |
| Interest expense                                             |   | —                 |       | (16 | ) |
| Operating loss before income taxes                           |   | (613                   | )          | (2,007 | ) |
| Provision for income taxes                                   |   | (8                     | )          | (8 | ) |
| Net loss                                                     |   | $                      | (621       | ) | $ | (2,015 | ) |
| Basic and diluted net loss per share                         |   | $                      | (0.03      | ) | $ | (0.10 | ) |
| Shares used to compute basic and diluted net loss  per share |   | 20,729                 |       | 19,975 |   |

 

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(1)                   Included inamortization of stock-based compensation is $1 and $1 for network and operations,$2 and $4 for research and development, $1 and $1 for sales and marketing and$37 and $38 for general and administrative, for the three months endedMarch 31, 2003 and 2002.

See accompanying notes

 

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**GRICCOMMUNICATIONS, INC.****Condensed Conso****lidatedStatements of Cash Flows****(inthousands)(unaudited)**

 
|                                                                         |   | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                         |   | **Mar. 31,  2003**     |       | **Mar. 31,  2002** | ** ** |
| ***Cash flows from  operating activities:***                                 |   |                   |       |   |   |
| Net loss                                                                     |   | $                      | (621       | ) | $ | (2,015 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                   |       |   |   |
| Depreciation and amortization of property and  equipment                     |   | 330                    |       | 714 |   |
| Amortization of stock-based compensation                                     |   | 41                     |       | 44 |   |
| Gain on sale of assets                                                       |   | (104                   | )          | (335 | ) |
| Accounts receivable allowances                                               |   | (5                     | )          | (4 | ) |
| Noncash portion of restructuring benefit                                     |   | —                 |       | (129 | ) |
| Noncash warrant expenses—preferred stock                                |   | —                 |       | 1 |   |
| Net changes in assets and liabilities:                                       |   |                   |       |   |   |
| Accounts receivable                                                          |   | (649                   | )          | (347 | ) |
| Prepaid expenses and other current assets                                    |   | (568                   | )          | (881 | ) |
| Other assets                                                                 |   | 87                     |       | (29 | ) |
| Accounts payable                                                             |   | 252                    |       | 612 |   |
| Accrued compensation and benefits                                            |   | 12                     |       | (751 | ) |
| Deferred revenue                                                             |   | 273                    |       | (88 | ) |
| Other current liabilities                                                    |   | 1                      |       | 4 |   |
| Other long-term liabilities                                                  |   | (70                    | )          | (3 | ) |
| Net cash used in operating activities                                        |   | (1,021                 | )          | (3,207 | ) |
| ***Cash flows from  investing activities:***                                 |   |                   |       |   |   |
| Available-for-sale investments:                                              |   |                   |       |   |   |
| Purchases                                                                    |   | (2,700                 | )          | (500 | ) |
| Maturities                                                                   |   | 301                    |       | 3,506 |   |
| Proceeds from sales of fixed assets                                          |   | 104                    |       | 335 |   |
| Capital expenditures                                                         |   | (62                    | )          | (45 | ) |
| Net cash provided by (used in) investing  activities                         |   | (2,357                 | )          | 3,296 |   |
| ***Cash flows from  financing activities:***                                 |   |                   |       |   |   |
| Payments of debt and capital lease obligations                               |   | —                 |       | (277 | ) |
| Proceeds from sales of common stock, net                                     |   | 286                    |       | 66 |   |
| Proceeds from sales of treasury stock                                        |   | —                 |       | 99 |   |
| Net cash provided by (used in) financing  activities                         |   | 286                    |       | (112 | ) |
| Net decrease in cash and cash equivalents                                    |   | (3,092                 | )          | (23 | ) |
| Cash and cash equivalents at beginning of quarter                            |   | 7,314                  |       | 4,021 |   |
| Cash and cash equivalents at end of quarter                                  |   | $                      | 4,222      |   | $ | 3,998 |   |
|                                                                         |   |                   |       |   |   |
| ***Supplemental  disclosures of cash flow information:***                    |   |                   |       |   |   |
| Income taxes paid                                                            |   | $                      | 8          |   | $ | — |   |
| Interest paid                                                                |   | $                      | —     |   | $ | 14 |   |

 

See accompanying notes

 

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**GRICCOMMUNICATIONS, INC.****Notes to Condensed****Consolidated Financial Statements****(unaudited)**

** **

**1.****                      ****Basis of Presentation**

 

The financial information atMarch 31, 2003 and for the three months ended March 31, 2003 isunaudited, but includes all adjustments (consisting of normal recurring adjustmentsand restructuring adjustments) that GRIC Communications, Inc. (the“Company”) considers necessary for a fair presentation of the financialinformation set forth herein, in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for annual financialstatements. The results for the three months ended March 31, 2003 are notnecessarily indicative of the results that may be expected for future periods.

 

The balance sheet atDecember 31, 2002 has been derived from the audited financial statementsat that date but does not include all of the information and footnotes requiredby accounting principles generally accepted in the United States for completefinancial statements.

 

The following informationshould be read in conjunction with consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

** **

**2.****                       Summary ofSignificant Accounting Policies**

 

*Revenue Recognition and Related Allowances. *The Company derives revenues primarilyfrom remote Internet access services to customers through its virtual network.These services are generally billed on a per-minute basis for usage or at aflat rate per month per user based on negotiated rates. The Company has somecustomers with minimum commitment arrangements. To a lesser extent, the Companyderives revenues from licenses of its authentication software, relatedmaintenance and support services, which are recognized ratably over thecontractual services period or term of services, and other optional servicesrelated to its GRIC MobileOffice offering.

 

Revenues arerecognized when a binding agreement or purchase order from the customer hasbeen received, the services have been delivered, the fee or price was fixed ordeterminable, the collection of the receivable was reasonably assured, and nosignificant post-delivery obligations remained.

 

The Companyrecords estimated allowances against revenues in the same period the revenuesare recorded. These estimates are based upon historical analysis of our creditmemo data and other known factors for pricing and transaction volume disputesthat arise in the normal course of business. To date, allowances pertaining tothe Company’s current business have not been significant.

 

From time totime, the Company’s customers, including significant customers, may seekprotection under bankruptcy laws. When this occurs, the Company determines itsongoing exposure to risk that a pre-filing account receivable will prove to beuncollectible, and establishes appropriate allowances for that contingency asnecessary. In addition, for each continuing customer in bankruptcy the Companyevaluates the creditworthiness of the customer and determines whether revenueshould be recognized on an accrual basis or as cash payments are received. Whenrevenue is recorded on a accrual basis, the Company bases its judgment on thecreditworthiness of the debtor-in-possession, their payment experience,collectability of receivables are reasonably assured, all in addition to otherrevenue recognition criteria having been met.

 

*Allowancefor Doubtful Accounts.*TheCompany maintains allowances for doubtful accounts for estimated losses fromits customer’s inability to make required payments. In order to estimate theappropriate level of this allowance, the Company analyzes historical bad debts,customer concentrations, current customer credit-worthiness, current economictrends and changes in its customer payment patterns. If the financial conditionof its customers were to deteriorate and to impair their ability to makepayments, additional allowances might be required in future periods.

 

*RestructuringExpenses and Related Accruals.*In each of January 2001 and June 2002, we undertook plans torestructure our operations inorder to reduce operating expenses. Estimated restructuring expenses haveincluded severance and outplacement costs, lease cancellations, assetwrite-offs and other restructuring costs. Given the significance of, and

 

6

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timing of the execution of such activities, thisprocess is complex and involves periodic reassessments of estimates made at thetime the original decisions were made. The Company’s restructuring expensesinvolved significant estimates made by management using the best informationavailable at the time that the estimates were made, some of which were basedupon information provided by third parties. The Company continually evaluatesthe adequacy of the remaining liabilities under its restructuring initiatives.Although the Company believes that these estimates accurately reflect the costsof its restructuring plans, actual results may differ, thereby requiring theCompany to record additional provisions or reverse a portion of such provisions.

 

*Net Loss Per Share. *Netloss per common share and diluted net loss per share are presented inconformity with the Financial Accounting Standards Board’s Statement ofFinancial Accounting Standards No. 128, *“EarningsPer Share”* (“SFAS No. 128”) for all years presented.

 

In accordancewith SFAS No. 128, basic and diluted net loss per share has been computedusing the weighted-average number of shares of common stock outstanding duringthe period. Potentially dilutive securities have been excluded from the computationof basic and diluted net loss per share, as their effect is antidilutive.

 

Weighted-averageoptions outstanding to purchase approximately 1.1 million and 906,000shares of common stock for the three months ended March 31, 2003 and 2002,respectively, were not included in the computation of diluted net loss pershare because the effect would be antidilutive. Such securities, had they beendilutive, would have been included in the computation of diluted net loss pershare using the treasury stock method.

 

*Reclassifications. *Amountsfor revenues and cost of revenues**inthe previous quarter have been reclassified to conform to the currentpresentation.

 

*Recent Accounting Pronouncements. *In June 2002, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting StandardsNo. 146 (“SFAS 146*”), “Accountingfor Costs Associated with Exit or Disposal Activities.”*SFAS 146nullifies Emerging Issues Task Force Issue No. 94-3,*“Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring)”*(“EITF 94-3”). The principle difference betweenSFAS 146 and EITF 94-3 relates to its requirement for recognition of aliability for a cost associated with an exit or disposal activity. Thisstatement requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred. Under EITF94-3, a liability for an exit cost as defined in EITF 94-3 was recognized atthe date of an entity’s commitment to an exit plan. This statement alsoestablishes that fair value is the objective for initial measurement of theliability. SFAS 146 is effective for exit or disposal activities that areinitiated after December 31, 2002. There was no impact on the Company’sconsolidated financial position or results of operations from the adoption ofSFAS 146 as the Company did not have any exit or disposal activities during thethree months ended March 31, 2003.

 

InNovember 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”),*“Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.”* FIN 45 requires that a liability be recorded in theguarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45requires disclosures about the guarantees that an entity has issued, includinga roll forward of the entity’s product warranty liabilities. The disclosureprovisions of FIN 45 are effective for financial statements of interim orannual periods ending after December 15, 2002. The Company has adopted thedisclosure provisions of FIN 45. The Company does not expect the adoption ofthe accounting requirements of FIN 45 will have a material impact on its consolidatedfinancial position or results of operations.

 

InDecember 2002, the FASB issued Statement of Financial Accounting StandardsNo. 148 (“SFAS 148”), *“Accountingfor Stock-Based Compensation—Transition and Disclosure—an Amendment of FASBStatement No. 123.”* SFAS 148 amends SFAS 123 toprovide alternative methods of transition for a voluntary change to the fairvalue method of accounting for stock-based employee compensation. In addition,SFAS 148 amends the disclosure requirements of SFAS 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based compensation and the effect of the methodused on reported results. The transition and annual disclosure requirements ofSFAS 148 are effective for fiscal years ending after December 15,2002. The interim financial statement disclosure requirements of SFAS 148are effective for interim periods beginning after December 15, 2002. Thetransition provisions do not currently have an impact on the Company’sconsolidated financial position and results of operations as the Company hasnot elected to adopt the fair value based method of accounting for stock-basedcompensation as per SFAS 123. The Company has adopted the annual andinterim disclosure requirements of SFAS 148.

 

7

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**3.****                       Stock-BasedCompensation**

 

As permitted under FASB Statement No. 123, *“Accounting for Stock-Based Compensation”*(“SFAS No. 123”), the Company has elected to continue to follow APBNo. 25 and related interpretations in accounting for its stock-basedawards to employees. Under APB No. 25, the Company generally recognizes nocompensation expense with respect to such awards.

 

Pro formainformation regarding net income (loss) and earnings (loss) per share isrequired by SFAS No. 148 and SFAS No. 123 and has been determined as ifthe Company had accounted for awards to employees under the fair value methodof SFAS No. 123. The fair value of stock options under the Company’s 1999Equity Incentive Plan and stock purchase plan rights under the Company’s 1999Employee Stock Purchase Plan was estimated as of the grant date using theBlack-Scholes option pricing model. The Black-Scholes model was originallydeveloped for use in estimating the fair value of traded options and requiresthe input of highly subjective assumptions including expected stock pricevolatility. Because the Company’s options have characteristics significantlydifferent from those of traded options and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in the opinionof management, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its employee stock options.

 

The fair value of stock options granted during the three months endedMarch 31, 2003 and 2002 were estimated at the date of grant assuming noexpected dividends and the following weighted average assumptions.

 

**Stock Options**

 
|                             |   | **Three Months Ended March 31,** | ** ** |
|----------------------------------|--------|----------------------------------|------------|
|                             |   | **2003**                         |       | **2002** | ** ** |
|                             |   |                             |       |   |   |
| Expected  life (years)           |   | 1.64                             |       | 2.70 |   |
| Expected  stock price volatility |   | 1.14                             |       | 1.14 |   |
| Risk-free  interest rate         |   | 2.91                             | %          | 4.72 | % |

 

**Stock Purchase**

 
|                             |   | **Three Months Ended March 31,** | ** ** |
|----------------------------------|--------|----------------------------------|------------|
|                             |   | **2003**                         |       | **2002** | ** ** |
|                             |   |                             |       |   |   |
| Expected  life (years)           |   | 0.50                             |       | 0.50 |   |
| Expected  stock price volatility |   | 1.07                             |       | 1.23 |   |
| Risk-free  interest rate         |   | 2.78                             | %          | 4.90 | % |

 

For purposes of pro forma disclosures, theestimated fair value of stock-based awards is amortized against pro forma netincome over the stock-based awards’ vesting period for options and over theoffering period for stock purchases under the Company’s 1999 Employee StockPurchase Plan.

 

The Company’s pro forma information is as follows:

 
|                                        |   | **Three Months Ended March 31,**              | ** ** |
|---------------------------------------------|--------|-----------------------------------------------|------------|
|                                        |   | **2003**                                      |       | **2002** | ** ** |
|                                        |   |                                          |       |
|                                        |   | **(in  thousands, except per share amounts)** |       |
| Net loss as  reported                       |   | $                                             | (621       | ) | $ | (2,015 | ) |
| Stock-based  compensation expense           |   | (693                                          | )          | (1,262 | ) |
| Amortization  of stock compensation         |   | 41                                            |       | 44 |   |
| Pro forma  net loss                         |   | $                                             | (1,273     | ) | $ | (3,233 | ) |
|                                        |   |                                          |       |   |   |
| Basic and  fully diluted net loss per share |   |                                          |       |   |   |
| As reported                                 |   | $                                             | (0.03      | ) | $ | (0.10 | ) |
|                                        |   |                                          |       |   |   |
| Pro forma                                   |   | $                                             | (0.06      | ) | $ | (0.16 | ) |

 

Calculated under SFAS No. 123, the weighted-average fair values ofthe employee stock options granted during the three months ended March 31, 2003and 2002 were, $1.12 and $0.89 per share, respectively. The weighted-averageestimated

 

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fair value ofshares purchased under the Company’s 1999 Employee Stock Purchase Plan duringthe three months ended March 31, 2003 and 2002 were $0.63 and $0.67 per share,respectively.

 

**4.****                       IntangibleAssets**

 

The Company entered into anagreement with a wireless service provider during 2001 for the exchange ofservices, which resulted in a prepayment for future wireless services and theobligation by the Company to provide future Internet roaming services. Theassessed value of these wireless services is included in prepaid expenses andother current assets and in other assets in the amounts of $200,000 and$400,000, respectively. As of March 31, 2003, these assets had not beenutilized; these services are due to expire on September 30, 2003. The Companyis currently in discussions with the provider to modify the scope of thebusiness relationship in order to enable the Company to realize value equivalentto that of the prepaid assets.  Inassessing the recoverability of these amounts, the Company must make certainassumptions regarding a number of factors including its ability to modify thescope of the business relationship to determine the fair value of theassets.  If the Company is unable tomodify the scope of the business relationship in order to enable the Company torealize value equivalent to that of the prepaid assets or if these assumptionschange during the term of the underlying agreement with the service provider,the Company might be required to record an impairment charge related to theseassets in the future.

 

**5.****                       Commitmentsand Contingencies**

 

#### *Lease commitments.  *The Company leases all of itsfacilities under operating leases that expire at various dates through 2008. Asof March 31, 2003, the Company had $2.7 million in future operating leasecommitments.

 

*Purchase Commitments.  *The Company hasentered into certain non-cancelable purchase commitments from suppliers whoprovide network access, software and related services that are utilized by theCompany in order to deliver its GRIC MobileOffice solution. As of March 31,2003 the Company had $873,000 in future purchase commitments that expire atvarious dates through 2004.

 

*Legal Matters.***  **The Company issubject to various legal proceedings and claims arising in the ordinary courseof business. The Company’s management does not expect that the results in anyof these legal proceedings will have a material adverse effect on its financialcondition, results of operations or cash flows.

 

In July andAugust 2001, the Company and certain of its officers were named as defendantsin five purported securities class action lawsuits filed in the United StatesDistrict Court, Southern District of New York, captioned as In re GRICCommunications, Inc. Initial Public Offering Securities Litigation, No. 01 Civ6771 (SAS), and is one of over three hundred substantially identicalproceedings consolidated as In re Initial Public Offering Securities Litigation,Master File No. 21 MC 92 (SAS). The Consolidated Amended Class Action Complaintfor Violation of the Federal Securities Laws (“Consolidated Complaint”) wasfiled on or about April 19, 2002, and alleges claims against certain of theCompany’s officers and against CIBC World Markets Corp., Prudential SecuritiesIncorporated, DB Alex. Brown, as successor to Deutsche Bank, and U.S. BancorpPiper Jaffray Inc., underwriters of the Company’s December 14, 1999 initialpublic offering (“underwriter defendants”), under Sections 11 and 15 of theSecurities Act of 1933, as amended, and under Section 10(b) and 20(a) of theSecurities Exchange Act of 1934, as amended.

 

In October2002, certain of the Company’s officers and directors who had been named asdefendants in the In re Initial Public Offering Securities Litigation weredismissed without prejudice upon order of the presiding judge. In February2003, the presiding judge dismissed the Section 10(b) claims against theCompany and its named officers and directors with prejudice.  In addition, the parties have beenparticipating in a mediation. Settlement proposals that could include dismissal of the remainingSection 11 claim against the Company have been made. There can be no guaranteethat the parties will be able to reach agreement on either a partial dismissalor a global resolution of the claims involving the issuer defendants. TheCompany’s management believes that the Consolidated Complaint is without meritand intends to defend against it vigorously. The Company does not believe theoutcome of this consolidated lawsuit will have a material adverse affect on theCompany’s financial condition, results of operations or cash flows.

 

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###### ***Indemnifications.  ***The Companyfrom time to time enters into types of contracts that contingently require theCompany to indemnify parties against third party claims. These contractsprimarily relate to: (i) divestiture agreements, under which the Companymay provide customary indemnifications to purchasers of the Company’s assets;(ii) real estate leases, under which the Company may be required toindemnify property owners for environmental and other liabilities, and otherclaims arising from the Company’s use of the applicable premises; and(iii) agreements with the Company’s officers, directors and employees,under which the Company may be required to indemnify such persons forliabilities arising out of their employment relationship.

 

The terms ofsuch obligations vary. Generally, a maximum obligation is not explicitlystated. Because the obligated amounts of these types of agreements often arenot explicitly stated, the overall maximum amount of the obligations cannot bereasonably estimated. Historically, the Company has not been obligated to makeany payments for these obligations, and no liabilities have been recorded forthese obligations on its balance sheet at March 31, 2003.

 

**6.****                      ****Restructuring Events**

 

*June 2002 Restructuring. * In June 2002, the Company undertook astrategic restructuring to streamline its operations in order to help reduceoperating expenses. The provision and associated charges against the provisionfor the June 2002 restructuring through the year ended December 31,2002, and the three months ended March 31, 2003, are as follows:

 
|                                                        |   | **Employee  Severance  Costs** |       | **Termination of  Lease and  Other  Obligations** | ** ** | **Loss on  Disposition and  Retirement of  Fixed Assets** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------|--------|--------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
|                                                        |   | **(in thousands)**             | ** ** |
|                                                        |   |                           |       |                                              |       |                                                      |       |      |       |
| Provision  recorded in the quarter ended June 30, 2002 |   | $                              | 964        |                                              | $          | 169                                                       |       | $         | 43         |   | $ | 1,176 |   |
| Non-cash  charges                                           |   | —                         |       | —                                            |       | (43                                                       | )          | (43       | )          |
| Cash  payments                                              |   | (444                           | )          | (101                                              | )          | —                                                    |       | (545      | )          |
| Accrual  reversals                                          |   | (191                           | )          | (68                                               | )          | —                                                    |       | (259      | )          |
| Accruals at  December 31, 2002                              |   | 329                            |       | —                                            |       | —                                                    |       | 329       |       |
| Cash  payments                                              |   | (44                            | )          | —                                            |       | —                                                    |       | (44       | )          |
| Accruals at  March 31, 2003                                 |   | $                              | 285        |                                              | $          | —                                                    |       | $         | —     |   | $ | 285 |   |

 

In connection with the June 2002 restructuring, the Companyincurred a total charge to operations of $1.2 million.

 

Restructuring-relatedinvoluntary employee severance costs resulted in a charge of $964,000, pertainingto the estimated termination payout to employees worldwide. During the yearended December 31, 2002, the Company recorded noncash restructure benefitsfrom restructuring-related involuntary employee severance costs of $191,000, asa result of final settlements that were less than the amount of previouslyreserved obligations.  As of March 31,2003, the Company has a remaining restructuring accrual of $285,000. A total of16 employees were terminated as part of these cost cutting measures.

 

The termination of lease and other obligations resulted in a charge of$169,000.  During the year endedDecember 31, 2002, the Company recorded noncash restructuring benefitsfrom lease and other obligations of $68,000, as a result of final settlementsthat were less than the amount of previously recorded obligations.  As of March 31, 2003, the Company had nofurther lease and other obligations pertaining to the June restructuring.

 

The loss on disposition and write-off of assets totaled $43,000. Thisloss was primarily the result of retirement of fixed assets due to the closureof a facility.

 

*January 2001 Restructuring. *  InJanuary 2001, the Company undertook a strategic restructuring and decidedto cease providing its Internet telephony settlement services, based on ananalysis of the operating expenses required to support these services and thelow gross margins associated with them, and on the Company’s expectation thatcontinued Internet telephony operations would require additional cash infusionsto the business. The Company completed this strategic restructuring by December2001.

 

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During thethree months ended March 31, 2002, the Company recorded a restructuring benefitof $464,000 due to an unexpected gain of approximately $335,000 on Internettelephony assets that were previously written-off during the restructuring inJanuary 2001 and the elimination of the remaining restructuring accrual in theamount of $129,000.  The Company settledthe related obligations for amounts which were less than previouslyestimated.  As of March 31, 2003, therewere no remaining accruals from our January 2001 strategic restructuring.

 

**7.****                      ****Segment Information**

 

The Company operates solelyin one segment, providing a global network for corporate enterprises withmobile and remote workforces and for the Company’s service provider resellersand value-added resellers.

 

The following is a summaryof revenue and long-lived assets by geographical area for the periodspresented:

 
|                                    |   | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|--------|-----------------------------------|------------|
|                                    |   | **2003**                          |       | **2002** | ** ** |
|                                    |   | **(in thousands)**                | ** ** |
| Revenue by external customers:          |   |                              |       |   |   |
| United States, Canada and Latin America |   | $                                 | 5,025      |   | $ | 3,451 |   |
| Japan/Korea                             |   | 2,584                             |       | 2,144 |   |
| Asia Pacific                            |   | 857                               |       | 828 |   |
| Europe, Middle East and Africa          |   | 1,025                             |       | 961 |   |
|                                    |   | $                                 | 9,491      |   | $ | 7,384 |   |

 

Thefollowing is a summary of long-lived assets by geographical area for theperiods presented:

 
|               |   | **March 31,  2003** |       | **December 31,  2002** | ** ** |
|--------------------|--------|---------------------|------------|------------------------|------------|
|               |   | **(in thousands)**  | ** ** |
| Long-lived assets: |   |                |       |                   |       |
| United States      |   | $                   | 1,298      |                   | $          | 1,554 |   |
| Rest of World      |   | 212                 |       | 224                    |       |
|               |   | $                   | 1,510      |                   | $          | 1,778 |   |

 

Revenue by external customeris based on the customer’s billing locations. Long-lived assets are thoseassets used in each geographic location. For the three months ended March 31, 2003, three customers each accountedfor 10% or more of the Company’s total consolidated revenues.

 

**8.****                      ****Stock Repurchase Program**

## ** **

## **In September 2001, the Board of Directorsapproved a program to expend up to $2.0 million to repurchase shares ofthe Company’s common stock in open market transactions. The Company purchased110,000 shares for approximately $99,000 during 2001. No additional shares wererepurchased by the Company during 2002 or during the quarter ended March 31,2003.**

 

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## **ITEM 2.**                 MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

*The following discussion should be read inconjunction with the selected consolidated financial information and theconsolidated financial statements and notes appearing elsewhere in thisForm 10-Q. The following discussion contains forward-looking statements,such as statements of expected revenues and expenses, that involve risks anduncertainties. We assume no obligation to update any such forward-looking statements.Our actual results could differ materially from those anticipated in theseforward-looking statements. Factors that could cause or contribute to suchdifferences include, but are not limited to, those detailed from time to timein our filings with the Securities and Exchange Commission and those discussedin this Form 10-Q, particularly in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations and under “FactorsThat May Affect Future Results.”*

 

*Unless expressly stated or the contentotherwise requires, the terms “we”, “our”, “us”, “the Company” and “GRIC” referto GRIC Communications, Inc. and its subsidiaries as a whole.*

 

**Overview**

 

We provide remote Internet access, managed security services — bothvirtual private network and remote end-point security — and mobile broadbandservices for customers requiring mobile office communications capabilitiesworldwide.  Our services solution,called the GRIC Mobile Office, enables people who are working away from theoffice to remain productively and securely connected to their home network asif they were working in their office. Our solution is used by corporate enterprises with mobile employees andremote workforces on a global basis.

 

We provide services over a heterogeneous virtual network known as theGRIC TierOne Network. As of March 31, 2003, the GRIC TierOne Network includedmore than 30,000 Internet access dialing locations, 700 public wirelessfidelity — or WiFi — hotspots and over 400 public broadband access points in approximately150 countries.  We created this networkby forming contractual relationships with over 300 Internet service providersand telecommunication companies.  Theseproviders, to whom we refer as the GRIC TierOne Network members, are able toshare their communications networks.  Our customers benefit from the resulting network delivering a securemobile Internet access solution cost-effectively. Our member providers benefitfrom the GRIC TierOne Network because we manage this shared network and providesettlement services as a clearinghouse. As a clearinghouse, we have establishedcommon technical, service and payment standards to settle charges that ourcustomers incur when their end users access the network facilities of GRICTierOne Network members in order to initiate Internet-based communications,such as Internet roaming. We intend to continue evolving our service offeringto introduce new Internet-based mobile office communications services that maybe adopted, deployed and managed on a global scale across the GRIC TierOneNetwork.

 

We have incurred substantial losses since our inception as a result ofexpenses associated with building the GRIC TierOne Network and related networkinfrastructure and with developing our software products. Although we were cashflow positive for our combined activities for the first time during the fourthquarter of 2002, we had an accumulated deficit of approximately$129.2 million as of March 31, 2003 and incurred a loss for the threemonth period ending March 31, 2003. See “Factors That May Affect FutureResults—We have a history of net losses and may incur future losses.”

 

Our business model has evolved in the course of our development and webelieve that period-to-period comparisons of our operating results should notbe relied upon as indicative of future performance. Our future prospects mustbe considered in light of the risks, expenses and difficulties frequentlyencountered by companies in the early stages of development, particularlycompanies in new and rapidly evolving markets. See “Factors That May AffectFuture Results—We have limited experience in our business, which makes it moredifficult for us to execute our business plan and for you to evaluate us.”

 

**CriticalAccounting Policies and Estimates**

 

The methods, estimates and judgments we use in applying our mostcritical accounting policies have a significant impact on the results we reportin our consolidated financial statements. We evaluate our estimates andjudgments on an on-going basis. We base our estimates on historical experienceand on assumptions that we believe to be reasonable under the circumstanceswhen made. Our experience and assumptions form the basis for our judgmentsabout the carrying value of assets and liabilities and reported amounts ofrevenues and expenses that are not readily apparent from other sources. Actualresults may vary from what we anticipate, and different assumptions orestimates about the future could change our reported results. We believe thefollowing accounting policies are the most critical to us, because they areimportant to the portrayal of

 

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our financial statements and they require our most difficult,subjective or complex judgments in the preparation of our consolidatedfinancial statements.

 

*Revenue Recognition and Related Allowances.*  We derive revenues primarily from remoteInternet access services we provide to customers through our virtual network.These services are generally billed on a per-minute basis for usage or at aflat rate per month per user based on negotiated rates.  We have some customers with minimumcommitment arrangements.  To a lesserextent, we also derive a portion of our revenues from licenses of ourauthentication software, related maintenance and support services, which arerecognized ratably over the contractual services period or term of service, andother optional services related to our GRIC MobileOffice offering.  These other revenues amounted to fivepercent or less of total revenues over the last three years.  Revenues are recognized when a bindingagreement or purchase order from the customer has been received, the serviceshave been delivered, the fee or price was fixed or determinable, the collectionof the receivable was reasonably assured, and no significant post-deliveryobligations remained.

 

We record estimated allowances against revenues in the same period therevenues are recorded. These estimates are based upon historical analysis ofour credit memo data and other known factors for pricing and transaction volumedisputes that arise in the normal course of business. To date, allowancespertaining to our current business have not been significant. If the historicaldata we use to calculate these estimates does not accurately reflect amountsassociated with future disputes, our actual revenues could be higher or lowerthan what we have recognized.

 

From time to time our customers, including significant customers, mayseek protection under bankruptcy laws. When this occurs, our managementdetermines our risk that an account receivable will prove to be uncollectible,and establishes appropriate reserves for that contingency as necessary. Inaddition, for each continuing customer in bankruptcy management evaluates thecreditworthiness of the customer and determines whether revenue should berecognized on an accrual basis or as cash payments are received. When we recordrevenue on an accrual basis, management has based their judgment on thecreditworthiness of the debtor-in-possession, their experience, and reasonableassurance of collectability of receivables, in addition to other revenuerecognition criteria having been met.

 

*Allowance for Doubtful Accounts.*  We maintain allowances for doubtful accountsfor estimated losses from our customers’ inability to make payments they oweus. In order to estimate the appropriate level of this allowance, we analyzehistorical bad debts, customer concentrations, current customercredit-worthiness, current economic trends and changes in our customer paymentpatterns. If the financial condition of our customers were to deteriorate andto impair their ability to make payments to us, additional allowances might berequired in future periods.  If ourestimates prove too low, future revenues will be lower.

 

*Restructuring Expenses and Related Accruals*.  In each of January 2001 and June 2002, weundertook plans to restructure our operations in order to reduce operatingexpenses. Estimated restructuring expenses have included severance andoutplacement costs, lease cancellations, asset write-offs and otherrestructuring costs.  Given thesignificance of, and timing of the execution of such activities, this processis complex and involves periodic reassessments of estimates made at the timethe original decisions were made.  Ourrestructuring expenses involved significant estimates made by management usingthe best information available at the time that the estimates were made, someof which were based upon information provided by third parties.  We continually evaluate the adequacy of theremaining liabilities under our restructuring initiatives.  Although we believe that these estimatesaccurately reflect the costs of our restructuring plans, actual results may differ,thereby requiring us to record additional provisions or reverse a portion ofsuch provisions.

 

**Results of Operations**

**Three Months Ended March 31, 2003 Compared to Three Months EndedMarch 31, 2002**

 

*Revenues.*  Revenues consist of amounts received fromour customers for utilizing our remote Internet access services or otherservices from our GRIC MobileOffice offering that we provided. Total revenuesincreased to $9.5 million in the three months ended March 31, 2003 from$7.4 million in the three months ended March 31, 2002, representing an increaseof 29%. The increase of approximately $2.1 million was primarily due toincreased volumes of our remote Internet access services by our existingcustomers in North America and to a lesser degree the expansion of our globalcustomer base. We expect 2003 revenues to exceed 2002 revenues based onincreased usage of our remote Internet access services as well as increasedsales of our managed security service offering and our value-added services.

 

*Cost of Revenues.*  Cost of revenues consists of amounts we payto access the Internet in order to provide remote Internet access services toour customers and amounts we pay to third parties to offer other mobilebroadband services.  Cost of revenuesincreased to $4.4 million in the three months ended March 31, 2003 from$3.4 million in the three months ended March 31, 2002, which representedan increase of 30%. The increase of approximately $1.0 million reflectscorresponding increases in the volume of remote Internet access and theexpansion of our customer base.  Weexpect that the cost of

 

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revenues in 2003 will increase in absolute dollars when compared to2002, as remote Internet access revenues increase, but will decline as apercentage of total revenues.

 

*Network and Operations.*  Network and operations expenses includesalaries and benefits, allocated facility and management information systemsexpenses, depreciation on network equipment, administrative expenses, costs ofco-location of network equipment and leased telecommunication lines and otherrelated costs. Network and operations expenses decreased to $947,000 in thethree months ended March 31, 2003 from $1.1 million in the three months endingMarch 31, 2002, representing a decrease of 14%. The decrease of approximately$150,000 reflects reductions of approximately $135,000 in depreciation expenseprimarily associated with older assets that are still in use, but have reachedthe end of their estimated lives for accounting purposes and reductions ofapproximately $69,000 in compensation-related expenses that were primarily dueto lower staffing levels and the elimination of compensation programs,partially offset by an increase of approximately $36,000 in co-locationexpenses due to the addition of an Internet server co-location site.  We expect the amount of network andoperations expenses to increase in 2003 when compared to 2002, as we expand ourcustomer support department to accommodate our shift to supporting enterprisecustomers and purchase new servers to replace those that have reached the endof their useful lives.

 

*Research and Development.*  Research and development expenses consist ofquality assurance, salaries and benefits, allocated facility and managementinformation systems, depreciation costs, facilities costs, outside consultants,administration and other related costs. Research and development expensesdecreased to $645,000 in the three months ended March 31, 2003 from $787,000 inthe three months ended March 31, 2002, representing a decrease of 18%. Thedecrease of approximately $142,000 reflects reductions of approximately $89,000in outside professional services expenses and reductions of approximately$57,000 in compensation-related expenses, primarily due to shifting stafffrom our U.S. headquarters to our development center in India where engineeringtalent is available at more favorable rates. We expect research and developmentexpenses to increase moderately, in absolute dollars, in 2003.

 

*Sales and Marketing.*  Sales and marketing expenses consist ofsalaries and benefits, allocated facility and management information systemscosts, travel and entertainment costs, costs for marketing and promotionalprograms, outside consultant fees, administrative expenses, costs associated withdomestic and international sales offices and other related costs. Sales andmarketing expenses decreased to $2.7 million in the three months endedMarch 31, 2003 from $3.1 million in the three months ended March 31, 2002,representing a decrease of 14%. The decrease of approximately $441,000 reflectsreductions of approximately $396,000 in compensation-related expenses,approximately $87,000 in outside professional services expenses due tocontinued efforts to streamline our operations in 2003 and approximately$47,000 in depreciation expense primarily associated with older assets that arestill in use, but have reached the end of their estimated lives for accountingpurposes.  These decreases werepartially offset by increases of approximately $60,000 in costs associated withallocated facility and management information systems. We expect the overallamount of sales and marketing expenses to significantly increase during 2003 aswe evolve our business strategy to employ not only an indirect sales channel,but also a direct sales channel.

 

*General and Administrative.*  General and administrative expenses consistof general corporate and facility costs as well as salary, benefits and relatedcosts for executive, finance, legal, administrative, human resources, investorrelations and management information systems functions and provisions foruncollectible receivables. General and administrative expenses decreased to$1.4 million in the three months ended March 31, 2003 from$1.5 million in the three months ended March 31, 2002, representing adecrease of 4%. The decrease of approximately $57,000 reflects a decrease of$149,000 in depreciation expense primarily associated with older assets thatare still in use, but have reached the end of their estimated lives foraccounting purposes, approximately $102,000 in compensation-related expensesand approximately $85,000 in lower facility costs due to continued efforts tostreamline our operations in 2003, primarily offset by an increase ofapproximately $365,000 for one-time costs related to the resignation of theCompany’s CEO. We expect the amount of general and administrative expenses togradually increase in 2003, but to decrease as a percentage of total revenuefor the same period.

 

*Amortization of Stock-Based Compensation.*  Some stock options granted throughDecember 14, 1999 were considered compensatory because the deemed fairvalue for accounting purposes was higher than the stock option exercise priceas determined by the board of directors on the date of grant. As a result, werecorded amortization of deferred compensation expense of $41,000 and $44,000in the three months ended March 31, 2003 and 2002, respectively.  As of March 31, 2003, we had anaggregate of $24,000 of deferred compensation remaining to be amortized.Deferred compensation is amortized on a straight-line basis over the vestingperiod of the options. We expect amortization to end in 2003.

 

*Restructuring Charge.*  In each of June 2002 andJanuary 2001, we undertook plans to restructure operations in order toreduce operating expenses.

 

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In our June 2002 strategic restructuring, we streamlined ouroperations in order to help us reduce operating expenses. As of March 31, 2003,the remaining balance in our restructuring accrual was $285,000.

 

In our January 2001 strategic restructuring, we decided to ceaseproviding Internet telephony settlement services, based on an analysis of theoperating expenses required to support these services and the low gross marginsassociated with them, and on our expectation that continued Internet telephonyoperations would require additional cash infusions to the business. During thethree months ended March 31, 2002, we recorded a restructuring benefit of$464,000 due to a gain of approximately $335,000 on Internet telephony assetsthat were previously written-off during the restructuring in January 2001 andreversals to our restructuring accrual in the amount of $129,000.  The accrual was reversed as a result of finalsettlements that were less than the amount of previously reserved obligations.As of March 31, 2003, there were no remaining accruals from ourJanuary 2001 strategic restructuring.

 

*Interest Income and Other, Net.  *Interest incomeand other, net, consists of interest income on cash balances and on short-terminvestments, gain on disposition of assets and sales, use and value-added tax.Interest income and other, net, represented a net expense of $9,000 for thethree months ended March 31, 2003 as compared to $36,000 of income for thethree months ended March 31, 2002. The decrease of approximately $45,000reflects sales, use and value-added tax on equipment for approximately $172,000and net losses due to foreign currency translation on the results of operationsof our international offices of approximately $6,000, partially offset by again on the sale of assets of $104,000 and an increase in interest income ofapproximately $29,000 due to higher cash balances related to our Series APreferred Stock funding completed in April 2002.

 

*Interest Expense.  *Interest expense consists of interestexpense associated with capital leases and amortization of the fair value ofwarrants issued in connection with our financing activities. There was no interest expense in the three months endedMarch 31, 2003, as we paid our remaining debt balance from our capital leaseobligations during the fourth quarter of 2002 as compared to $15,000 for thethree months ended March 31, 2002. There was no amortization of the fair value of warrants in the threemonths ended March 31, 2003 as compared to $1,000 for the three months endedMarch 31, 2002.

 

*Income Taxes.  *Theprovision for income taxes for March 31, 2003 and 2002 was $8,000. Theprovision for income taxes consists of foreign tax provisions.

 

***Liquidity and Capital Resources***

 
|                                                 |   | **March 31,  2003** |       | **March 31,  2002** | ** ** |
|------------------------------------------------------|--------|---------------------|------------|---------------------|------------|
|                                                 |   | **(in thousands)**  | ** ** |
| Cash and cash equivalents                            |   | $                   | 4,222      |                | $          | 3,998 |   |
| Net cash used in operating activities                |   | (1,021              | )          | (3,207              | )          |
| Net cash provided by (used in) investing  activities |   | (2,357              | )          | 3,296               |       |
| Net cash provided by (used in) financing  activities |   | 286                 |       | (112                | )          |
|                                                      |        |                     |            |                     |            |  |  |

* *

*Cash and cash equivalents.*    Our principal sourceof liquidity is our cash, cash equivalents and short-term investments. As ofMarch 31, 2003, in addition to our cash and cash equivalents balance of$4.2 million we had a short-term investment balance of approximately$18.2 million.

* *

*Operating activities.  *Net cash used inoperating activities was $1.0 million in the three months endedMarch 31, 2003, and $3.2 million in the three months endedMarch 31, 2002. Net cash used in operating activities in the three monthsended March 31, 2003 reflects our net operating losses of $621,000, higheraccounts receivable balances of approximately $649,000 due to increasedrevenues and higher prepaid and other current asset balances of $568,000 dueprimarily to the payment of our 2003 directors’ and officers’ insurance policy.Net cash used in operating activities in the three months ended March 31,2002 reflects net operating losses of $2.0 million, a higher prepaid and othercurrent asset balance of $881,000 due primarily to the payment of our 2002directors’ and officers’ insurance policy and capitalized costs related to ourSeries A Preferred Stock funding that was closed in April 2002, and loweraccrued compensation and benefit payable balances of $751,000 principally dueto the elimination of our 2002 bonus plan.

* *

*Investing activities.*    Net cash used ininvesting activities was $2.4 million in the three months ended March 31,2003 and net cash provided by investing activities was $3.3 million in thethree months ended March 31, 2002. Net cash used in investing activitiesin the three months ended March 31, 2003 reflects purchases of short-terminvestments.  The net cash provided byinvesting activities in the three months ended March 31, 2002 wasprimarily the result of proceeds from maturing short-term investments to fundnet operating activities.

 

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*Financing activities.*    Net cash provided byfinancing activities was $286,000 in the three months ended March 31, 2003and net cash used in financing activities was $112,000 in the three monthsended March 31, 2002. The net cash provided by financing activities in thethree months ended March 31, 2003 was principally due to proceeds receivedfrom the sale of common stock through the incentive stock option and theemployee stock purchase plans. The net cash used in financing activities in thethree months ended March 31, 2002 was primarily due to the payment of ourdebt and capital lease obligations.

* *

*Commitments.*    We lease all of our facilities under operatingleases that expire at various dates through 2008. As of March 31, 2003, wehad $2.7 million in future operating lease commitments. We have enteredinto certain non-cancelable purchase commitments from suppliers who providenetwork access, software and related services that are utilized by the Companyin order to deliver its GRIC MobileOffice solution.  We have $873,000 in future purchase commitments that expire atvarious dates through 2004.

 

*Summary of Liquidity.*  At March 31, 2003, we had an accumulated deficit of$129.2 million and we incurred a net loss of approximately $621,000 forthe three months ended March 31, 2003. We achieved profitability in thefourth quarter of 2002 and simultaneously turned cash flow positive for ourcombined activities for that quarter. We expect to be profitable for fiscalyear 2003.

 

We believe that ouravailable cash, cash equivalents and short-term investments of$22.4 million at March 31, 2003, and cash expected to be generated byoperations during the next twelve months, will fund planned operations for atleast the next twelve months.  Ourcurrent business model does not require a substantial investment in capitalequipment.  Although a large portion ofour fixed assets have reached the end of their useful lives for accountingpurposes, we expect spending levels for capital assets in the near-term toremain consistent with levels in recent quarters.

 

We plan toinvest in expanding our Internet roaming and related services on a global basisby continuing to build strategic partnering relationships. This will require usto maintain market acceptance and to grow our Internet roaming and relatedservices offerings in order for us to continue our research and developmentactivities and fund planned operating expenses. There can be no assurance thatour Internet roaming product offerings will maintain market acceptance, growthand operating margins.

 

If we are unable to attainour revenue and margin goals, significant reductions in spending and the delayor cancellation of planned activities or more substantial restructuring may benecessary to enable us to meet our cash requirements through at least the next12 months. These actions could have a material adverse effect on our business,results of operations and prospects. Furthermore, we may need to raiseadditional funds in future periods through public or private financing, orother arrangements, to fund operations and potential acquisitions, if any.Although we achieved cash flow positive results for our combined activitiesduring the fourth quarter of fiscal year 2002, we may not remain cash flowpositive. If additional financing is needed, it might not be available onreasonable terms or at all. Failure to raise capital when needed couldseriously harm our business and results of operations. If additional funds wereraised through the issuance of equity securities, the percentage of ownershipof our stockholders would be reduced. Furthermore, these equity securitiesmight have rights, preferences or privileges senior to our common stock.

 

**RecentAccounting Pronouncements**

 

In June 2002, the Financial Accounting Standards Board (‘‘FASB’’)issued Statement of Financial Accounting Standards No. 146 (‘‘SFAS 146’’), *‘‘Accounting for Costs Associated with Exit orDisposal Activities.’’* SFAS 146 nullifies Emerging Issues Task ForceIssue No. 94-3, *‘‘Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)’’* (‘‘EITF94-3’’). The principle difference between SFAS 146 and EITF 94-3 relates to itsrequirement for recognition of a liability for a cost associated with an exitor disposal activity. This statement requires that a liability for a costassociated with an exit or disposal activity be recognized when the liabilityis incurred. Under EITF 94-3, a liability for an exit cost, as defined in EITF94-3, was recognized at the date of an entity’s commitment to an exit plan.This statement also establishes that fair value is the objective for initialmeasurement of the liability. SFAS 146 is effective for exit or disposalactivities that are initiated after December 31, 2002. There was no impact onour consolidated financial position or results of operations from the adoptionof SFAS 146, as we did not have any exit or disposal activities during thethree months ended March 31, 2003.

 

In November 2002, the FASB issued FASB Interpretation No. 45 (‘‘FIN45’’), *‘‘Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.’’* FIN 45 requires that a liability berecorded in the guarantor’s balance sheet upon issuance of a guarantee. Inaddition, FIN 45 requires disclosures about the guarantees that an entity hasissued, including a roll forward of the entity’s product warranty liabilities.The disclosure provisions of FIN 45 are effective for financial statements ofinterim or annual periods ending after December 15,

 

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2002. We have adopted the disclosure provisions of FIN 45. We do notexpect that the adoption of the accounting requirements of FIN 45 will have amaterial impact on our consolidated financial position or results ofoperations.

 

In December 2002, the FASB issued Statement of Financial AccountingStandards No. 148 (‘‘SFAS 148’’), *‘‘Accountingfor Stock-Based Compensation—Transition and Disclosure—an Amendment of FASBStatement No. 123.’’* SFAS 148 amends SFAS 123 to provide alternativemethods of transition for a voluntary change to the fair value method ofaccounting for stock-based employee compensation. In addition, SFAS 148 amendsthe disclosure requirements of SFAS 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based compensation and the effect of the method used on reported results.The transition and annual disclosure requirements of SFAS 148 are effective forfiscal years ending after December 15, 2002. The interim financial statementdisclosure requirements of SFAS 148 are effective for interim periods beginningafter December 15, 2002. The transition provisions do not currently have animpact on our consolidated financial position and results of operations, as wehave not elected to adopt the fair value based method of accounting forstock-based compensation as per SFAS 123. We have adopted the annual and interimdisclosure requirements of SFAS 148.

 

**Factors ThatMay Affect Future Results**

 

*In addition to the information in thisQuarterly Report Form 10-Q, the following should be considered inevaluating GRIC and our business.*

 

**We have a history of net losses and may incurfuture losses.**

 

We have incurred net losses every year since our inception. We reportedoperating losses before income taxes of approximately $621,000 for the threemonths ended March 31, 2003, $5.0 million for 2002, $31.5 million for2001, and $32.4 million for 2000. Although we were profitable in the fourth quarter of 2002, as of March30, 2003 we had an accumulated deficit of $129.2 million. Although weexperienced positive cash flow for our combined activities in the fourthquarter of 2002, we experienced a loss in the first quarter of 2003 and haveexperienced negative cash flows in each year since our inception in 1994.   We cannot assure you that we will becomeprofitable or cash flow positive. Moreover, we might not be able to increaseour operating profitability on a quarterly or annual basis. To increaseprofits, we will need to generate additional revenue growth from our existingcustomers and to obtain new customers, while continuing to control ourexpenses. We expect to continue to invest in network and operations, researchand development and sales and marketing, and we expect to face pressure toadopt new pricing arrangements, including volume discounts, that may lower ourgross margins. If revenues do not meet levels we anticipate, or if our costsand expenses exceed our expectations, our quarterly losses would continue, andthe price of our common stock is likely to decline as a result.

 

**We have limited experience in our business,which makes it more difficult for us to execute our business plan and for youto evaluate us.**

** **

We have limited experience providing clearinghouse services—having doneso since only 1997—and it is only since January 2001 that our efforts have beenfocused primarily on providing services that enable our customers to provideInternet roaming services to their end-users. We have only offered our GRICMobileOffice solution since mid-2002. Many members of our senior managementteam and other employees have worked with us for only a short period of time.As a result of our limited operating history, we have little meaningfulhistorical financial data upon which to plan operating expenses or forecast ourrevenues accurately. This combination of factors makes it difficult for us toplan and to implement plans, and it makes it difficult for you to evaluate yourinvestment in GRIC.

 

 

**We may require additional capital for ouroperations, which could have a negative effect on your investment.**

 

If our cash proves to be insufficient to fund our operations, we mayneed to raise additional funds at some point in the future. If we raiseadditional funds by selling equity or convertible debt securities, ourstockholders may experience additional dilution and these new securities mayhave powers, preferences and rights that are senior to those of the rights ofour common stock. For example, as a result of the April 2002 sale of ourSeries A Preferred Stock, the investors in our Series A PreferredStock control a significant portion of our outstanding capital stock, and theowners of the Series A Preferred Stock have rights that are senior tothose of holders of the common stock in the event of a bankruptcy orliquidation, and the issuance of the Series A Preferred Stock hassubstantially diluted the ownership interest of the common stockholders. Wecannot predict whether additional financing will be available on termsfavorable to us, or at all. If adequate funds are not available or are notavailable on acceptable terms, we may be unable to fund our businessoperations, promote our brand identity, take advantage of acquisitionopportunities, develop or enhance services or respond to competitive pressures.Any inability to do so could have a negative effect on our business, revenues,financial condition and results of operations.

 

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**We restructured our business in 2001 to focuson our Internet roaming service, which makes us more dependent on the successof this service.**

 

In January 2001, we ceased providing Internet telephony serviceand focused on providing our Internet roaming service. This concentration makesus more dependent on the growth of the Internet roaming market, and morevulnerable if our Internet roaming product offerings are not favorably receivedin the market or if we fail to achieve our revenue and margin targets.

 

**We face significant competition, includingcompetition from larger companies, which could make it more difficult for us tosucceed.**

 

Our business environment is intensely competitive, highly fragmented andrapidly changing. Competition can come from many sources. For example, wecompete directly with iPass in the market for Internet roaming and relatedsettlement services, and iPass has a network that competes with the GRICTierOne Network. Large communications service providers such as AT&T,Equant and WorldCom/UUNET also have the ability and resources to compete withus in the Internet-based mobile office communications services market. We couldalso face competition from emerging, wireless based network service providerstargeting the traveling business communities. Many of our competitors havesubstantially greater resources, larger customer bases, longer operatinghistories, greater name recognition and more established relationships in theindustry than we have. Any of these competitors may combine or form strategicpartnerships, gaining competitive advantages as a result. Our competitors maybe able to develop and market products and services that are superior to ourown in terms of features, quality, pricing or other factors.  This competition may result in reducedprices and longer sales cycles for our products.  If any of our larger competitors were to commit greater technical,sales, marketing and other resources to our markets, it would be more difficultfor us to compete.

 

**Since we have no assurance that our customerswill continue to use our services or that our customer base will expand, wehave little ability to predict revenue growth or operating results.**

 

Our customers are generally free to use competing products andservices, so we could face significant customer losses, at unpredictable times.Our customers are generally not obligated to generate minimum revenues, andsome generate very little revenue for us. On the other hand, we had four customersin 2002 that each accounted for more than ten percent of our revenues:  Sony Communication Network Corporation(17%), Fiberlink Communications Corporation (13%), WorldCom/UUNET (13%) andAmerica Online, Inc. (11%).  Losing anyof these customers would mean a significant revenue shortfall for us.  These factors make it difficult toanticipate the level of our future revenues from existing customers. Inaddition, our success depends on our ability to expand our customer base. If weare unable to expand our customer base and to increase our average revenues percustomer, our business success will be less likely.

 

**If we fail in our strategy of focusing oursales efforts on larger companies, our revenue and profitability goals willlikely not be achieved.**

 

Historically, a significant portion of our revenues was derived fromsmaller companies in the Internet marketplace, but in recent periods we haveattempted to focus our sales and marketing efforts on larger corporate andenterprise-level customers. This strategy places new demands on our business,such as the longer sales cycles and higher levels of service and support thatlarger accounts generally require. If we fail in this strategy, or if we haveunderestimated the costs of this strategy, we will likely miss our revenue andprofitability goals.

 

**If new services, products or features weintroduce do not succeed in the marketplace, we will not be able to generatenew revenues and will have increased costs without the expected returns.**

 

The success of our business depends on our ability to introduce newservices, products and features that will generate new revenues.  Each effort to develop and introduce a newservice, product or feature involves investments of money, personnel and time,as well as opportunity costs.  In 2002we introduced GRIC MobileOffice, a product suite that includes wireless access,security monitoring and other features in addition to our traditional dial-upaccess.  We have no assurance that thisnew product will be accepted by the marketplace, or whether competingtechnologies will be more popular. Further, we do not know whether third-party developers of Internetcommunications applications will be willing to develop new applications that canbe delivered as part of our mobile office communications solutions, or whetherwe will be able to develop any applications of this type ourselves.  If our new products are not successful, wewill not achieve a profitable return on the costs of product development andlaunch, and we will have lost opportunities to pursue other products.

 

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**We depend on our customers to marketInternet-based communications services to their end users, so if our customersfail to market their services effectively, our revenues may be reduced.**

 

Our business depends on the efforts and success of our customers inmarketing Internet-based communications services to their end users. We havelittle ability to promote our services, or to promote demand for our customers’services generally.   The use of theInternet as a medium for communications services remains unproven.  If our customers fail to market theirInternet-based communications services effectively, our revenues will bereduced. Similarly, if the market for Internet-based communications servicesfails to grow, or expands more slowly than anticipated, our revenues will belower than expected. The Internet-based services we provide are relatively newand have not achieved widespread market acceptance. Network service providersand communication solutions providers may be reluctant to promote or rely uponour services until they gain greater commercial acceptance, which may neveroccur.

 

**Sales in the Internet infrastructure marketare unpredictable, and since we depend on sales to this market, our revenuesand any earnings are at risk when the market declines.**

 

Sales to the Internet infrastructure market are characterized bysporadic purchasing decisions and sensitivity to expansions and contractions inthe telecommunications industry. Recently, many companies have warned ofpurchasing declines in the Internet infrastructure market. Sales activity inthis industry depends upon the stage of completion of expanding networkinfrastructures, the availability of funding and the extent to which serviceproviders are affected by local regulatory and business conditions. If oursales do not match our expectations, we would likely be unable to achievesustained profitability.

 

**The unpredictability of our quarterly resultsmay cause the trading price of our common stock to decline.**

 

Our quarterly revenues and operating results have varied in the pastand are likely to fluctuate unpredictably in the future for many reasons beyondour control. Any of these factors could cause our stock price to decline. Theprimary factors that affect revenues and operating results, in addition to thefactors discussed elsewhere in this section, include the following:

 

•                                          thevolume of transaction-based revenues;

 

•                                          thetiming of deployment of services by our customers;

 

•                                          competitivepricing pressure;

 

•                                          changesin global travel patterns due to past and potential future terrorist activitiesin the U.S. and the military responses to them in the Middle East, SouthernAsia and elsewhere;

 

•                                          themix of services used by our customers’ end users;

 

•                                          difficultycollecting accounts receivable, particularly from customers based outside theU.S.; and

 

•                                          regulation,domestically and internationally.

 

Our operating expenses are largely determined based on our expectationsabout revenues.  A high percentage ofour expenses are fixed in the short term. As a result, lower than anticipated revenues for any reason could causesubstantial operating losses.

 

**Our customers require a high degree ofreliability in the delivery of our services, and if we cannot meet theirexpectations for any reason, demand for our products and services will suffer.**

 

Our success depends on our ability to assure generally error-freeclearinghouse services, uninterrupted operation of our network and softwareinfrastructure, and a satisfactory experience for our customers’ end users. Inthe past, we have experienced problems due to our inability to detect systemmalfunctions and due to errors in collecting or processing account usage andsettlement data. Due to the high level of performance required for criticalcommunications traffic, any failure to deliver a satisfactory experience to endusers, whether or not caused by our own failures, and any failure to provideaccurate settlement data in connection with acting as a clearinghouse, couldreduce demand for our products and services.

 

 

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**Our long sales cycle makes it particularlydifficult for us to forecast revenues, requires us to incur high sales costs,and aggravates fluctuations in quarterly financial results.**

 

Our business is characterized by a long “sales cycle” — the timebetween initial contact with a potential customer and the resulting purchaseand deployment of our service. Typically, our sales cycle is between three totwelve months, and the actual length of a sales cycle depends on a number offactors such as the complexity of the customer’s business and needs, the natureof services being purchased and the level of deployment.  Even after a sale is made there may befurther delays before new users are brought into our system and we begin torealize associated revenues. As a result, we typically incur substantial salescosts before we recognize any related revenues.  It is possible that in some periods there will be unusually highcosts associated with the long sales cycle, or that the length of the salescycle will increase, which could have a material effect on our business.

 

**Because much of our business is conductedinternationally, we encounter special difficulties, which may impede ourefforts to remain profitable and harm the trading price of our common stock.**

 

We generate most of our revenues from business conductedinternationally, so we are subject to special risks. It is costly to maintaininternational facilities and operations, promote our brand internationally anddevelop localized systems and support centers. In some regions revenues may notoffset the expense of maintaining operations there. Some of the risks that weface as a result of our international operations include:

 

•                                          foreigncustomers often take longer to pay for services;

 

•                                          businessactivity is often slow in some region or another, negatively impacting overallresults;

 

•                                          foreigncurrency exchange rates fluctuate and can impact our results;

 

•                                          recruitmentand retention of experienced senior management and staff for our internationaloperations is costly;

 

•                                          compliancewith a variety of foreign laws, tariffs and trade barriers is costly andinefficient for a small company such as ours;

 

•                                          compliancewith telecommunications and other Internet-related regulations in foreignjurisdictions is expensive and difficult; and

 

•                                          generalgeopolitical risks, such as political and economic instability and changes indiplomatic and trade relationships, can have a significant impact on ourbusiness.

 

**Terrorist acts and acts of war may seriouslyharm our business and revenue, costs and expenses and financial condition.**

 

Terrorist acts or acts of war, including military actions in Iraq andother parts of the Middle East, may cause damage or disruption to us, ouremployees, facilities, partners, suppliers, resellers or customers, which couldsignificantly impact our revenue, costs and expenses and financial condition.The terrorist attacks that took place in the United States onSeptember 11, 2001 were unprecedented events that have created manyeconomic and political uncertainties, some of which may materially harm ourbusiness and results of operations. The long-term effects on our business ofthe September 11, 2001 attacks and the current state of warfare in theMiddle East are unknown. The potential for future terrorist attacks, thenational and international responses to terrorist attacks or perceived threatsto national security and other acts of war or hostility have created manyeconomic and political uncertainties that could adversely affect our businessand results of operations in ways that cannot presently be predicted. Inaddition, as a multi-national company with headquarters and significantoperations located in the United States, we may be impacted by actions againstthe United States. We are predominantly uninsured for losses and interruptionscaused by terrorist acts and acts of war.

 

**Recent fears concerning SARS have affectedtravel to and from Asia, which could harm our revenues.**

 

Severe Acute Respiratory Syndrome, which is generally known as SARS, isa highly communicable disease that emerged recently in Asia.  Concerns about the spread of SARS has led toquarantines and travel restrictions being imposed on

 

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individuals with suspected symptoms in some countries, and somecompanies have restricted or banned nonessential travel to and from certainparts of Asia.  If business travel toAsia or elsewhere were to decline for a sustained period of time due toSARS-related issues or other health concerns, the level of demand for ourservices is likely to decline which could result in reduced revenues.

 

**The economic downturn could adversely affectour revenue, gross margins and expenses.**

 

Our revenue and gross margins depend in part on the overall demand forinformation technology products and services, particularly in the product andservice segments in which we compete. Softening demand for our products andservices caused by the ongoing economic downturn has resulted in decreasedrevenue growth rates, and may in the future result in decreased revenue,earnings or growth rates and problems with our ability to realize customerreceivables. The global economy has weakened and market conditions continue tobe challenging. As a result, companies are delaying or reducing expenditures,including those for information technology. In addition, if our customersexperience financial difficulties, we could suffer losses associated with theoutstanding portion of accounts receivable. The global economic downturn hascontributed to reported declines in our revenue growth during fiscal 2002 andin the first quarter of 2003. Further delays or reductions in informationtechnology spending could have a material adverse effect on demand for ourproducts and services and consequently our results of operations, prospects andstock price.

 

**It is difficult to hire and retain qualifiedsales personnel.**

 

Highly-trained sales personnel are key to our performance. Competitionfor these individuals is often intense, and we may not be able to hire the typeand number of sales personnel we need. Moreover, even after we hiresalespersons, they require extensive training in our products and services.This training typically covers six to eight weeks of formal in-class andon-the-job instruction.  If we areunable to continue to retain our current employees and train new salespersonnel as rapidly as necessary, we may not be able to increase marketawareness and sales of our services, which may prevent us from generatingrevenue and achieving sustained profitability.

 

**We could become subject to litigationregarding intellectual property rights that could be costly and result in theloss of significant rights.**

 

In recent years, there has been significant litigation in the UnitedStates involving patents and other intellectual property rights. We may becomea party to a litigation in the future to protect our intellectual property oras a result of an alleged infringement of another party’s intellectualproperty.  Claims for allegedinfringement and any resulting lawsuit, if successful, could subject us tosignificant liability for damages and invalidation of our proprietaryrights.  These lawsuits, regardless oftheir success, would likely be time-consuming and expensive to resolve andwould divert management time and attention. Any potential intellectual property litigation could also force us to doone or more of the following:

 

•                                          stopor delay selling, incorporating or using products that use the challengedintellectual property;

 

•                                          obtainfrom the owner of the infringed intellectual property right a license to sellor use the relevant technology, which license might not be available onreasonable terms or at all; and

 

•                                          redesignthe products that use that technology.

 

If we are forced to take any of these actions, our business might beseriously harmed.  Our insurance may notcover potential claims of this type or may not be adequate to indemnify us forall liability that could be imposed.

 

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**The concentration of our capital stockownership with insiders will likely limit the ability of other stockholders toinfluence corporate matters.**

 

As of April 30, 2003, our executive officers and directors, and theirrelated entities, owned a majority of our outstanding common stock and commonstock equivalents, including the effect of a voting agreement that coverselections of directors, to which some of our stockholders are parties. As aresult, these stockholders will be able to exercise control over all mattersrequiring approval of our stockholders, including the election of directors andapproval of significant corporate transactions.  This concentration of ownership might also have the effect ofdelaying or preventing a change in control of the Company that might be viewedas beneficial by other stockholders.

 

The interests of some of these stockholders may not be aligned with theinterests of the common stockholders. The holders of our Series A Preferred Stock have special rights,preferences and privileges, including liquidation preferences that are seniorto those of the holders of our common stock in the event of a bankruptcy orliquidation.

 

**As the holders of our Series A PreferredStock reduce their ownership interest through resales pursuant to ourprospectus dated September 19, 2002, or otherwise, their interest incontributing to our success may decline and the price of our common stock maybe harmed.**

 

Some of the holders of our Series A Preferred Stock identified in ourprospectus dated September 19, 2002 have a substantial investment in GRIC andto the extent that they liquidate their investment through sales of such stock,they will have a diminished interest in contributing to our success.  In addition, the registration and sale ofthe shares held by the selling stockholders may result in a decline in theprice of our common stock.

 

**Provisions in our charter documents mightdeter a company from acquiring us, which could inhibit your ability to receivean acquisition premium for your shares.**

 

Provisions of our certificate of incorporation, bylaws and Delaware lawmake it difficult for a third party to acquire us, despite the possible benefitto our stockholders, and this may potentially lower the price of our commonstock. These provisions of our certificate of incorporation and bylaws:

 

•                                          authorizethe board to issue preferred stock without stockholder approval;

 

•                                          prohibitcumulative voting in the election of directors;

 

•                                          limitthe persons who may call special meetings of stockholders; and

 

•                                          establishadvance notice requirements for nominations for the election of the board ofdirectors or for proposing matters that can be acted on by stockholders atstockholder meetings.

 

In addition, we have elected to remain subject to the anti-takeoverprovisions of Delaware law. These factors may discourage takeover attempts.

 

**If our common stock price falls below and remainsunder $1.00, or if we otherwise fail to comply with Nasdaq rules, our commonstock could be delisted from The Nasdaq National Market, which could severelylimit the trading market for our common stock.**

 

If we fail to meet the criteria for continued listing on The NasdaqNational Market, our common stock may be delisted, which could make it moredifficult for you to sell your shares. For example, if the market price for ourcommon stock falls and remains below $1.00 per share for thirty trading days, wewould be subject to delisting. On April 30, 2003, the closing price of ourcommon stock was $2.80.

 

**Security concerns may deter the use of theInternet for Internet-based communications, which would reduce demand for ourproducts and services.**

 

The secure transmission of confidential information over publicnetworks is a significant barrier to widespread adoption of electronic commerceand communications. The Internet is a public network and information is sentover this network from many sources. Advances in computer capabilities, newdiscoveries in the field of code breaking or other developments could result incompromised security on our network or the networks of others. Security andauthentication concerns with respect to the transmission over the Internet ofconfidential information, such as corporate access passwords, and the abilityof unauthorized computer users, so-called hackers, to penetrate online securitysystems may reduce the demand for

 

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our services. If any well-publicized compromises of confidentialinformation were to occur, it could reduce demand for Internet-basedcommunications and our products and services.

 

**Government regulations and legaluncertainties regarding the Internet could harm our business.**

 

We are not currently subject to federal or state regulations imposed ontelecommunications service providers, and we do not believe that we are subjectto local regulation or laws or regulations applicable to access to or commerceon the Internet, other than regulations applicable to businesses generally.

 

*United States.*  We believe that, under United States law,the Internet-related services that we provide constitute information servicesor other non-telecommunications services, and do not constitute regulatedtelecommunications services. Therefore our services are not currently subjectto regulation by the Federal Communications Commission, and, by operation offederal preemption law, are also exempt from regulation by state agencies chargedwith regulating telecommunications carriers. We do not know the extent to whichour Internet-related services may be subject to regulation by the FederalCommunications Commission or state telecommunications authorities in thefuture.

 

The Federal Communications Commission has initiated several proceedingsthat may change the regulatory and legal framework for the provision ofbroadband and Internet services. Recently, the Federal Communications Commission determined that cablemodem services constitute unregulated information services.  This decision is currently under appeal inthe Court of Appeals for the Ninth Circuit. In addition, the industry and policy makers continue to debate theobligation of cable operators to provide ISPs non-discriminatory access tocable broadband platforms.  The FederalCommunications Commission also has recently issued new rules in its TriennialReview proceeding relieving incumbent local exchange carriers of certainregulatory obligations in the provision of broadband services, includingrequirements that they provide certain types of network access services on anunbundled and discounted basis to competitors. The Federal CommunicationsCommission is also considering whether incumbent local exchange carriers shouldbe treated as non-dominant in the provision of broadband services as well aswhether facilities-based broadband Internet access providers should be requiredto contribute to the universal service fund, which is used to subsidize theuniversal availability of telecommunications services. If adopted, theseregulatory measures may lessen some of the regulatory burdens on existingproviders of broadband services, particularly incumbent local exchangecarriers, but may increase barriers to entry for new providers and may resultin increased costs to customers of such services. We cannot be certain of theimpact that any of these measures would have on our business.

 

The regulatory status and treatment of various configurations of voiceover Internet protocol (“VoIP”) service is also under consideration by theFederal Communications Commission as well as certain state regulatorycommissions.  We cannot determine theimpact that any changes in the regulatory treatment of VoIP may have on ourbusiness.

 

Federal rules and regulations governing inter-carrier compensation arealso currently under review at the Federal Communications Commission and theU.S. Court of Appeals for the District of Columbia Circuit. To the extent thatour U.S. customers are adversely affected by the combination of increased costsof Internet access and transport services and decreased revenues frominter-carrier compensation, we cannot be certain that our business will not beadversely affected as well.

 

Congress has adopted legislation addressing certain other aspects ofthe Internet, including intellectual property protection, child privacyprotection, Internet spamming, privacy, taxes, Internet fraud, security andbroadband deployment in rural areas. Various states also have adopted and are consideringInternet-related legislation. Increased U.S. restriction of the Internet orInternet-related services may slow our growth, particularly if othergovernments follow suit, which may negatively impact the cost of doing businessover the Internet and materially adversely affect our business, prospects,results of operations and financial condition.

 

*International.*  Foreign regulatory frameworks affecting theInternet vary from country to country. However, as is the case in the U.S.,most countries currently do not impose telecommunications licensing or otherregulatory requirements on the information and other non-telecommunicationsservices that we provide. Increased regulation of the Internet andInternet-related services, or the imposition of other restrictions, couldmaterially adversely affect our business, prospects, operating results andfinancial condition.

 

In particular, the European Union has enacted several directivesconcerning the Internet and Internet-related activities. The European Unionhas, for example, adopted a directive that requires Member States to imposerestrictions on the collection and processing of personal data and to preventtransmission outside of Europe of personal data, which can include customer andbilling information as well as human resource data, except to countries thatprovide adequate protection of such data. In response to the European Uniondirective, the U.S. negotiated with the European Union the establishment ofcertain “Safe Harbor” principles, effective as of November 2000, whichprovide U.S. companies choosing to adhere to them a presumption of adequateprotection of privacy. Companies complying with the Safe Harbor principles mustprovide notice to users of personal data

 

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collection, provide choices to users regarding certain uses, includingthe transfer of information to third parties, guarantee the security andintegrity of personal data collected, provide users with the ability to access,correct and delete personal information that is being stored, and provide foruser enforcement and redress in the event of violation of the principles. Theseprinciples are more restrictive than other applicable U.S. laws and may imposeadditional cost on companies that decide to comply. Currently, the Safe Harborprinciples are voluntary and are intended to be implemented throughself-regulation and industry self-certification. In the future, however, therequirements embodied in the principles may become mandatory. To date, we havenot certified that we will operate under the Safe Harbor principles.

 

Although we do not engage in the collection of data for purposes otherthan routing our services and billing for our services, the directive is broadand the European Union privacy standards are stringent. Accordingly, thepotential effect on us is uncertain. In conducting our businessinternationally, we must comply with privacy laws directly applicable to ouractivities in Europe and similar privacy and data protection rules in othercountries in which we do business. Any such requirements may adversely affectour ability to collect demographic and personal information from users, whichcould have an adverse effect on our ability to provide targeted advertisements.Although we will endeavor to meet the requirements of the European Uniondirective and any U.S. regulations, we cannot guarantee that adequacy of ourcompliance will not be subject to challenge.

 

As our services are made available in foreign countries, and as we facilitatesales by our customers and affiliates to end users located in foreigncountries, these countries may claim that we or our customers are required toqualify to do business in the particular foreign country, that we are otherwisesubject to regulation, including requirements to obtain authorization, or thatwe or our customers are prohibited in all cases from conducting business ascurrently conducted in that foreign country. Our failure to qualify as aforeign corporation in a jurisdiction in which we are required to do so or tocomply with foreign laws and regulations could subject us to taxes andpenalties or preclude us from, or limit our ability in, enforcing contracts inthese jurisdictions, which could materially adversely affect our business,prospects, operating results and financial condition.

 

Our customers and affiliates may also currently be, or in the futuremay become, subject to requirements to qualify to do business in a particularforeign country, to comply with regulations, including requirements to obtainauthorization, or to cease from conducting their business as conducted in thatforeign country. We cannot be certain that our customers and affiliates arecurrently in compliance with any of these requirements, will be able to complywith any of these requirements, or will continue in compliance with any ofthese requirements. The failure of our customers and affiliates to comply withthese requirements could materially adversely affect our business, prospects,operating results and financial condition.

 

**Compliance with new rules and regulationsconcerning corporate governance may be costly and could harm our business.**

 

The Sarbanes-Oxley Act, which was signed into law in July 2002,mandates, among other things, that companies adopt new corporate governancemeasures and imposes comprehensive reporting and disclosure requirements, setsstricter independence and financial expertise standards for audit committeemembers and imposes increased civil and criminal penalties for companies, theirchief executive officers and chief financial officers and directors forsecurities law violations. In addition, The Nasdaq National Stock Market, onwhich our common stock is listed, is also considering the adoption ofadditional comprehensive rules and regulations relating to corporategovernance. These laws, rules and regulations will increase the scope,complexity and cost of our corporate governance, reporting and disclosurepractices, which could harm our results of operations and divert management’sattention from business operations. We also expect these developments to makeit more difficult and more expensive for us to obtain director and officerliability insurance, and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage. Further, our board members,Chief Executive Officer and Chief Financial Officer could face an increasedrisk of personal liability in connection with the performance of their duties.As a result, we may have difficultly attracting and retaining qualified boardmembers and executive officers, which would adversely affect our business.

 

**The current regulatory environment affectingaccounting principles generally accepted in the United States of America isuncertain and volatile, and significant changes in current principles couldaffect our financial statements going forward.**

 

Recent actions and public comments from the Securities ExchangeCommission have focused on the integrity of financial reporting generally. Inaddition, the FASB and other regulatory accounting agencies have recentlyintroduced several new or proposed accounting standards, or are developing newproposed standards, such as accounting for guarantees, restructuring chargesand stock options, some of which would represent a significant change fromcurrent industry practices. While we believe that our financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America, we cannot predict the impact of the adoption ofany such proposals on our financial statements going forward.

 

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**ITEM 3.**                 QUALITATIVEAND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

*Foreign Currency Risk.*    Wehave limited exposure to financial market risks, including changes in foreigncurrency exchange rates and interest rates. Although we have foreign operationsin Europe and Asia, to date our exposure to foreign currency fluctuations hasnot been significant. Therefore, no accompanying table has been provided.

 

*Interest Rate Risk.*    Ourexposure to interest rate risk relates primarily to our investment portfolioand debt obligations. Interest rate risk occurs when we cannot hold a purchasedinvestment to its maturity. The weighted-average maturity of our investmentportfolio, when taking into account the reset feature of floating ratemunicipal bonds, is limited to 90 days. We intend to hold our securitiesuntil maturity and, therefore, do not expect to recognize an adverse impact onincome or cash flows, although there can be no assurance of this. We haveestablished policies and business practices regarding our investment portfolioto preserve principal while obtaining reasonable rates of return withoutsignificantly increasing risk. We place investments with high credit qualityissuers according to our investment policy. We do not use derivative financialinstruments in our investment portfolio. All investments are carried at fairmarket value for March 31, 2002. Due to the short-term nature of ourinvestments and the immaterial amount of our debt obligation, we believe thatthere is no material exposure to interest fluctuation. Therefore, noaccompanying table has been provided.

 

**ITEM 4.**          CONTROLSAND PROCEDURES

 

***Evaluation ofDisclosure Controls and Procedures***.  Regulationsunder the Securities Exchange Act of 1934 require public companies to maintain“disclosure controls and procedures,” which are defined to mean a company’scontrols and other procedures that are designed to ensure that informationrequired to be disclosed in the reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the Commission’s rules and forms. OurChief Executive Officer and our Chief Financial Officer, based on theirevaluation of the effectiveness of our disclosure controls and procedureswithin 90 days before the filing date of this report, concluded that ourdisclosure controls and procedures were effective for this purpose.

 

*Changes in Internal Controls.*There were no significant changes in our internal controls or in other factorsthat could significantly affect these controls subsequent to the date of theirevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the company have been detected.  These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Further, the design of a control system must reflect the fact that thereare resource constraints, and the benefits of controls must be consideredrelative to their costs.  The design ofany system of controls is also based in part on certain assumptions regardingthe likelihood of future events, and there can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions.

 

 

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**PARTII****. OTHERINFORMATION**

 

**ITEM1.****                        LEGALPROCEEDINGS**

 

We are subjectto various legal proceedings and claims arising in the ordinary course ofbusiness. Our management does not expect that the results in any of these legalproceedings will have a material adverse effect on our financial condition,results of operations or cash flows.

 

In July andAugust 2001, we and certain of our officers were named as defendants in fivepurported securities class action lawsuits filed in the United States DistrictCourt, Southern District of New York, captioned as In re GRIC Communications,Inc. Initial Public Offering Securities Litigation, No. 01 Civ 6771 (SAS), andis one of over three hundred substantially identical proceedings consolidatedas In re Initial Public Offering Securities Litigation, Master File No. 21 MC92 (SAS). The Consolidated Amended Class Action Complaint for Violation of theFederal Securities Laws (“Consolidated Complaint”) was filed on or about April19, 2002, and alleges claims against certain of our officers, and CIBC WorldMarkets Corp., Prudential Securities Incorporated, DB Alex. Brown, as successorto Deutsche Bank, and U.S. Bancorp Piper Jaffray Inc., underwriters of theCompany’s December 14, 1999 initial public offering (“underwriter defendants”),under Sections 11 and 15 of the Securities Act of 1933, as amended, and underSection 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended.

 

In October2002, certain of our officers and directors who had been named as defendants inthe In re Initial Public Offering Securities Litigation were dismissed withoutprejudice upon order of the presiding judge. In February 2003, the presidingjudge dismissed the Section 10(b) claims against us and our named officers anddirectors with prejudice.  In addition,the parties have been participating in a mediation.  Settlement proposals that could include dismissal of theremaining Section 11 claim against us have been made. There can be no guaranteethat the parties will be able to reach agreement on either a partial dismissalor a global resolution of the claims involving the issuer defendants. Our managementbelieves that the Consolidated Complaint is without merit and intends to defendagainst it vigorously. We do not believe the outcome of this consolidatedlawsuit will have a material adverse effect on our financial condition, resultsof operations or cash flows.

 

**ITEM 2**.          CHANGES IN SECURITIESAND USE OF PROCEEDS

 

Not applicable.

 

## **ITEM3**.          DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

## ** **

## **ITEM4**.                 SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS

 

Not applicable.

## ** **

## **ITEM5**.          OTHER INFORMATION

 

Not applicable.

 

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## **ITEM6**.                 EXHIBITS AND REPORTS ON FORM 8-K

 

(a)          Exhibits

 
|                |   |                                                                                                                                                                                 |       | **Incorporated by Reference** |       |         |   |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------|--------|
| **Exhibit  Number** |   | **Exhibit Description**                                                                                                                                                              | ** ** | **Form**                      | ** ** | **File No.** |   | **Exhibit** | ** ** | **Filing Date** |   | **Filed  Herewith** | ** ** |
| 10.35               |   | Amendment  No. 1 dated January 29, 2003 to Lease dated January 6, 1998 among the  Registrant, John Arrillaga Survivor’s Trust and Richard T. Peery Separate  Property Trust.    |       | 10-K                          |       | 000-27871    |   | 10.35 |   | 3/31/03 |   |   |   |
|                |   |                                                                                                                                                                                 |       |                          |       |         |   |   |   |   |   |   |   |
| 10.36               |   | Employment  Agreement between the Registrant and Hong Chen.                                                                                                                          |       | 10-K                          |       | 000-27871    |   | 10.36 |   | 3/31/03 |   |   |   |
|                |   |                                                                                                                                                                                 |       |                          |       |         |   |   |   |   |   |   |   |
| 99.01*              |   | Certifications  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Registrant’s  Acting Chief Executive Officer and Chief Financial Officer, dated May 14,  2003. |       |                          |       |         |   |   |   |   |   | X* |   |

 

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*                                         Thesecertifications accompany GRIC’s Quarterly Report on Form 10-Q for the quarterlyperiod ended March 31, 2003.  Thesecertifications are not deemed filed with the Securities and Exchange Commissionand are not to be incorporated by reference in any filing of GRIC under theSecurities Act of 1933 or the Securities Exchange Act of 1934, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage in any filings.

 

(b)**Reports on Form 8-K**

 
| **Date of Report** |   | **Item(s)** |   | **Description**                                                                                                                                                                                                                                                        | ** ** |
|--------------------|--------|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 1/29/03            |   | 5,7         |   | In  January 2003, we filed a Form 8-K regarding a press release announcing our  financial results for the fourth quarter of 2002 and the decision by our  co-founder, Dr. Hong Chen, as Chief Executive Officer and to continue as  Chairman of our Board of Directors |       |

 

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## **SIGN**ATURE

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized, on May 14, 2003.

 
|   | GRIC COMMUNICATIONS, INC.                                                                                                |
|--------|-------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                          |
|   | **/s/ KIM S. SILVERMAN**                                                                                                      |
|   | Kim S. Silverman  Vice President and Chief Financial Officer  (Principal Financial Officer and  Principal Accounting Officer) |

 

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**CERTIFICAT****ION PURSUANT TO**

**SECTION 302 OF THE**

**SARBANES-OXLEY ACT OF 2002**

 

I, **BHARAT DAVÉ**,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of GRIC Communications, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that  material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is  being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                        Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May 14, 2003 | By:    | /s/ BHARAT  DAVÉ                                                     |
|--------------------------|--------|---------------------------------------------------------------------------|
|                     |   | Bharat Davé                                                          |
|                     |   | Acting Chief  Executive Officer, President &  Chief Operating Officer |

 

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**CERTIFICATION PURSUANT TO**

**SECTION 302 OF THE**

**SARBANES-OXLEY ACT OF 2002**

 

I, **Kim S. Silverman**,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of GRIC Communications, Inc.;

 

2.                                     Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that  material informationrelating to the registrant, including its consolidated subsidiaries, ismade known to us by others within those entities, particularly during theperiod in which this quarterly report is  being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and  procedures asof a date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May 14, 2003 | By:    | /s/ Kim S.  Silverman                         |
|--------------------------|--------|-----------------------------------------------|
|                     |   | Kim S.  Silverman                             |
|                     |   | Vice  President & Chief Financial Officer |

 

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