**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q/A**

 

**(Amendment No. 1)**

 

**(Mark One)**

 
| **ý**                                              | ** ** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                                                                                                                        |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                                                                                                                                                                          |
| **For the quarterly period ended  April 30, 2005** |
|                                                    |       |                                                                                                                                                                                                                                                          |
| **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**

 

**GoRemoteInternet 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’sTelephone Number, Including Area Code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 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 in Rule 12b-2of the Exchange Act). Yes  ý    No  o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes  o   No ý

 

The number ofshares of the registrant’s common stock outstanding as of May 31, 2005 was41,630,983 shares.

 

 

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**EXPLANATORYNOTE**

 

As previously reported in our Current Reporton Form 8-K dated September 21, 2005, in September 2005 we determined that ourpreviously issued financial statements for the quarters ended April 30, 2005and July 31, 2005 should not be relied upon as a result of an error in suchfinancial statements as discussed under Accounting Principles Board Opinion No.20.  This Form 10-Q/A is being filed forthe sole purpose of correcting that error by amending Item 1, FinancialStatements, Item 2, Management's Discussion and Analysis of Financial Conditionand Results of Operations, and Item 4, Controls and Procedures.

 

 

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**GoRemote Internet Communications, Inc.INDEX**

 
|      | **PART I  FINANCIAL INFORMATION**                                                                                                        |   |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
|      |                                                                                                                                          |   |
| Item 1.   | Financial Statements:                                                                                                                         |   |
|      | Unaudited Condensed Consolidated Balance Sheets as of April 30,  2005 and October 31, 2004 (as Restated)                            | 3      |
|      | Unaudited Condensed Consolidated Statements of Operations for the  Three and Six Months Ended April 30, 2005 and 2004 (as Restated) | 4      |
|      | Unaudited Condensed Consolidated Statements of Cash Flows for the  Six Months Ended April 30, 2005 and 2004 (as Restated)           | 5      |
|      | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                | 6      |
| Item 2.   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                   | 17     |
|      |                                                                                                                                          |   |
| Item 4.   | Controls and Procedures                                                                                                                       | 35     |
|      |                                                                                                                                          |   |
|      | **PART II  OTHER INFORMATION**                                                                                                           |   |
|      |                                                                                                                                          |   |
| Item 6.   | Exhibits                                                                                                                                      | 38     |
| SIGNATURE | 39                                                                                                                                            |

 

2

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**PART I.****   FINANCIALINFORMATION**

** **

**ITEM 1.****   FINANCIAL STATEMENTS**

** **

**GoRemote Internet Communications, Inc.**

** **

**Condensed Consolidated Balance Sheets**

** **

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

 
| ** **                                                                                                                                                                                                                                             | ** ** | **April 30,  2005** | ** ** | **October 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                             | ** ** | **(unaudited)**          | ** ** | ** **                 | ** ** |
| ** **                                                                                                                                                                                                                                             | ** ** | **(Restated)**           | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                                                                                                             |       |                     |       |                       |       |
| ***Current assets:***                                                                                                                                                                                                                                  |       |                     |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                                                                              |       | $                        | 4,346      |                       | $          | 2,407 |   |
| Short-term investments                                                                                                                                                                                                                                 |       | 15,418                   |       | 15,614                     |       |
| Accounts receivable, net of allowances of  $214 and $211 at April 30, 2005 and October 31, 2004,  respectively                                                                                                                     |       | 5,881                    |       | 7,243                      |       |
| Inventory                                                                                                                                                                                                                                              |       | 104                      |       | 119                        |       |
| Deferred installation costs                                                                                                                                                                                                                            |       | 2,086                    |       | 1,425                      |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                              |       | 914                      |       | 725                        |       |
| Total current assets                                                                                                                                                                                                                                   |       | 28,749                   |       | 27,533                     |       |
| Property and equipment, net                                                                                                                                                                                                                            |       | 1,709                    |       | 1,694                      |       |
| Goodwill                                                                                                                                                                                                                                               |       | 21,612                   |       | 21,612                     |       |
| Intangible assets, net                                                                                                                                                                                                                                 |       | 3,394                    |       | 3,876                      |       |
| Deferred installation costs, less current  portion                                                                                                                                                                                                     |       | 790                      |       | 740                        |       |
| Other assets                                                                                                                                                                                                                                           |       | 365                      |       | 442                        |       |
| Total assets                                                                                                                                                                                                                                           |       | $                        | 56,619     |                       | $          | 55,897 |   |
|                                                                                                                                                                                                                                                   |       |                     |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                          |       |                     |       |                       |       |
| ***Current liabilities:***                                                                                                                                                                                                                             |       |                     |       |                       |       |
| Accounts payable                                                                                                                                                                                                                                       |       | $                        | 6,025      |                       | $          | 6,571 |   |
| Restructuring accrual                                                                                                                                                                                                                                  |       | 172                      |       | 434                        |       |
| Accrued compensation and benefits                                                                                                                                                                                                                      |       | 1,306                    |       | 1,061                      |       |
| Current portion of deferred revenue                                                                                                                                                                                                                    |       | 4,578                    |       | 2,741                      |       |
| Other current liabilities                                                                                                                                                                                                                              |       | 1,536                    |       | 1,407                      |       |
| Total current liabilities                                                                                                                                                                                                                              |       | 13,617                   |       | 12,214                     |       |
| Deferred revenue, less current portion                                                                                                                                                                                                                 |       | 1,393                    |       | 1,305                      |       |
| Restructuring accrual, less current portion                                                                                                                                                                                                            |       | 327                      |       | 416                        |       |
| Total liabilities                                                                                                                                                                                                                                      |       | 15,337                   |       | 13,935                     |       |
| Stockholders’ equity:                                                                                                                                                                                                                             |       |                     |       |                       |       |
| Series A redeemable convertible  preferred stock, $0.001 par value: 12,801 shares authorized at April 30,  2005 and October 31, 2004: no shares issued and  outstanding                                                  |       | —                   |       | —                     |       |
| Preferred stock, 5,000 shares authorized at  April 30, 2005 and October 31, 2004: no shares issued and  outstanding                                                                                                                |       | —                   |       | —                     |       |
| Common stock, $0.001 par value; 100,000 shares  authorized at April 30, 2005 and October 31, 2004: 41,629  and 41,159 shares issued and outstanding at April 30, 2005 and  October 31, 2004, respectively |       | 42                       |       | 41                         |       |
| Additional paid-in capital                                                                                                                                                                                                                             |       | 213,768                  |       | 213,244                    |       |
| Deferred stock-based compensation                                                                                                                                                                                                                      |       | (76                      | )          | (201                       | )          |
| Accumulated deficit                                                                                                                                                                                                                                    |       | (172,452                 | )          | (171,122                   | )          |
| Total stockholders’ equity                                                                                                                                                                                                                        |       | 41,282                   |       | 41,962                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                        |       | $                        | 56,619     |                       | $          | 55,897 |   |

 

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

 

3

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**GoRemote Internet Communications, Inc.**

 

**Condensed Consolidated Statements of Operations**

 

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

 

**(unaudited)**

 
| ** **                                                   | ** ** | **Three Months Ended  April 30,** | ** ** | **Six Months Ended  April 30,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                         | ** ** | **2004**                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **(Restated)**                                   | ** ** | ** **                                     | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| Revenues                                                     |       | $                                                | 12,030     |                                           | $          | 12,882 |   | $ | 24,006 |   | $ | 24,800 |   |
| Costs and expenses:                                          |       |                                             |       |                                           |       |   |   |   |   |
| Cost of revenues                                             |       | 4,933                                            |       | 5,310                                          |       | 9,945 |   | 10,019 |   |
| Network and operations                                       |       | 2,290                                            |       | 2,316                                          |       | 4,449 |   | 4,027 |   |
| Research and development                                     |       | 515                                              |       | 1,193                                          |       | 1,098 |   | 2,061 |   |
| Sales and marketing                                          |       | 3,058                                            |       | 4,734                                          |       | 6,167 |   | 9,492 |   |
| General and administrative                                   |       | 1,484                                            |       | 1,648                                          |       | 3,079 |   | 3,009 |   |
| Amortization of intangible assets                            |       | 238                                              |       | 400                                            |       | 482 |   | 666 |   |
| Amortization of stock-based compensation(1)                  |       | 27                                               |       | 89                                             |       | 84 |   | 149 |   |
| Restructuring charge                                         |       | —                                           |       | —                                         |       | 60 |   |   |   |
| Total costs and expenses                                     |       | 12,545                                           |       | 15,690                                         |       | 25,364 |   | 29,423 |   |
| Operating loss                                               |       | (515                                             | )          | (2,808                                         | )          | (1,358 | ) | (4,623 | ) |
| Interest income and other, net                               |       | 23                                               |       | 57                                             |       | 78 |   | 51 |   |
| Loss before income taxes                                     |       | (492                                             | )          | (2,751                                         | )          | (1,280 | ) | (4,572 | ) |
| Provision for income taxes                                   |       | 19                                               |       | 34                                             |       | 50 |   | 56 |   |
| Net loss                                                     |       | $                                                | (511       | )                                              | $          | (2,785 | ) | $ | (1,330 | ) | $ | (4,628 | ) |
| Basic and diluted net loss per share                         |       | $                                                | (0.01      | )                                              | $          | (0.07 | ) | $ | (0.03 | ) | $ | (0.12 | ) |
| Shares used to compute basic and diluted  net loss per share |       | 41,609                                           |       | 40,285                                         |       | 41,465 |   | 37,380 |   |

 

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(1)   Amortization of stock-based compensationconsists of:

 
| Network and operations                          |   | $ | 14     |   | $      | 26 |   | $  | 35     |   | $ | 43  |   |
|-------------------------------------------------|--------|---|--------|--------|--------|----|--------|----|--------|--------|---|-----|--------|
| Research and development                        |   | 2 |   | 19     |   | 6  |   | 32 |   |
| Sales and marketing                             |   | 8 |   | 36     |   | 34 |   | 61 |   |
| General and administrative                      |   | 3 |   | 8      |   | 9  |   | 13 |   |
| Total amortization of stock-based  compensation |   | $ | 27     |   | $      | 89 |   | $  | 84     |   | $ | 149 |   |

 

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

 

4

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**GoRemote Internet Communications, Inc.**

 

**Condensed Consolidated Statements of Cash Flows**

 

**(in thousands)**

 

**(unaudited)**

 
| ** **                                                                            | ** ** | **Six Months Ended  April 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
| ** **                                                                            | ** ** | **(Restated)**                                 | ** ** | ** ** | ** ** |
| ***Cash flows from operating activities:***                                           |       |                                           |       |   |   |
| Net loss                                                                              |       | $                                              | (1,330     | ) | $ | (4,628 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:          |       |                                           |       |   |   |
| Depreciation and amortization of property  and equipment                              |       | 593                                            |       | 751 |   |
| Amortization of stock-based compensation                                              |       | 84                                             |       | 149 |   |
| Amortization of intangibles                                                           |       | 482                                            |       | 666 |   |
| Provision for accounts receivable  allowances                                         |       | 22                                             |       | — |   |
| Non-cash portion of restructuring charge  (benefit)                                   |       | (21                                            | )          | — |   |
| Net changes in assets and liabilities:                                                |       |                                           |       |   |   |
| Accounts receivable                                                                   |       | 1,340                                          |       | (464 | ) |
| Inventories                                                                           |       | 15                                             |       | (38 | ) |
| Prepaid expenses and other current assets                                             |       | (850                                           | )          | 81 |   |
| Other assets                                                                          |       | 27                                             |       | (553 | ) |
| Accounts payable                                                                      |       | (876                                           | )          | 112 |   |
| Accrued compensation and benefits                                                     |       | 245                                            |       | (518 | ) |
| Deferred revenue                                                                      |       | 1,925                                          |       | 1,639 |   |
| Other current liabilities                                                             |       | 129                                            |       | (190 | ) |
| Net cash provided by (used in) operating  activities                                  |       | 1,785                                          |       | (2,993 | ) |
| ***Cash flows from investing activities:***                                           |       |                                           |       |   |   |
| Available-for-sale investments:                                                       |       |                                           |       |   |   |
| Purchases                                                                             |       | (3,798                                         | )          | (3,194 | ) |
| Sales and maturities                                                                  |       | 3,994                                          |       | 5,598 |   |
| Cash provided by business combination, net                                            |       | —                                         |       | 1,412 |   |
| Capital expenditures                                                                  |       | (608                                           | )          | (653 | ) |
| Net cash provided by (used in) investing  activities                                  |       | (412                                           | )          | 3,163 |   |
| ***Cash flows from financing activities:***                                           |       |                                           |       |   |   |
| Proceeds from sales of common stock, net                                              |       | 566                                            |       | 1,201 |   |
| Net cash provided by financing activities                                             |       | 566                                            |       | 1,201 |   |
| Net increase in cash and cash equivalents                                             |       | 1,939                                          |       | 1,371 |   |
| Cash and cash equivalents at beginning of  the period                                 |       | 2,407                                          |       | 3,560 |   |
| Cash and cash equivalents at end of the  period                                       |       | $                                              | 4,346      |   | $ | 4,931 |   |
| ***Supplemental disclosures of cash flow  information:***                             |       |                                           |       |   |   |
| Income taxes paid                                                                     |       | $                                              | 132        |   | $ | 36 |   |
| ***Supplemental disclosures of noncash  financing activities:***                      |       |                                           |       |   |   |
| Conversion of Series A redeemable  convertible preferred stock into common stock |       | $                                              | —     |   | $ | 1,326 |   |

 

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

 

5

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**GoRemote Internet Communications, Inc.**

 

**Notes to Condensed Consolidated Financial Statements**

 

**(unaudited)**

 

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

 

The financial informationat April 30, 2005 and for the three and six months ended April 30,2005 and 2004 is unaudited, but includes all adjustments that GoRemote InternetCommunications, Inc. (the “Company”) considers necessary for a fairpresentation of the financial information set forth herein, in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, the financial information set forth hereindoes 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 and six months ended April 30, 2005are not necessarily indicative of the results that may be expected for futureperiods.

 

The balance sheet at October 31,2004 has been derived from the audited financial statements at that date, butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.

 

The following informationshould be read in conjunction with the consolidated financial statements andnotes thereto included in the Company’s Annual Report on Form 10-KT forthe ten months ended October 31, 2004.

 

**2. Restatement of Financial Statements**

** **

On September 21, 2005, as part of aninternal audit of its accounting processes in its Irvine, California location,the Company determined that its accounting personnel had erroneously posted aroutine cost of revenues journal entry on a monthly basis during the periodfrom November 2004 through July 2005. The Company’s broadband service providers do not deliver actual accountinginformation to the Company on a timely basis at month-end. Due to this delay,which is outside the Company’s control, the Company estimates its cost of salesrelated to broadband services on a monthly basis, and adjusts them to actual inthe subsequent month after receiving information from its serviceproviders.  The journal entries that weremade to reflect these monthly adjustments, instead of being posted to cost ofrevenues in the Company’s statement of operations, were posted to deferredinstallation costs and deferred installation costs less current portion on theCompany’s balance sheet, then amortized over a 24-month period to cost ofrevenues.  As a result of this error, foreach of the three-month and six-month periods ended April 30, 2005, theCompany’s cost of revenues was understated by approximately $319,000.   As of April 30, 2005, deferredinstallation costs were understated by approximately $174,000 and deferredinstallation costs, less current portion were overstated by approximately $145,000.

 
| ** **                                         | ** ** | **As of April 30, 2005** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **As Previously  Reported**   | ** ** | **Adjustment** | ** ** | **As  Restated** | ** ** |
| ** **                                         | ** ** | **(in thousands)**            | ** ** |
| Balance Sheet                                      |       |                          |       |   |   |   |   |
| Deferred installation costs                        |       | $                             | 2,260      |   | $ | (174 | ) | $ | 2,086 |   |
| Total current assets                               |       | $                             | 28,923     |   | $ | (174 | ) | $ | 28,749 |   |
| Deferred installation costs, less current  portion |       | $                             | 935        |   | $ | (145 | ) | $ | 790 |   |
| Total assets                                       |       | $                             | 56,938     |   | $ | (319 | ) | $ | 56,619 |   |
| Accumulated deficit                                |       | $                             | (172,133   | ) | $ | (319 | ) | $ | (172,452 | ) |
| Total stockholders’ equity                    |       | $                             | 41,601     |   | $ | (319 | ) | $ | 41,282 |   |
| Total liabilities and stockholders’equity     |       | $                             | 56,938     |   | $ | (319 | ) | $ | 56,619 |   |

 

6

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| ** **                           | ** ** | **For the Six Months Ended April 30, 2005** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **As Previously  Reported**                      | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **                           | ** ** | **(in thousands,except per share data)**         | ** ** |
| Statement of Operations              |       |                                             |       |   |   |   |   |
| Cost of revenues                     |       | $                                                | 9,626      |   | $ | 319 |   | $ | 9,945 |   |
| Total costs and expenses             |       | $                                                | 25,045     |   | $ | 319 |   | $ | 25,364 |   |
| Operating loss                       |       | $                                                | (1,039     | ) | $ | (319 | ) | $ | (1,358 | ) |
| Loss before income taxes             |       | $                                                | (961       | ) | $ | (319 | ) | $ | (1,280 | ) |
| Net loss                             |       | $                                                | (1,011     | ) | $ | (319 | ) | $ | (1,330 | ) |
|                                 |       |                                             |       |   |   |   |   |
| Basic and diluted net loss per share |       | $                                                | (0.02      | ) | $ | (0.01 | ) | $ | (0.03 | ) |

 
| ** **                           | ** ** | **For the Three Months Ended April 30, 2005** | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|
| ** **                           | ** ** | **As Previously  Reported**                        | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **                           | ** ** | **(in thousands,except per share data)**           | ** ** |
| Statement of Operations              |       |                                               |       |   |   |   |   |
| Cost of revenues                     |       | $                                                  | 4,614      |   | $ | 319 |   | $ | 4,933 |   |
| Total costs and expenses             |       | $                                                  | 12,226     |   | $ | 319 |   | $ | 12,545 |   |
| Operating loss                       |       | $                                                  | (196       | ) | $ | (319 | ) | $ | (515 | ) |
| Loss before income taxes             |       | $                                                  | (173       | ) | $ | (319 | ) | $ | (492 | ) |
| Net loss                             |       | $                                                  | (192       | ) | $ | (319 | ) | $ | (511 | ) |
|                                 |       |                                               |       |   |   |   |   |
| Basic and diluted net loss per share |       | $                                                  | (0.00      | ) | $ | (0.01 | ) | $ | (0.01 | ) |

 

**3.****   Summary of Significant Accounting Policies**

 

*Basisof Presentation.  *The condensed consolidated financialstatements include all the accounts of GoRemote and its wholly owned subsidiaries.All significant intercompany balances and transactions have been eliminated.The condensed consolidated financial statements have been prepared inconformity with accounting principles generally accepted in the United States.

 

*Use ofEstimates.  *The preparation of the condensedconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. The Company’s broadband service providers do notdeliver actual accounting information to the Company on a timely basis atmonth-end. Due to this delay, which is outside the Company’s control, theCompany estimates its revenue and cost of sales related to broadband serviceson a monthly basis, and adjusts them to actual in the subsequent month afterreceiving information from its service providers. Historically, theseadjustments have been immaterial. In addition, the Company made estimates as toits accounts receivable allowance and reserves, the recoverability of a prepaidasset, potential liability derived from certain tax obligations andrestructuring expenses. Actual results could differ from those estimates.

 

*ForeignCurrency Remeasurement.  *The Company considers thefunctional currency of its foreign subsidiaries to be the U.S. dollar.Adjustments resulting from the process of remeasurement into U.S. dollars ofthe foreign currency financial statements of the Company’s foreign subsidiariesare included in operations and have not been material.

 

*CashEquivalents.  *Cash equivalents consist of certificatesof deposits, money market funds and commercial paper with maturities of90 days or less at the date of purchase. Cash and cash equivalents arecarried at cost that approximates market value.

 

7

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*Short-termInvestments.  *The Company’s policy is to invest invarious short-term instruments with investment grade credit ratings and ready markets.All of the Company’s investments are classified as available-for-sale, and theCompany views its available-for-sale portfolio as available for use in itscurrent operations. Even though some of our investments have maturities greaterthan one year they are considered short-term because they have interestfeatures that are similar to short-term investments and therefore they areclassified as available-for-sale in accordance with Statement of FinancialAccounting Standards No. 115, *“Accountingfor Certain Investments in Debt and Equity Securities”* (“SFAS No. 115”).

 

The cost of securitiessold is based on the specific identification method. Any realized gains orlosses and declines in value, judged to be other-than-temporary, are includedin interest income and other. The Company includes unrealized gains or lossesin comprehensive income in stockholders’ equity, if material.

 

*Concentrationof Credit Risk.  *Financial instruments that potentiallysubject the Company to concentrations of credit risk consist principally ofcash equivalents, short-term investments and accounts receivable. The Companymaintains its cash and cash equivalents and short-term investments principallyin domestic financial institutions of high credit standing. The Company isexposed to credit risks in the event of default by these institutions to theextent of the amount recorded on the balance sheet. The credit risk in theCompany’s accounts receivable is mitigated by the Company’s credit evaluationprocess for both domestic and foreign customers. The Company generally does notrequire collateral and maintains adequate reserves for potential credit losses.Cash equivalents and short-term investments are recorded at fair value. Thecarrying value of accounts receivable approximates fair value due to theshort-term nature of this instrument.

 

*Inventories.  *Inventoriesconsist of finished goods and are stated at the lower of cost or market, costbeing determined using the first-in, first-out method.

 

*Propertyand Equipment.  *Property and equipment are stated atcost, net of accumulated depreciation and amortization. Depreciation andamortization are provided on a straight-line basis over the estimated usefullives of the respective assets. The useful lives used by the Company are36 months for furniture and fixtures, 24 to 42 months for computerequipment and software and the shorter of the useful life or the remaininglease term for leasehold improvements, respectively.

 

*Goodwill.  *Goodwillrepresents the excess of the purchase price of an acquired enterprise or assetsover the fair value of the identifiable assets acquired and liabilitiesassumed. The Company does not amortize goodwill, but tests for impairment ofgoodwill on an annual basis in the third fiscal quarter and at any other timeif events occur or circumstances indicate that the carrying amount of goodwillmay not be recoverable. During fiscal year 2005, the third quarter will end July 31,2005 and will be the date we test again for impairment.

 

*Impairmentof Goodwill.  *Circumstances that could trigger animpairment test include, but are not limited to, a significant adverse changein the business climate or legal factors, an adverse action or assessment by aregulator, unanticipated competition or loss of key personnel. In addition, theCompany assesses goodwill for recoverability if its market capitalization isless than the recorded value of its net assets. If the carrying amount of thegoodwill exceeds the implied fair value of that goodwill, an impairment loss isrecorded in net earnings (loss). The Company has determined that its serviceofferings have similar economic characteristics and as a result the Companytreats its single operating segment as its sole reporting unit in testing forthe impairment of goodwill.

 

*PurchasedIntangible Assets.  *Purchased intangible assets consistof customer relationships, internal use software and other purchasedintangibles such as domain names. Intangible assets are amortized on astraight-line basis over the estimated useful lives ranging from one tofive years.

 

*Impairmentof Long-Lived Assets and Intangible Assets.  *The Companyevaluates the carrying amount of its long-lived assets, including purchasedintangible assets, when events or changes in business circumstances have occurred,which indicate the carrying amount of such assets may not be fully realizable.Determination of impairment is based on an estimate of undiscounted future cashflows resulting from the use of the assets and their eventual disposition. Ifthe Company determines that any of these assets have been impaired, theimpairment charge is recorded based on a comparison of the net book value ofthe assets and the fair value. The fair value of the assets is determined byeither discounted future cash flows resulting from the use of the assets overtheir average remaining useful lives or specific appraisal.

 

8

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*RevenueRecognition and Related Allowances.  *The Company derivesrevenues primarily from providing remote Internet access services to customersthrough its virtual network and by providing monthly security and supportservices and monthly connectivity services to broadband Internet remote accesscustomers. The Company’s arrangements with its customers typically havemultiple deliverables. These deliverables may include software, installationservices, customer premises equipment, connectivity services, and maintenanceand support services.

 

The Company recognizesrevenues when persuasive evidence of an arrangement exists, service has beenprovided to the customer, the price to the customer is fixed or determinable,and collectibility is probable. Mobile remote Internet access services aregenerally billed on a per-minute basis for usage or at a flat rate per month peruser based on negotiated rates. Usage fees are recognized in the period theservices are rendered to end users, and monthly fees are recognized ratablybased on the number of days that have elapsed. The Company has minimumcommitment arrangements with some customers. These customers are notcontractually entitled to use or otherwise receive benefit for unused servicein subsequent periods. Minimum commitment fees are recognized as revenue in themonth it has been determined that the minimum commitments have not beenachieved, assuming all other criteria for revenue recognition have been met.

 

The Company’s solutionssometimes include installation services, the sale of customer premise equipmentand managed security services related to its broadband services offerings.Depending on the service provided and the nature of the arrangement, theCompany may charge a one-time, annual or monthly fee for these additionalservices or deliverables. Revenue from installation services and the sale ofequipment is deferred and recognized ratably over the period of expected usageby its customers since the Company considers these services and products to bean enabler of the related managed remote access service contracts. The Company’sestimate of expected usage is 24 months for all periods presented. On aquarterly basis, the Company reviews this estimate of expected usage based onactual data. Revenues from managed security services are recognized in themonth the service is provided. To a lesser extent, the Company also derives aportion of its revenues from licenses of its authentication software, relatedmaintenance and support services, and other optional services related to itsremote access solutions all of which are recognized ratably over the term ofservice. These other revenues amounted to five percent or less of totalrevenues over the last three years. Fees generated from maintenance contractsare recognized over the life of those contracts. The majority of themaintenance contracts cover periods of one to twelve months. Amounts billed inadvance of revenue recognition are recorded to deferred revenue as collected.The Company recognizes certain broadband connectivity revenues generated underagency arrangements on a net basis. Product returns and allowances have notbeen significant.

 

The Company providesservices over a heterogeneous virtual network, which was created by formingcontractual relationships with approximately 500 Internet service providers,cable companies, DSL companies and telecommunications companies. Thesecompanies may provide their services under either a reseller or an agencyarrangement. In applying its revenue recognition policy, the Company must makejudgments and estimates with regard to the specific facts and circumstancessurrounding each provider relationship to determine which portion of itsrevenues the Company provides under a reseller arrangement, where the Companywould record gross revenues and cost of revenues, and which portion of itsrevenues the Company provides as an agent, where the Company would recordrevenues and cost of revenues combined on a net basis. The Company bases itsestimates on historical experience and on various other assumptions believed tobe applicable and reasonable under the circumstances. These estimates maychange as new events occur, as additional information is obtained and as itsoperating environment changes, any of which could cause a material impact onthe revenues that the Company has reported.

 

The Company recordsestimated allowances against revenues for returns, disputes and cancellationsin the same period the revenues are recorded. These estimates are based uponhistorical analysis of the Company’s service level agreements, credit memo dataand other known factors for pricing and transaction volume disputes that arisein the normal course of business. To date, allowances pertaining to the Company’scurrent business have not been significant. If the historical data the Companyuses to calculate these estimates does not accurately reflect amountsassociated with future disputes, its actual revenues could be higher or lowerthan what the Company has recognized.

 

*Cost ofRevenues.  *Cost of revenues represents the amounts paidto Internet service providers, cable companies, DSL companies andtelecommunications companies for the use of their networks, and amounts paid toother third party providers of products or services that the Company includesin its solutions. The Company has entered into minimum purchase commitmentswith some network service providers for access that the Company expects toutilize during the term of the contracts. Costs of minimum purchase contractsare recognized as network access expenses at the greater of the minimumcommitment or actual usage. If the Company estimates that the revenues derivedfrom the

 

9

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purchasecommitment will be less than the purchase commitment, the Company recognizes aloss on that purchase commitment to the extent of that difference. No such losshas been recognized to date.

 

*Allowancefor Doubtful Accounts.  *The Company maintains allowancesfor doubtful accounts for estimated losses from its customers’ inability tomake payments they owe. In order to estimate the appropriate level of thisallowance, the Company analyzes historical bad debts, customer concentrations,current customer credit-worthiness, current economic trends and changes in itscustomer payment patterns. If the financial condition of its customers were todeteriorate and to impair their ability to make payments to the Company,additional allowances might be required in future periods. If the Companydetermines that collectibility is not probable, revenue is recognized as cashis collected. If the Company’s estimates prove too low, its bad debt expensewill increase.

 

*Researchand Development.  *The Company’s research and developmentcosts, which principally have related to development of internal use softwarethat is also marketed to the Company’s customers, are expensed as incurreduntil technological feasibility has been established. To date, the softwaredeveloped by the Company has generally been available for general releaseconcurrent with the establishment of technological feasibility and,accordingly, no software development costs have been capitalized.

 

*Stock-basedCompensation.  *As permitted under the provisions ofStatement of Financial Accounting Standards No. 123, *“Accounting for Stock-Based Compensation”*(“SFAS No. 123”), the Company accounts for employee stock-basedcompensation in accordance with Accounting Principles Board Opinion No. 25,*“Accounting for Stock Issued to Employees”*(“APB No. 25”), using an intrinsic value approach to measure compensationexpense, if any. Under APB No. 25, the Company generally recognizes nocompensation expense with respect to such awards. Appropriate disclosures usinga fair-value based method, as provided by SFAS No. 123, are also reflectedherein. Options issued to non-employees are accounted for in accordance withSFAS 123 using a fair-value approach.

 

Pro forma informationregarding net income and earnings per share is required by SFAS No. 123and has been determined as if the Company had accounted for awards to employeesunder the fair-value method of SFAS No. 123. The fair value of stockoptions under the Company’s stock option plan and stock purchase plan rightsunder the Company’s stock purchase plan was estimated as of the grant dateusing the Black-Scholes option-pricing model.

 

The fair value of stockoptions granted during the three and six months ended April 30, 2005 and2004, respectively, were estimated at the date of grant assuming no expecteddividends and the following weighted average assumptions.

 

*StockOptions*

 
| ** **                      | ** ** | **Three Months Ended  April 30,** | ** ** | **Six Months Ended  April 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                         | ** ** | **2004**                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life (years)           |       | 2.32                                             |       | 2.93                                           |       | 2.55 |   | 2.80 |   |
| Expected stock price volatility |       | 256                                              | %          | 384                                            | %          | 256 | % | 384 | % |
| Risk-free interest rate         |       | 3.17                                             | %          | 1.17                                           | %          | 2.69 | % | 1.11 | % |

 

*StockPurchase*

 
| ** **                      | ** ** | **Three Months Ended  April 30,** | ** ** | **Six Months Ended  April 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                         | ** ** | **2004**                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life (years)           |       | 0.49                                             |       | 0.50                                           |       | 0.50 |   | 0.50 |   |
| Expected stock price volatility |       | 193                                              | %          | 544                                            | %          | 229 | % | 436 | % |
| Risk-free interest rate         |       | 2.90                                             | %          | 0.98                                           | %          | 2.98 | % | 1.11 | % |

 

For purposes of pro formadisclosure only, the estimated fair value of stock-based awards is amortized againstpro forma net income over the stock-based awards’ vesting period for optionsand over the offering period for stock purchases under the Company’s 1999Employee Stock Purchase Plan.

 

10

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The Company’s pro formainformation is as follows:

 
| ** **                                                           | ** ** | **Three Months Ended  April 30,**                  | ** ** | **Six Months Ended  April 30,**                    | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                                          | ** ** | **2004**                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                           | ** ** | **(Restated)**                                                    | ** ** | ** **                                                        | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **(in thousands, except  per share amounts)** | ** ** | **(in thousands, except  per share amounts)** | ** ** |
| Net loss attributable to common  stockholders as reported            |       | $                                                                 | (511       | )                                                                 | $          | (2,785 | ) | $ | (1,330 | ) | $ | (4,628 | ) |
| Add: Amortization of stock compensation  measured under APB 25       |       | 27                                                                |       | 89                                                                |       | 84 |   | 149 |   |
| Less: Stock-based compensation expense  measured under SFAS 123 |       | (889                                                              | )          | (1,368                                                            | )          | (1,720 | ) | (3,121 | ) |
| Pro forma net loss                                                   |       | $                                                                 | (1,373     | )                                                                 | $          | (4,064 | ) | $ | (2,966 | ) | $ | (7,600 | ) |
| Basic and diluted net loss per share                                 |       | $                                                                 | (0.01      | )                                                                 | $          | (0.07 | ) | $ | (0.03 | ) | $ | (0.12 | ) |
| Pro forma basic and diluted net loss per  share                      |       | $                                                                 | (0.03      | )                                                                 | (0.10      | ) | $ | (0.07 | ) | $ | (0.20 | ) |

 

Calculated under SFAS No. 123,the weighted-average fair value of the employee stock options granted duringthe three months ended April 30, 2005 and 2004 was $1.50 and $3.70 pershare, respectively, and during the six months ended April 30, 2005 and2004, was $1.52 and $5.08, respectively. The weighted-average estimated fairvalue of shares purchased under the Purchase Plan during the three months endedApril 30, 2005 and 2004 was $1.08 and $5.82 per share, respectively, andduring the six months ended April 30, 2005 and 2004, was $1.05 and $5.52,respectively.

 

In December 2004,the FASB issued a revision of SFAS No. 123R (“SFAS 123 Revised”). TheCompany will adopt the provisions of SFAS 123 Revised effective as of thebeginning of its next fiscal year, which will commence on November 1,2005. The Company has not completed its evaluation of the impact of adoption ofSFAS 123 Revised on the Company’s consolidated financial position orresults of operations. The Company expects to complete its evaluation duringthe fourth quarter of fiscal year 2005.

 

*IncomeTaxes.  *The Company accounts for income taxes under theprovisions of Statement of Financial Accounting Standards No. 109, *“Accounting for Income Taxes”* (“SFAS No. 109”),which provides for the establishment of deferred tax assets and liabilitiesbased on the difference between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposes.

 

*NetLoss Per Share.  *Net loss per common share and dilutednet loss per share are presented in conformity with the Financial AccountingStandards Board’s Statement of Financial Accounting Standards No. 128, *“Earnings Per Share”* (“SFAS No. 128”)for all years presented. In accordance with SFAS No. 128, basic anddiluted net loss per share has been computed using the weighted-average numberof shares of common stock outstanding during the period. Weighted-averageoptions outstanding to purchase approximately 8.5 million and 7.7 millionshares of common stock for the three months ended April 30, 2005 and 2004,respectively, and approximately 8.7 and 7.4 million shares of common stock forthe six months ended April 30, 2005 and 2004, respectively, were notincluded in the computation of diluted net loss per share because the effectwould be antidilutive. The increase in weighted-average options outstanding inthe three and six months ended April 30, 2005, respectively, compared tothe same periods in 2004, respectively, was primarily due to grants of newoptions to the Company’s employees. Such securities, had they been dilutive,would have been included in the computation of diluted net loss per share usingthe treasury stock method.

 

**4.****   Change in Fiscal Year End**

 

In October 2004, theCompany changed its fiscal year end from December 31 to October 31.The consolidated financial information for 2005 presented in this Form 10-Qis for the three and six month periods ended April 30, 2005. The 2004financial results presented in this Form 10-Q are for the three and sixmonth periods ended April 30, 2004.

 

11

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**5.**   Business Combination

** **

On December 1, 2003,the Company completed its acquisition of Axcelerant, a privately held providerof broadband Internet remote access services and managed security services. TheCompany’s acquisition of Axcelerant did not result in a new reportable segment.The results of operations of Axcelerant have been included in the Company’sfinancial statements subsequent to the date of the acquisition.

 

A total of approximately1.5 million shares of the total consideration that was to be delivered toAxcelerant’s stockholders as a result of the acquisition was set aside as anescrow fund, serving as collateral for the indemnification obligations ofAxcelerant stockholders. The Company made no claims against the escrow fundthrough December 1, 2004, the expiration date for the escrow period. Theescrowed shares were released to the former Axcelerant shareholders during December 2004.

 

*DeferredStock Compensation.  *The intrinsic value of unvestedstock options assumed in the Axcelerant acquisition in an amount ofapproximately $674,000 has been allocated to deferred stock compensation and isbeing amortized to expense on a straight-line basis over the vesting period.The Company assumed options from Axcelerant to purchase a total of approximately597,000 shares of the Company’s common stock, of which approximately 462,000were fully vested. Options assumed in connection with the acquisition hadexercise prices between $0.02 and $5.05 per share, with a weighted averageexercise price of $1.32 per share and a weighted average remaining vestingperiod of approximately 2.5 years as of the acquisition date. As of April 30,2005, the Company had an aggregate of $76,000 of deferred compensation relatedto the acquisition of Axcelerant remaining to be amortized.

 

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**6.   Propertyand Equipment and Intangible Assets**

 

*Propertyand Equipment*

* *

Property and equipmentcomprised the following (in thousands):

 
| ** **                                      | ** ** | **April 30,** | ** ** | **October 31,** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2005**           | ** ** | **2004**             | ** ** |
| Computer hardware                               |       | $                  | 6,569      |                 | $          | 6,319 |   |
| Software                                        |       | 4,829              |       | 4,495                |       |
| Office furniture and equipment                  |       | 1,531              |       | 1,506                |       |
| Leasehold improvements                          |       | 422                |       | 422                  |       |
|                                            |       | 13,351             |       | 12,742               |       |
| Less accumulated depreciation and  amortization |       | (11,642            | )          | (11,048              | )          |
| Total                                           |       | $                  | 1,709      |                 | $          | 1,694 |   |

 

*PurchasedIntangible Assets*

* *

Purchased intangibleassets are carried at cost less accumulated amortization. Amortization ofpurchased intangible assets is computed using the straight-line method overtheir expected useful lives of five years for customer relationships andWebsite URLs and one year for internal use software.

 

Purchased intangibleassets consisted of the following (in thousands):

 
| ** **                    | ** ** | **April 30,** | ** ** |
|-------------------------------|------------|--------------------|------------|
| ** **                    | ** ** | **2005**           | ** ** |
| Customer relationships        |       | $                  | 5,150      |   |
| Internal use software         |       | 100                |       |
| Website URL                   |       | 50                 |       |
|                          |       | 5,300              |       |
| Less accumulated amortization |       | (1,906             | )          |
| Total                         |       | $                  | 3,394      |   |

 

The aggregate estimatedremaining amortization expense from May 1, 2005 through October 31,2009, based on fiscal years ending October 31, is as follows (inthousands):

 
| ** ** | ** ** | **Amortization** | ** ** |
|------------|------------|------------------|------------|
| 2005       |       | 473              |       |
| 2006       |       | 946              |       |
| 2007       |       | 946              |       |
| 2008       |       | 946              |       |
| 2009       |       | 83               |       |
|       |       | $                | 3,394      |   |
|            |            |                  |            |  |

 

*OtherIntangible Assets*

 

The Company entered intoan agreement 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. As of April 30,2005, $46,000 of the asset remained to be utilized, an amount that the Companybelieves will be utilized over the period of the agreement.

 

**7.   Commitmentsand Contingencies**

 

*Commitments.  *TheCompany leases all of its facilities under operating leases that expire atvarious dates through 2008. It has entered into certain purchase commitmentsfrom suppliers who provide network access, software and related services thatare utilized by us in order to deliver its products and services.

 

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During 2005, the Companyexpects to continue automating and updating back office processes andprocedures that are required for it to efficiently run its business, however,the Company believes that its capital equipment expenditures in absolutedollars will be relatively flat as compared to 2004. The Company expects tocontinue to provide customer premises equipment to customers for a fee, as partof its solution offerings.

 

The future minimumoperating lease and purchase commitments were as follows at April 30,2005, based on fiscal years ending October 31 (in thousands):

 
| ** ** | ** ** | **Operating  Leases** | ** ** | **Purchase  Commitments** | ** ** |
|------------|------------|-----------------------|------------|---------------------------|------------|
| 2005       |       | $                     | 766        |                      | $          | 737 |   |
| 2006       |       | 1,389                 |       | 1,073                     |       |
| 2007       |       | 817                   |       | 149                       |       |
| 2008       |       | 181                   |       | —                    |       |
| Thereafter |       | —                |       | —                    |       |
|       |       | $                     | 3,153      |                      | $          | 1,959 |   |

 

*LegalMatters.  *The Company is subject to various legalproceedings and claims arising in the ordinary course of business. The Company’smanagement does not expect that the results in any of these legal proceedingswill have a material adverse effect on its financial condition, results ofoperations, or cash flows.

 

In July and August 2001,the Company and certain of its 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 GoRemote InternetCommunications, Inc. Initial Public Offering Securities Litigation, No. 01Civ 6771 (SAS), and consolidated with more than three hundred substantiallyidentical proceedings as In re Initial Public Offering Securities Litigation,Master File No. 21 MC 92 (SAS). The Consolidated Amended Class ActionComplaint for Violation of the Federal Securities Laws (“Consolidated Complaint”)was filed on or about April 19, 2002, and alleges claims against certainof the Company’s officers and against CIBC World Markets Corp., PrudentialSecurities Incorporated, DB Alex. Brown, as successor to Deutsche Bank, andU.S. Bancorp Piper Jaffray Inc., underwriters of the Company’s December 14,1999 initial public offering (“underwriter defendants”), under Sections 11and 15 of the Securities Act of 1933, as amended, and under Section 10(b) and20(a) of the Securities Exchange Act of 1934, as amended.

 

Citing several pressarticles, the Consolidated Complaint alleges that the underwriter defendantsused improper methods in allocating shares in initial public offerings, andclaim the underwriter defendants entered into improper commission agreementsregarding aftermarket trading in the Company’s common stock purportedly issuedpursuant to the registration statement for the initial public offering. TheConsolidated Complaint also alleges market manipulation claims against theunderwriter defendants based on the activities of their respective analysts,who were allegedly compromised by conflicts of interest. The plaintiffs in theConsolidated Complaint seek damages as measured under Section 11 and Section 10(b) ofthe Securities Act of 1933, pre-judgment and post-judgment interest, andreasonable attorneys’ and expert witnesses’ fees and other costs; no specificamount is claimed in the plaintiffs’ prayer in the Consolidated Complaint. ByOrder of the Court, no responsive pleading is yet due, although motions todismiss on global issues affecting all of the issuers have been filed.

 

In October 2002,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 February 2003,the presiding judge dismissed the Section 10(b) claims against theCompany and its named officers and directors with prejudice.

 

From September 2002through June 2003, the Company participated in settlement negotiationswith a committee of issuers’ litigation counsel, plaintiffs’ executivecommittee and representatives of various insurance companies (the “Insurers”).The Company’s Insurers were actively involved in the settlement negotiations,and strongly supported a settlement proposal presented to the Company forconsideration in early June 2003. The settlement proposed by theplaintiffs would be paid for by the Insurers and would dispose of all remainingclaims against the Company.

 

After carefulconsideration, the Company decided to approve the settlement proposal in July 2003.Although the Company believes that plaintiffs’ claims are without merit, it hasdecided to accept the settlement proposal (which does not admit wrongdoing) toavoid the cost and distraction of continued litigation. Because the settlementwill be

 

14

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fundedentirely by its Insurers, the Company does not believe that the settlement willhave any effect on the Company’s financial condition, results of operations orcash flows.

 

The settlement waspresented to the Court for approval in June 2004. The Court preliminarilyapproved most of the settlement in February 2005, but requested a fewminor modifications be made to its terms. The parties are currently negotiatingthese modifications and intend to present the revised settlement agreement tothe Court shortly. While the Court is expected to finally approve or disapprovethe settlement in the coming months, there can be no guarantee that thesettlement will be judicially approved.

 

**8.   RestructuringEvents**

 

In August 2004, theCompany undertook a strategic restructuring to reduce its operating expensestructure by streamlining operations. The activity related to the restructuringis accounted for under the provisions of Statement of Financial AccountingStandards No. 146, *“Accounting forCosts Associated with Exit or Disposal Activities”* (“SFAS 146”).

 

The provision andassociated charges against the provision for the August 2004 restructuringthrough April 30, 2005 are as follows:

 
| ** **                                                       | ** ** | **Employee  Severance Costs** | ** ** | **Lease  Facilities  and Other  Obligations** | ** ** | **Retirement of  Fixed Assets** | ** ** | **Valuation of  Modified  Stock Options** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------|------------|-----------|------------|
| ** **                                                       | ** ** | **(in thousands)**            | ** ** |
| Provision recorded in the quarter ended  September 30, 2004 |       | $                                  | 1,492      |                                               | $          | 650                                       |       | $                                                   | 273        |      | $          | 53 |   | $ | 2,468 |   |
| Non-cash charges                                                 |       | —                             |       | 15                                                 |       | (273                                      | )          | (53                                                 | )          | (311      | )          |
| Cash payments                                                    |       | (1,268                             | )          | (39                                                | )          | —                                    |       | —                                              |       | (1,307    | )          |
| Accruals at October 31, 2004                                |       | 224                                |       | 626                                                |       | —                                    |       | —                                              |       | 850       |       |
| Provision recorded in the quarter ended  January 31, 2005   |       | 69                                 |       | (9                                                 | )          | —                                    |       | —                                              |       | 60        |       |
| Non-cash charges (recoveries)                                    |       | —                             |       | (16                                                | )          | —                                    |       | —                                              |       | (16       | )          |
| Cash payments                                                    |       | (293                               | )          | (48                                                | )          | —                                    |       | —                                              |       | (341      | )          |
| Accruals at January 31, 2005                                |       | —                             |       | 553                                                |       | —                                    |       | —                                              |       | 553       |       |
| Non-cash charges (recoveries)                                    |       | —                             |       | —                                             |       | —                                    |       | —                                              |       | —    |       |
| Cash payments                                                    |       | —                             |       | (54                                                | )          | —                                    |       | —                                              |       | (54       | )          |
| Accruals at April 30, 2005                                  |       | $                                  | —     |                                               | $          | 499                                       |       | $                                                   | —     |      | $          | — |   | $ | 499 |   |

 

**9.   SegmentInformation**

 

The Company operates inone segment, providing secure managed broadband and remote access services tocorporate enterprises with mobile and remote workforces and to the Company’sservice provider resellers and value-added resellers.

 

The following is asummary of revenue by geographical area for the periods presented:

 
| ** **                              | ** ** | **Three months ended  April 30,** | ** ** | **Six months ended  April 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                         | ** ** | **2004**                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(in thousands)**                          | ** ** | **(in thousands)**                        | ** ** |
| Revenue by external customers:          |       |                                             |       |                                           |       |   |   |   |   |
| United States, Canada and Latin America |       | $                                                | 9,593      |                                           | $          | 8,638 |   | $ | 18,776 |   | $ | 16,070 |   |
| Japan/Korea                             |       | 824                                              |       | 2,162                                          |       | 1,955 |   | 4,865 |   |
| Asia Pacific                            |       | 708                                              |       | 938                                            |       | 1,440 |   | 1,719 |   |
| Europe, Middle East and Africa          |       | 905                                              |       | 1,144                                          |       | 1,835 |   | 2,146 |   |
|                                    |       | $                                                | 12,030     |                                           | $          | 12,882 |   | $ | 24,006 |   | $ | 24,800 |   |

 

15

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The following is asummary of long-lived assets by geographical area for the periods presented:

 
| ** **         | ** ** | **April 30,  2005** | ** ** | **October 31,  2004** | ** ** |
|--------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **         | ** ** | **(in thousands)**  | ** ** |
| Long-lived assets: |       |                     |       |                       |       |
| United States      |       | $                        | 26,659     |                       | $          | 27,169 |   |
| Rest of World      |       | 102                      |       | 67                         |       |
|               |       | $                        | 26,761     |                       | $          | 27,236 |   |

 

Revenue by externalcustomer is based on the customer’s billing locations. Long-lived assets arethose assets used in each geographic location. For the six months ended April 30,2005, Fiberlink Communications Corporation accounted for approximately elevenpercent of the Company’s total consolidated revenues, however, for the threemonths then ended, no customer accounted for 10 percent or more of theserevenues.

 

**10.   Stockholders’Equity**

 

*Series AConvertible Preferred Stock.  *During the three monthsended April 30, 2004, 1.0 million shares of Series A Preferred Stockwere converted into common stock. No shares of Series A Preferred Stockwere outstanding as of April 30, 2005 and 2004.

 

*Series APreferred Stock Warrants.  *No Series A PreferredStock warrants were exercised during the three and six months ended April 30,2005 and 2004, respectively. Warrants to purchase 1.5 million shares of Series APreferred Stock were outstanding at April 30, 2005.

 

16

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**ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSISOF 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 this Form 10-Q.The following discussion contains forward-looking statements, such asstatements of expected revenues and expenses that involve risks anduncertainties. We assume no obligation to update any such forward-lookingstatements. Our actual results could differ materially from those anticipatedin these forward-looking statements. Factors that could cause or contribute tosuch differences include, but are not limited to, those detailed from time totime in our filings with the Securities and Exchange Commission and thosediscussed in this Form 10-Q, particularly in this Management’s Discussionand Analysis of Financial Condition and Results of Operations and under “FactorsThat May Affect Future Results.”*

* *

*In October 2004, we changed our fiscalyear-end from December 31 to October 31. As a result, references inthis Form 10-Q to the second quarter of 2005 are references to thethree-month period ended April 30, 2005 and references to the secondquarter of 2004 are references to the three-month period ended April 30,2004. Unless expressly stated or the context otherwise requires, the terms “we”,“our”, “us”, “the Company” and “GoRemote” refer to GoRemote InternetCommunications, Inc. and its subsidiaries as a whole.*

* *

**Overview**

** **

We provide managed remoteInternet access services to customers through our virtual network and providemonthly security and support services and monthly connectivity services tobroadband Internet remote access customers. Our services enable enterprises tosecurely, reliably, and cost-effectively extend their corporate networks andapplications to mobile and remote workers outside the corporate firewall. Theseworkers include mobile professionals such as sales professionals, projectmanagers and engineers; teleworkers, including call center agents;telecommuters; and employees in branch offices and retail settings. We providecomprehensive and integrated managed broadband and global remote accessservices that include: intelligent client software; multiple network accesstypes, including broadband, Wi-Fi, dial-up and general packet radio service (orGPRS); security capabilities that ensure security policy compliance by remoteworkers; a real-time remote access management console; end-to-end managed andvalue-added services including managed security services; and design,deployment, monitoring, and technical support. Our products and services enableenterprises to reduce the cost, complexity and risk of remote officenetworking, while maximizing the productivity of mobile and remote workers.

 

In December 2003, weacquired Axcelerant, Inc., a privately held provider of broadband Internetremote access services and managed security services. In May 2004, wechanged our corporate name from GRIC Communications, Inc. to GoRemoteInternet Communications, Inc. to reflect our current vision and serviceofferings. On August 12, 2004, we announced a restructuring of our globaloperations to reduce operating expense and streamline our operations.

 

The majority of ourrevenue comes from providing managed remote Internet access services tocustomers through our virtual network and by providing monthly security andsupport services and monthly connectivity services to broadband Internet remoteaccess customers. We provide services over a heterogeneous virtual networkknown as the GoRemote Global Network. As of April 30, 2005, the GoRemoteGlobal Network included approximately 28,000 Internet access—dial-up locations,over 21,000 public wireless fidelity—or WiFi—hotspots and approximately 1,700public broadband access points in over 150 countries. Through the acquisitionof Axcelerant, we added a virtual broadband cable modem and DSL network thatspans the United States and Canada. This network is an aggregation of thenetworks of more than 150 broadband providers, including virtually all of theleading cable companies, incumbent local exchange carriers (or ILECs) andcompetitive local exchange carriers (or CLECs) in the United States. Byutilizing this network, we are able to provide comprehensive coverage in theUnited States for enterprises requiring broadband branch office and broadbandteleworker solutions. We created the GoRemote Global Network by formingcontractual relationships with approximately 500 access providers—Internetservice providers, cable companies, DSL companies and telecommunicationcompanies. These providers, which we refer to as the GoRemote Global Networkmembers, are able to share their communications networks. Our customers, whoare enterprises, value added resellers (VARs) and service provider resellers,benefit from the resulting network delivering secure mobile Internet accesscost-effectively. Our member providers benefit from the GoRemote Global Networkbecause we manage this shared network and provide settlement services. We haveestablished common technical, service and payment standards to settle chargesthat our customers incur when their end users access the

 

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networkfacilities of GoRemote Global Network members to conduct Internet-basedcommunications. We intend to continue developing our solutions offering tointroduce new managed Internet-based remote communications services that may beadopted, deployed and managed on a global scale across the GoRemote GlobalNetwork.

 

We have incurredsubstantial losses since our inception as a result of expenses associated withbuilding the GoRemote Global Network and related network infrastructure,developing our software products and marketing our solutions to our customers.We had an accumulated deficit of approximately $172.1 million as of April 30,2005. We cannot assure you that we will achieve or sustain profitability. See “FactorsThat May Affect Future Results—We have a history of net losses and mayincur future losses.”

 

Our business model hasevolved in the course of our development and we believe that period-to-periodcomparisons of our operating results should not be relied upon as indicative offuture performance. Our future prospects must be considered in light of therisks, expenses and difficulties frequently encountered by companies in theearly stages of development, particularly companies in new and rapidly evolvingmarkets. See “Factors That May Affect Future Results—We have limitedexperience in our business, which makes it more difficult for us to execute ourbusiness plan and for you to evaluate us.”

 

We have changed ourfiscal year-end from December 31 to October 31. The consolidatedfinancial information for 2005 presented in this Form 10-Q are for thethree and six month periods ended April 30, 2005. The 2004 financialresults presented in this Form 10-Q are for the three and six monthperiods ended April 30, 2004.

 

**CriticalAccounting Policies and Estimates**

 

The methods, estimatesand judgments we use in applying our most critical accounting policies have asignificant impact on the results we report in our consolidated financialstatements. We evaluate our estimates and judgments on an on-going basis. Webase our estimates on historical experience and on assumptions that we believeto be reasonable under the circumstances when made. Our experience andassumptions form the basis for our judgments about the carrying value of assetsand liabilities and reported amounts of revenues and expenses that are notreadily apparent from other sources. Actual results may vary from what weanticipate, and different assumptions or estimates about the future could changeour reported results.

 

*RevenueRecognition and Related Allowances.  *We derive revenuesprimarily from providing managed remote Internet access services to customersthrough our virtual network and by providing monthly security and supportservices and monthly connectivity services to broadband Internet remote accesscustomers. Our arrangements with our customers typically have multipledeliverables. These deliverables may include software, installation services,customer premises equipment, connectivity services, and maintenance and supportservices.

 

We recognize revenueswhen persuasive evidence of an arrangement exists, service has been provided tothe customer, the price to the customer is fixed or determinable, andcollectibility is probable. Mobile remote Internet access services aregenerally billed on a per-minute basis for usage or at a flat rate per monthper user based on negotiated fees. Usage revenues are recognized in the periodthe services are rendered to end users, and monthly fees are recognized ratablybased on the number of days that have elapsed. We have minimum commitmentarrangements with some customers. These customers are not contractuallyentitled to use or otherwise receive benefit for unused service in subsequentperiods. Minimum commitment fees are recognized as revenue in the month it hasbeen determined that the minimum commitments have not been achieved, assumingall other criteria for revenue recognition have been met.

 

Our solutions may alsoinclude installation services, the sale of customer premise equipment andmanaged security services related to our broadband services offerings.Depending on the service provided and the nature of the arrangement, we maycharge a one-time, annual or monthly fee for these additional services ordeliverables. Revenue from installation services and the sale of equipment isdeferred and recognized ratably over the period of expected usage by ourcustomers since we consider these services and products to be an enabler of therelated remote access service contracts. Our estimate of expected usage is24 months for all periods presented. On a quarterly basis, we review thisestimate of expected usage based on actual data. Revenues from managed securityservices are recognized in the month the service is provided. To a lesserextent, we also derive a portion of our revenues from licenses of ourauthentication software, related maintenance and support services, and otheroptional services related to our managed remote access solutions, all of whichrevenues are recognized ratably over the term of service. These other revenuesamounted to five percent or less of total revenues over the last three years.Fees generated from maintenance contracts

 

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arerecognized over the life of those contracts. The majority of the maintenancecontracts cover periods of one to twelve months. Amounts billed in advance ofrevenue recognition are recorded to deferred revenue as collected. We recognizecertain broadband connectivity revenues generated under agency arrangements ona net basis. Product returns and allowances have not been significant.

 

We provide services overa heterogeneous virtual network, which was created by forming contractualrelationships with approximately 500 access providers, including Internetservice providers, cable companies, DSL companies and telecommunicationscompanies. These companies may provide us their services under either areseller or an agency arrangement. In applying our revenue recognition policywe must make judgments and estimates with regard to the specific facts andcircumstances surrounding each provider relationship to determine which portionof our revenues we provide under a reseller arrangement, where we would recordgross revenues and cost of revenues, and which portion of our revenues we provideas an agent, where we would record revenues and cost of revenues combined on anet basis. We base our estimates on historical experience and on various otherassumptions believed to be applicable and reasonable under the circumstances.These estimates may change as new events occur, as additional information isobtained and as our operating environment changes, any of which could cause amaterial impact on the revenues that we have reported. The Company’s broadbandservice providers do not deliver actual accounting information to the Companyon a timely basis at month-end. Due to this delay, which is outside the Company’scontrol, the Company estimates its revenue and cost of sales related tobroadband services on a monthly basis, and adjusts them to actual in thesubsequent month after receiving information from its service providers.Historically, these adjustments have been immaterial. In addition, the Companymade estimates as to its accounts receivable allowance and reserves, therecoverability of a prepaid asset, potential liability derived from certain taxobligations and restructuring expenses. Actual results could differ from thoseestimates. We record estimated allowances against revenues for returns andcancellations in the same period the revenues are recorded. These estimates arebased upon historical analysis of our service level agreements, credit memodata and other known factors for pricing and transaction volume disputes thatarise in the normal course of business. To date, allowances pertaining to ourcurrent business have not been significant. If the historical data we use tocalculate these estimates does not accurately reflect amounts associated withfuture disputes, our actual revenues could be higher or lower than what we haverecognized.

 

*Cost ofRevenues.  *Cost of revenues represents the amounts paidto Internet service providers, cable companies, DSL companies andtelecommunications companies for the use of their networks, and amounts paid toother third party providers of products or services that we include in oursolutions. We have entered into minimum purchase commitments with some networkservice providers for access that we expect to utilize during the term of thecontracts. Costs of minimum purchase contracts are recognized as network accessexpenses at the greater of the minimum commitment or actual usage. If weestimate that the revenues derived from the purchase commitment will be lessthan the purchase commitment, we recognize a loss on that purchase commitmentto the extent of that difference. No such loss has been recognized to date.

 

*Allowancefor Doubtful Accounts.  *We maintain allowances fordoubtful accounts for estimated losses from our customers’ inability to makepayments they owe us. In order to estimate the appropriate level of this allowance,we analyze historical 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 we determine that collectibility is notprobable, revenue is recognized as cash is collected. If our estimates provetoo low, our bad debt expense will increase.

 

*Valuationof Long-Lived Assets including Intangible Assets.  *Weevaluate the carrying amount of our long-lived assets, including purchasedintangible assets, whenever events or circumstances indicate the amount of theassets may not be recoverable. Determination of impairment of property andequipment, goodwill and intangible assets is highly subjective and requiressignificant judgment at many points during the analysis. This analysis is basedon our estimate of future cash flows that the assets are expected to generateand their eventual disposition. If we determine that any of these assets havebeen impaired, the impairment charge will be charged to earnings in the periodsuch determination is made. We have determined that our service offerings havesimilar economic characteristics and as a result we treat our single operatingsegment as our sole reporting unit in testing for the impairment of long-livedassets including intangible assets.

 

*Valuationof Goodwill.  *We test goodwill for possible impairmenton an annual basis in the third fiscal quarter and at any other time if eventsoccur or circumstances indicate that the carrying amount of goodwill may not be

 

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recoverable.Circumstances that could trigger an impairment test include, but are notlimited to, a significant adverse change in the business climate or legalfactors, an adverse action or assessment by a regulator, unanticipatedcompetition and loss of key personnel. In addition, we assess goodwill forrecoverability if our market capitalization is less than the value of our netassets. The determination as to whether a write-down of goodwill is necessaryinvolves significant judgment based on the short-term and long-term projectionsof our future performance. The assumptions supporting the estimated future cashflows, including the discount rate used and estimated terminal value reflectour best estimates.

 

*Restructuring,Workforce Reductions and Excess Facilities Accrual.  *Inorder to bring our operating expense structure in line with our current levelof revenues, in August 2004 we implemented a restructuring, workforcereduction and facilities consolidation plan to improve our operatingperformance. Restructuring and facilities consolidation costs consist ofexpenses associated with workforce reductions, consolidation of excessfacilities and impairment of leasehold improvements and other equipmentassociated with abandoned facilities. At April 30, 2005, $499,000 wasaccrued for future facilities consolidation costs. In connection with ourrestructuring plans, we accrue for severance payments and other relatedtermination benefits provided to employees in connection with involuntary staffreductions. We accrue for these benefits in the period when benefits arecommunicated to the terminated employees. Typically, terminated employees arenot required to provide continued service to receive termination benefits. Ifcontinued service is required, then the severance liability is accrued over therequired service period. In general, we use a formula based on a combination ofthe number of years of service and the employee’s position within the Companyto calculate the termination benefits to be provided to affected employees. At April 30,2005, all affected employees were terminated and there was no remaining accrualfor future severance and termination benefits payments.

 

**BusinessCombination**

 

On December 1, 2003,we completed our acquisition of Axcelerant, a privately held provider ofbroadband Internet remote access services and managed security services. Ouracquisition of Axcelerant did not result in a new reportable segment. Theresults of operations of Axcelerant have been included in our financialstatements subsequent to the date of the acquisition.

 

**Results of OperationsThree and Six Month Periods Ended April 30, 2005 Compared to Three and SixMonth Periods Ended April 30, 2004**

 

*Overviewof the Second Quarter of Fiscal 2005*

* *

During the second quarterof 2005, we continued to evolve our business model from one based principallyon a reseller sales model to a model under which we sell a significant portionof our services directly and through third parties to enterprise customers.During the second quarter of 2005 and 2004, 62 percent and 44 percent,respectively, of our quarterly revenues was derived from services sold toenterprise customers both directly and indirectly through third parties.

 

In the second quarter of2005, our revenues and expenses each decreased compared to the second quarterof 2004. Revenues were lower quarter over quarter primarily due to a reductionin dial-up based Internet access revenues that was partially offset by anincrease in managed broadband revenues. Cost of revenues was slightly lower asa percentage of revenues principally due to the reversal of loss contingenciesestablished for carrier costs no longer required. We expect the trend in ourcost of revenues to be similar to that of prior quarters and possibly increaseas a percentage of revenues if sales to enterprise customers through partnersgrow and represent a higher percentage of total revenues. Our operatingexpenses were lower in the second quarter of 2005 than in the second quarter of2004 principally due to the cost savings generated from our strategicrestructuring in August 2004. We expect our quarterly operating expensesto remain approximately the same as a percentage of revenues during fiscal year2005.

 

In the six months ended April 30,2005, our revenues decreased from the six months ended April 30, 2004while our expenses in the six month period of 2005 were lower than the sixmonth period of 2004. Revenues were lower primarily due to a reduction indial-up based Internet access revenues that was partially offset by an increasein managed broadband. Cost of revenues, which were slightly higher as apercentage of revenues, were flat period to period. Our operating expenses werelower in the six month period of 2005 than in the six month period of 2004

 

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principallydue to the cost savings generated from our strategic restructuring in August 2004,which was partially offset by the inclusion of six months of costs incurred atof our Irvine, California facility that resulted from our acquisition ofAxcelerant whereas five months of Irvine location expense are included in thesix month period of 2004.

 

We continue to focus ondelivering innovative services for our customers to drive revenues and achievepositive earnings. During the balance of fiscal 2005 and during fiscal 2006 weplan to release additional new value added services, which we expect over timewill augment the revenues we earn from our existing customers and, togetherwith expanding the global footprint of the GoRemote Global Network, generaterevenues from new enterprise customers. Several factors will impact our abilityto achieve and sustain profitability, including the effectiveness of our salesand marketing efforts through both direct and third party sales channels, thetimely release of new services and the introduction of new services by existingor new competitors. For a discussion of these and other risk factors, see the section titled“Factors That May Affect Future Results.”

 

The results of operationsfor the six months ended April 30, 2005 include six months of revenues andexpenses related to the acquisition of Axcelerant that was completed in December 2003.The results of operations for the six months ended April 30, 2004 includefive months of revenues and expenses related to the prior Axcelerantoperations.

 

*Revenues*

 
| ** ** | ** ** | **Three Months Ended  April 30,** | ** ** | **Six Months Ended  April 30,** | ** ** |
|------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **2005**                                         | ** ** | **2004**                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** ** | ** ** | **(in millions)**                           | ** ** | **(in millions)**                         | ** ** |
| Revenues   |       | $                                                | 12.0       |                                           | $          | 12.9 |   | $ | 24.0 |   | $ | 24.8 |   |
|            |            |                                                  |            |                                                |            |  |  |  |  |  |  |  |  |

 

Total revenues decreased approximately$852,000 in the three months ended April 30, 2005, compared to the threemonths ended April 30, 2004. The net decrease during the three monthsended April 30, 2005 was principally due to reductions in dial-up basedInternet access service in the amount of $3.0 million that were partiallyoffset by an earned annual minimum commitment fee of approximately $385,000 andby increased broadband revenues in the amount of $1.8 million. Our experienceleads us to believe that the decline in dial-up revenues from service providerswill likely continue. We believe that future declines in dial-up access revenuethat may occur over the next twelve months will be more predictable and of alower magnitude than previously due to our expectation that no single dial-upaccess customer will represent ten percent or more of our revenue in any fiscalquarter.Total revenues decreased approximately $794,000 in the six months endedApril 30, 2005, compared to the six months ended April 30, 2004. Thenet decrease was principally due to reductions in legacy dial-up Internetaccess service revenues in the amount of $5.1 million that were partiallyoffset by increased broadband revenues in the amount of $4.3 million during thesix months ended April 30, 2005.

 

We expect our revenues toincrease, based on sales to new customers and sales of additional services,such as our newer broadband teleworker and branch office solutions and managedsecurity service offering, to existing customers. We expect these revenues tobe partially offset by a continuing decline in our dial-based Internet accessservices. Fiberlink Communications Corporation accounted for eleven percent ofour consolidated revenues during both the six months ended April 30, 2005and 2004. Fiberlink is both our customer and in certain markets our competitor,principally with respect to our dial-up access offering. During the secondquarter of 2005, Fiberlink obtained direct access in a small number ofcountries that had represented a majority of its dial-up traffic on ournetwork. Traffic from this group of countries represented approximately$894,000 of our revenues in the first fiscal quarter of 2005 and $475,000 inthe second fiscal quarter of 2005. We expect to receive no traffic fromFiberlink from this group of countries in the future.

 

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*Costsand Expenses*

 
| ** **                               | ** ** | **For the Three Months Ended  April 30,** | ** ** | **For the Six Months Ended  April 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                                           | ** ** | **2004**                                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(Restated)**                                                     | ** ** | ** **                                                       | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **(in millions)**                                             | ** ** | **(in millions)**                                           | ** ** |
| Cost of revenues                         |       | $                                                                  | 4.9        |                                                             | $          | 5.3 |   | $ | 9.9 |   | $ | 10.0 |   |
| Percentage of revenues                   |       | 41.0                                                               | %          | 41.2                                                             | %          | 41.4 | % | 40.4 | % |
| Network and operations                   |       | $                                                                  | 2.3        |                                                             | $          | 2.3 |   | $ | 4.4 |   | $ | 4.0 |   |
| Percentage of revenues                   |       | 19.0                                                               | %          | 18.0                                                             | %          | 18.5 | % | 16.2 | % |
| Research and Development                 |       | $                                                                  | 0.5        |                                                             | $          | 1.2 |   | $ | 1.1 |   | $ | 2.1 |   |
| Percentage of revenues                   |       | 4.3                                                                | %          | 9.3                                                              | %          | 4.6 | % | 8.3 | % |
| Sales and Marketing                      |       | $                                                                  | 3.1        |                                                             | $          | 4.7 |   | $ | 6.2 |   | $ | 9.5 |   |
| Percentage of revenues                   |       | 25.4                                                               | %          | 36.7                                                             | %          | 25.7 | % | 38.3 | % |
| General and administrative               |       | $                                                                  | 1.5        |                                                             | $          | 1.6 |   | $ | 3.1 |   | $ | 3.0 |   |
| Percentage of revenues                   |       | 12.3                                                               | %          | 12.8                                                             | %          | 12.8 | % | 12.1 | % |
| Amortization of purchased intangibles    |       | $                                                                  | 0.2        |                                                             | $          | 0.4 |   | $ | 0.5 |   | $ | 0.7 |   |
| Percentage of revenues                   |       | 2.0                                                                | %          | 3.1                                                              | %          | 2.0 | % | 2.7 | % |
| Amortization of stock-based compensation |       | $                                                                  | 0.03       |                                                             | $          | 0.09 |   | $ | 0.08 |   | $ | 0.15 |   |
| Percentage of revenues                   |       | 0.2                                                                | %          | 0.7                                                              | %          | 0.3 | % | 0.3 | % |
| Restructuring charge                     |       | $                                                                  | —     |                                                             | $          | — |   | $ | 0.06 |   | $ | — |   |
| Percentage of revenues                   |       | —                                                             | %          | —                                                           | %          | 0.2 | % | — | % |

 

*Cost ofRevenues.  *Cost of revenues consists of amounts we payto access the Internet in order to provide remote Internet access services forour customers and to offer other mobile broadband services and includesamortization of the deferred installation costs we incur to provide broadbandconnectivity to our customers.

 

Cost of revenuesdecreased approximately $377,000 in the three months ended April 30, 2005compared to the three months ended April 30, 2004, representing andecrease of seven percent. The decrease was primarily due to decreased volumesof remote Internet access of approximately $1.7 million, partially offset by aone-time adjustment for the reversal of loss contingencies for carrier costs nolonger required of $310,000, and by an increase in broadband cost of sales ofapproximately $1.1 million, related to our increase in broadband revenues. Weexpect that during fiscal year 2005 the cost of revenues will increase inabsolute dollars as remote Internet access revenues and broadband revenuesincrease, but be similar to the six months ended April 30, 2005 as apercentage of revenues and possibly increase as sales through partnersrepresent a greater percentage of total revenues.

 

Cost of revenuesdecreased approximately $74,000 in the six months ended April 30, 2005compared to the six months ended April 30, 2004, representing a decreaseof one percent. The decrease was primarily due to decreased volumes of remoteInternet access of approximately $2.6 million, partially offset by a one-timeadjustment for the reversal of loss contingencies for carrier costs no longerrequired of $310,000, and an increase in broadband cost of sales ofapproximately $2.2 million due to a related increase in broadband revenues.

 

*Networkand Operations.  *Network and operations expenses consistof salaries and benefits, depreciation on network equipment, allocated facilityand management information systems expenses, administrative expenses, costs ofco-location of network equipment and leased telecommunication lines and otherrelated costs.

 

Network and operationsexpenses decreased approximately $26,000 in the three months ended April 30,2005 compared to the three months ended April 30, 2004, representing adecrease of one percent. The decrease was due primarily to an decrease incompensation and benefits-related expenses of approximately $171,000 based onlower temporary help costs and the reversal of an accrued bonus no longerexpected to be earned, partially offset by higher professional expenses ofapproximately $173,000 due to the deployment of outsourced post-sales customersupport. We expect network and operations expenses to remain constant as apercentage of revenues during the remainder of fiscal year 2005 as we deployand support new customers.

 

Network and operationsexpenses increased approximately $422,000 in the six months ended April 30,2005 compared to the three months ended April 30, 2004, representing anincrease of ten percent. The increase was due primarily to an increase ofapproximately $233,000 of professional expenses in our Milpitas facility as aresult of outsourcing of certain customer support activities, increasedfacility allocation of approximately $100,000 and

 

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increasedinternet and telecommunications cost of $91,000. Additionally, there was aincrease of compensation and benefits of approximately $132,000 partiallyoffset by a decrease in temporary help of approximately $159,000. We expectnetwork and operations expenses to remain constant as a percentage of revenuesduring fiscal year 2005 as we deploy and support new customers.

 

*Researchand Development.  *Research and development expensesconsist of salaries and benefits, allocated facility and management informationsystems, depreciation costs, outside consultants, facilities costs,administration and other related costs.

 

Research and developmentexpenses decreased approximately $678,000 in the three months ended April 30,2005 compared to the three months ended April 30, 2004, representing adecrease of 57 percent. The decrease was due primarily to a reduction ofapproximately $505,000 of compensation and benefits related to reducedCalifornia based personnel resulting from the August 2004 strategicrestructuring and the relocation of our development activities to our networkoperations and development center in India. Additionally, there was a reductionin the facility allocation expense of approximately $129,000 due to a lower shareallocation and lower overall facility costs.

 

Research and developmentexpenses decreased approximately $963,000 in the six months ended April 30,2005 compared to the three months ended April 30, 2004, representing adecrease of 47 percent. The decrease was due primarily to a reduction ofapproximately $716,000 of compensation and benefits related to reducedCalifornia based personnel resulting from the August 2004 strategicrestructuring and the relocation of our development activities to our network operationsand development center in India. Additionally, there was a reduction in thefacility allocation expense of approximately $232,000 due to a lower shareallocation and lower overall facility costs. We expect research and developmentexpenses to remain constant as a percentage of revenues during fiscal year2005.

 

*Salesand 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 consultants, commissions earned by sales and marketingpersonnel, and costs associated with domestic and international sales officesand other related costs.

 

Sales and marketingexpenses decreased $1.7 million in the three-month period ended April 30,2005 compared with the three-month period ended April 30, 2004,representing a decrease of 35 percent. The decrease is due primarily to adecrease in compensation and benefits and travel and entertainment of approximately$852,000 and $159,000, respectively, as a result of our strategic workforcereduction in August 2004. In addition, advertising and promotionalprograms decreased by $270,000 as we scaled back our marketing programs and ourfacility allocation expense decreased by $178,000 as a result of lower facilitycosts and reduced personnel. We expect sales and marketing expenses to beconstant as a percentage of revenues as we continue to develop our sales forceand redefine our advertising and marketing strategy during 2005.

 

Sales and marketingexpenses decreased $3.3 million in the six-month period ended April 30,2005 compared with the six-month period ended April 30, 2004, representinga decrease of 35 percent. The decrease is due primarily to a decrease in compensationand benefits and travel and entertainment of approximately $1.6 million and$233,000, respectively, as a result of our strategic workforce reduction inlate 2004. In addition, advertising and promotional programs decreased by$849,000 as we realigned our marketing program focus and our facilityallocation expense decreased by $331,000 as a result of lower facility costsand reduced personnel. We expect sales and marketing expenses to be constant asa percentage of revenues as we continue to develop our sales force and redefineour advertising and marketing strategy during 2005.

 

*Generaland Administrative.  *General and administrative expensesconsist of general corporate and facility costs as well as salary, benefits andrelated costs for executive, finance, legal, administrative, human resources,investor relations and management information systems functions and provisionsfor uncollectible receivables.

 

General andadministrative expenses decreased approximately $164,000 in the three monthsended April 30, 2005 compared to the three months ended April 30,2004, representing an decrease of ten percent. The decrease was due primarilyto $260,000 of decreased professional fees primarily related to higher feescharged by our previous independent auditors and consultants for Sarbanes-Oxleycompliance activities in fiscal 2004 and decreased compensation and benefits ofapproximately $106,000, as a result of our strategic workforce reduction inlate 2004 partially offset by a net increase in facility allocation expenses of$218,000, as a result of the reallocation of facilities costs following ourstrategic workforce reduction.

 

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General andadministrative expenses increased approximately $70,000 in the six months endedApril 30, 2005 compared to the six months ended April 30, 2004,representing an increase of two percent. The increase was due primarily to anet increase in facility allocation expenses of $188,000, as a result of thereallocation of facilities costs as a result of our strategic workforcereduction and an increase in travel and entertainment expense of approximately$65,000 partially offset by a $119,000 reduction of professional fees primarilyrelated to fees charged by our previous independent auditors and consultantsfor Sarbanes-Oxley compliance activities, as well as a reduction incompensation and benefits of approximately $81,000. We expect general andadministrative expenses to increase in fiscal year 2005 in absolute dollars aswe continue to update back office processes and procedures company-wide to meetthe requirements of the Sarbanes-Oxley Act of 2002 and related regulations, butto decrease as a percentage of revenues.

 

*Amortizationof Purchased Intangibles.  *Amortization of purchasedintangibles includes three months of amortization of the intangible assetsacquired in connection with the acquisition of Axcelerant. The initial valueassigned to Axcelerant customer relationships was $7.5 million, which was amortizedon a straight-line basis over a five-year life at a rate of $125,000 per month.At September 30, 2004 an impairment charge of $2.4 million was recognizedand the carrying value of the customer relationships was adjusted to $3.9million, which will be amortized over the remaining 50 months of the originalfive-year life on a straight-line basis at a rate of $78,000 per month. Thevalue assigned to internal use software was $100,000, which is amortized on astraight-line basis over a one-year life at a rate of $8,000 per month. Theinternal use software was fully amortized in November 2004.

 

*Amortizationof Stock-Based Compensation.  *In connection with ouracquisition of Axcelerant, we recorded $674,000 of additional deferredstock-based compensation, which is being amortized over the vesting period ofthe underlying stock options assumed during the acquisition. As a result, werecorded amortization of deferred compensation expense of $27,000 and $89,000during the three months ended April 30, 2005 and 2004, respectively, and$84,000 and $149,000 during the six months ended April 30, 2005 and 2004,respectively. We expect to record amortization of deferred compensation expenseof approximately $39,000 in the remainder of fiscal year 2005, related tooptions assumed by us in connection with our acquisition of Axcelerant.

 

As of April 30,2005, we had an aggregate of $76,000 of deferred compensation related to theacquisition of Axcelerant remaining to be amortized. Deferred compensation isamortized on a straight-line basis over the vesting period of the options. Weexpect amortization of stock-based compensation related to these optionsassumed by us to end in 2007.

 

*InterestIncome (Expense) and Other and Taxes*

* *

Interest income andother, net, interest expense and taxes for the three and six months ended April 30,2005 and 2004 were as follows:

 
| ** **                     | ** ** | **For the three months ended  April 30,** | ** ** | **For the six months ended  April 30,** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                                      | ** ** | **2004**                                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(in thousands)**                                       | ** ** | **(in thousands)**                                     | ** ** |
| Interest income and other, net |       | $                                                             | 23         |                                                        | $          | 57 |   | $ | 78 |   | $ | 51 |   |
| Provision for income taxes     |       | $                                                             | 19         |                                                        | $          | 34 |   | $ | 50 |   | $ | 56 |   |

 

*InterestIncome and Other, Net*

* *

Interest income andother, net, primarily represents interest income on cash balances and onshort-term investments, gain on disposition of assets, sales, use andvalue-added tax, and interest expense.

 

Interest income andother, net, decreased $34,000 in the three months ended April 30, 2005compared to the three months ended April 30, 2004. This decrease wasprimarily due to approximately $83,000 of higher sales, use and value-addedtaxes that was partially offset by $57,000 of additional interest income basedon higher interest rate yields and $6,000 of interest expense incurred in 2005.

 

Interest income andother, net, increased $27,000 in the six months ended April 30, 2005compared to the three months ended April 30, 2004. This increase wasprimarily due to $86,000 of additional interest income based on higher interestrate yields partially offset by approximately $30,000 of higher sales, use andvalue-added taxes, partially offset by $15,000 of interest expense incurred in2005.

 

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Interest expense consistsof the amortization of the discount of future facility lease payments relatedto the ceased use of facilities in connection with the August 2004strategic restructuring. The discount was approximately $50,000, which is beingamortized over the remaining life of the lease. During the three and six monthsended April 30, 2005, $6,000 and $15,000, respectively, of interestexpense was recorded.

 

*IncomeTaxes*

* *

The provision for incometaxes was $19,000 and $34,000 for the three months ended April 30, 2005and 2004, respectively. The provision for income taxes was $50,000 and $56,000for the six months ended April 30, 2005 and 2004, respectively. Theprovision for income taxes consists of foreign tax provisions and state taxes.

 

**Liquidityand Capital Resources**

 
| ** **                                           | ** ** | **For the six months ended  April 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                                         | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                                          | ** ** |
| Cash and cash equivalents                            |       | $                                                                | 4,346      |   | $ | 4,931 |   |
| Net cash provided by (used in) operating  activities |       | 1,785                                                            |       | (2,993 | ) |
| Net cash provided by (used in) investing  activities |       | (412                                                             | )          | 3,163 |   |
| Net cash provided by financing activities            |       | 566                                                              |       | 1,201 |   |
|                                                      |            |                                                                  |            |  |  |  |  |

 

*Cash,Cash Equivalents and Short-Term Investments.  *Ourprincipal source of liquidity is our cash, cash equivalents and short-terminvestments. As of April 30, 2005, in addition to our cash and cashequivalents balance of $4.3 million, we had a short-term investment balance ofapproximately $15.4 million.

 

*OperatingActivities.  *Net cash provided by operating activitiesin the six months ended April 30, 2005 of $1.8 million was primarily aresult of an increase in deferred revenue of approximately $1.9 million ($1.1million and $800,000 in the three months ended April 30, 2005 and January 31,2005, respectively) primarily related to deferred installation revenues and areduction in accounts receivable balances of approximately $1.3 million ,partially offset by our net operating losses of $1.0 million, increases inprepaid expenses and other current assets of $1.0 million primarily related toan increase in deferred installation costs and decreased accounts payablebalances of approximately $876,000 principally from reductions in restructuringaccruals. While our days sales outstanding fell significantly during the sixmonths ended April 30, 2005, we generally expect the number of days ittakes for us to collect our accounts receivable to lengthen from the periodsexperienced historically, primarily due to the longer payment cycles generallyassociated with enterprise customers and the increasing percentage of ourrevenue base represented by such customers.

 

*InvestingActivities.  *Net cash used in investing activitiesduring the six months ended April 30, 2005 of approximately $412,000 wasprimarily the result of capital expenditures of approximately $608,000,partially offset by the liquidation of certain short-term instruments.

 

*FinancingActivities.  *Net cash provided by financing activitiesduring the six months ended April 30, 2005 of approximately $566,000 wasprimarily the result of sales of common stock to our employees and optionholders.

 

*Commitments.  *Welease all of our facilities under operating leases that expire at various datesthrough 2008. We have entered into certain purchase commitments from supplierswho provide network access, software and related services that are utilized byus in order to deliver our products and services.

 

During 2005, we expect tocontinue automating and updating back office processes and procedures that arerequired for us to efficiently run our business, however, we believe that ourcapital equipment expenditures in absolute dollars will be relatively flat ascompared to 2004. We expect to continue to provide customer premises equipmentto customers for a fee, as part of our solution offerings.

 

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The future minimumoperating lease and purchase commitments were as follows at April 30,2005, based on fiscal years ending October 31 (in thousands):

 
| ** ** | ** ** | **Operating  Leases** | ** ** | **Purchase  Commitments** | ** ** |
|------------|------------|-----------------------|------------|---------------------------|------------|
| 2005       |       | $                     | 766        |                      | $          | 737 |   |
| 2006       |       | 1,389                 |       | 1,073                     |       |
| 2007       |       | 817                   |       | 149                       |       |
| 2008       |       | 181                   |       | —                    |       |
| Thereafter |       | —                |       | —                    |       |
|       |       | $                     | 3,153      |                      | $          | 1,959 |   |

 

*Indemnifications.  *Fromtime to time we enter into types of contracts that contingently require us toindemnify parties against third party claims. These contracts primarily relateto: (i) divestiture agreements, under which we may provide customaryindemnifications to purchasers of our assets; (ii) real estate leases,under which we may be required to indemnify property owners for environmentaland other liabilities, and other claims arising from our use of the applicablepremises; (iii) agreements with our officers, directors and employees,under which we may be required to indemnify such persons for liabilitiesarising out of their employment relationship; and (iv) agreements withcustomers and resellers, under which we may provide customary indemnificationsagainst claims that our products and services infringe certain copyrights,patents or trademarks, or incorporate misappropriated trade secrets.

 

The terms of suchobligations vary. Generally, a maximum obligation is not explicitly stated,except for indemnifications involving infringement of third party intellectualproperty rights. Because the obligated amounts of these types of agreementsoften are not explicitly stated, the overall maximum amount of the obligationscannot be reasonably estimated. Historically, we have not been obligated tomake any payments for these obligations, and no liabilities have been recordedfor these obligations on our balance sheet at April 30, 2005.

 

*Summaryof Liquidity.  *We believe that our available cash, cashequivalents and short-term investments of $19.8 million at April 30, 2005and cash expected to be generated by operations during the next twelve monthswill fund planned operations for at least the same period. We generated$430,000 in cash during the quarter ended April 30, 2005.

 

We plan to invest inexpanding our managed remote access services, on a global basis, by continuingto build strategic partnering relationships. This will require us to maintainmarket acceptance, by growing our mobile office communications servicesofferings, continuing our research and development activities and fundingplanned operating expenses. There can be no assurance that our managed remoteaccess services will maintain market acceptance, growth and operating margins.

 

If we are unable toattain our revenue and margin goals, significant reductions in spending and thedelay or cancellation of planned activities or additional restructuring may benecessary to enable us to meet our cash requirements through the next twelvemonths. 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. Ifadditional financing is needed, it might not be available on reasonable termsor at all. Failure to raise capital when needed could seriously harm ourbusiness and results of operations. If additional funds were raised through theissuance of equity securities, the percentage of ownership of our stockholderswould be reduced. Furthermore, these equity securities might have rights,preferences or privileges senior to our common stock.

 

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**RecentAccounting Pronouncements**

 

In December 2004,the FASB issued a revision of SFAS No. 123R (“SFAS 123 Revised”), *Accounting for Stock-Based Compensation*.SFAS 123 Revised establishes standards for the accounting for transactionsin which an entity exchanges its equity instruments for goods or services. Italso addresses transactions in which an entity incurs liabilities in exchangefor goods or services that are based on the fair value of the entity’s equityinstruments or that may be settled by the issuance of those equity instruments.SFAS 123 Revised is effective as of the beginning of our next fiscal year,which will commence on November 1, 2005. We have not completed ourevaluation of the impact of adoption of SFAS 123 Revised on ourconsolidated financial position or results of operations. We expect to completeour evaluation during the fourth quarter of fiscal year 2005.

 

**FactorsThat May Affect Future Results**

 

In addition to theinformation elsewhere in this Quarterly Report on Form 10-Q, the followingshould be considered in evaluating GoRemote and our business.

 

**Ifwe fail in our strategy of focusing our sales efforts on larger companies, ourrevenue and profitability goals will likely not be achieved.**

 

Historically, asignificant portion of our revenues was derived from smaller companies andservice providers 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. Some of our competitors with greaterfinancial resources than ours have focused their sales efforts on selling tolarge enterprises for a longer period of time with more success than we haveexperienced, which adds to the risk of our strategy. In November 2004, weappointed a new Senior Vice President of Worldwide Sales and he may not succeedin executing this strategy. If we fail to execute this strategy, or if we haveunderestimated the costs of this strategy, we will likely miss our revenue andprofitability goals.

 

**Themarkets that we serve are highly competitive and there is no assurance that wewill be able to achieve or maintain profitability.**

 

We are aware of manycompanies in related markets that address particular aspects of the featuresand functions that our products provide. Currently, in the managed broadbandservices market, our primary competitors include New Edge, Megapath andNetifice.  In the market for manageddial-up Internet access services we compete directly with iPass and FiberlinkCommunications Corporation, each of whom has a network that competes with theGoRemote Global Network. In addition, iPass has greater cash resources than wedo and each of iPass and Fiberlink has a larger sales force than our owndedicated to enterprise sales. Large communications service providers such asAT&T, Equant and MCI also have the ability and resources to compete with usin the remote Internet access services market. Many of our competitors havelonger operating histories, greater name recognition or larger customer bases,which they may leverage in order to obtain more favorable volume discounts fromsuppliers. In addition, these competitors may be able to undertake moreextensive marketing efforts, adopt more aggressive pricing policies and providemore favorable payment terms to customers than we can, which could limit ouropportunities to obtain new customers or cause us to lose our existingcustomers.

 

**Ifwe are unable to increase revenues associated with broadband services, ourability to grow our business will be impaired.**

** **

Until our acquisition ofAxcelerant in December 2003, we generated our remote Internet accessservices revenues almost exclusively from the sale of services based on dial-upaccess—a narrowband technology. In some countries, including the United States,the use of narrowband as a primary means of remote access is expected todecline over time as broadband access technologies, such as cable modem, DSLand Wi-Fi, become more widely adopted and used. Our experience during 2004 andduring the first four months of 2005 showed us that the decline in dial-uprevenues from service providers will likely continue to occur and possibly at amore rapid pace that may not be predictable. Increasingly, we believe that thefuture growth of our business will depend in large part upon our ability toexpand the broadband elements of our virtual network and generate managedbroadband revenues at a

 

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substantiallyhigher level and growth rate. We may not succeed in this expansion and we maynot generate substantial new revenues, which could harm our results and causeour stock price to decline.

 

**Ourbusiness strategy has shifted over time and remains unproven, so the success ofour strategy cannot be assured.**

** **

Our business strategy haschanged over time. For example, we ceased to be an Internet service provider in1997 and abandoned our Internet telephony services business in 2001. We havepursued our current business—secure managed remote access services—for arelatively brief period, and in markets that are rapidly changing. We have onlybeen offering managed broadband services to enterprises with branch offices andlarge teleworker populations since December 2003, following ouracquisition of Axcelerant. There can be no assurance that we will succeed inour efforts to make our current business profitable.

 

**Werecently appointed a new chief executive officer and replaced a number ofexecutives and other key personnel, which may lead to additional personnel andorganizational changes that could impact our ability to achieve our strategicgoals.**

** **

On August 2, 2004,we announced the appointment of Tom Thimot to serve as our President and ChiefExecutive Officer. During the third quarter of 2004, we replaced our seniormarketing and operations executives and a number of other senior managers as partof a realignment of our global operations. On November 1, 2004, weappointed our Senior Vice President of Worldwide Sales. It is possible that thenew management team will introduce additional changes or cause workforceinstability as it evaluates how best to achieve our strategic goal of returningto profitability and building sustainable revenue growth.

 

**Wemay not be successful in our efforts to transition to a reduced cost structure,and the actions that we take in order to accomplish this transition could havelong-term adverse effects on our business.**

** **

We have taken, andcontinue to take, various actions to transition our company to a reduced coststructure. In response to declining revenues in our legacy dial access andservice provider business, we have scaled back our operations, reduced ourexpenses, and initiated facility closures and consolidations.

 

There are several risksinherent in our efforts to transition to a reduced cost structure. Theseinclude the risk that we will not be able to hold expenditures at a levelnecessary to achieve profitability, and that we may have to undertake furthercost-reduction initiatives that would entail additional charges. If we are notable to hold down expenses or if we are not able to reduce our non-people-relatedcosts in accordance with our plans, we may have to further reduce ourworkforce. There is also the risk that the cost-cutting actions we have takenand still plan to take will impair our ability to effectively develop andmarket products, to remain competitive in the industries in which we competeand to operate effectively. Each of the above measures could have long-termeffects on our business by reducing our pool of technical talent, decreasing orslowing improvements in our products, making it more difficult for us torespond to customers, limiting our ability to deploy our solutions to ourcustomers quickly if and when the demand for our solutions increases andlimiting our ability to hire and retain key personnel. These circumstancescould cause our income to be lower than it otherwise might be, which wouldadversely affect our stock price.

 

**Sincewe have no assurance that customers will continue to use our services or thatour customer base will expand, we will have little ability to predict revenuegrowth or operating results.**

** **

Our customers aregenerally free to use competing products and services and prices for dial-upremote access and Wi-Fi access are declining, so we could face significantcustomer losses and revenue declines, at unpredictable times. FiberlinkCommunications Corporation accounted for eleven percent of our revenues in thesix-month period ended April 30, 2005. During this period, a majority ofthe revenue derived from Fiberlink resulted from access to our network in asmall number of countries. As a result of obtaining direct dial-up accessthrough third parties in some of these countries, however, Fiberlink ceasedbeing a ten percent customer in the three-month period ended April 30,2005, causing a negative revenue impact for us. Revenue concentrations in oneor a small group of customers can make our business more risky. In addition,large customers have significant negotiating power during contract discussionsor in the event of a customer dispute, which may make it more likely that theterms of the customer arrangement or settlement may be more favorable to thecustomer. These factors make it difficult to anticipate the level of our futurerevenues from existing customers. In addition, our success depends on ourability to expand and

 

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diversifythe composition of our customer base. If we are unable to expand our customerbase and increase our average revenues per customer, our business success willbe less likely.

 

**Wemay not succeed in cost-effectively automating, integrating and updatingcritical back office systems and processes, which could limit our ability toachieve and maintain profitability.**

 

Historically, we haveinvested in the automation of back office systems and processes in order toenable us to cost effectively grow our traditional mobile office communicationsbusiness. The back office systems and processes of Axcelerant, whose businesswe acquired in December 2003, are largely manual. In order to efficientlyprovision, support and service our customers, we will be required tocost-effectively update, automate and, where appropriate, integrate thesesystems and processes. We will need to ensure that the combined company’sfinancial reporting, financial controls and documentation processes meet allapplicable financial controls certification standards, such as Section 404of the Sarbanes-Oxley Act. We may underestimate the investments required toaccomplish this automation, integration, updating and certification. We may notsucceed in this effort, which could impair our ability to scale our operations,limit our growth and lessen the likelihood that we would achieve profitability.

 

**Themarket price of our common stock has traditionally been highly volatile, and ifwe do not meet the expectations of analysts, the market price of our commonstock could decline further.**

 

In the past, the price ofour common stock has experienced large swings up and down. This volatilitymight occur again in the future. Volatility can arise particularly in responseto quarter-to-quarter variations in the actual or anticipated financial resultsof our Company or our customers or competitors, and announcements that ourcompetitors or we make regarding new product and service introductions. Themarket price of our common stock can also fluctuate in response to price andvolume fluctuations in the stock market, particularly those that affect themarket prices of technology stocks.

 

**Wehave incurred significant losses to date and we may continue to incur losses inthe future. If we fail to generate sufficient revenue to achieve and sustainpositive cash flow or profits, our stock price will decline.**

** **

We have incurredsignificant losses to date and we expect to continue to incur losses for someperiod of time. We incurred net losses of approximately $511,000 and $1.3million for the three and six months ending April 30, 2005, respectively,and $40.7 million for the ten months ending October 31, 2004. As of April 30,2005, we had an accumulated deficit of $172.5 million.

 

Prior to fiscal year2005, we have experienced negative cash flows in each year since our inceptionin 1994, and we may continue to do so in the future. In addition, we may alsoincur significant new costs related to possible acquisitions, the developmentof new products and services, the integration of new technologies or the updateof old technologies. Moreover, we might not be able to achieve operatingprofitability on a quarterly or annual basis. To achieve profits, we will needto maintain our relationships with existing customers, generate additionalrevenue growth from our existing customers and obtain new customers, whilecontinuing to control our expenses. We expect to continue to invest in networkand operations, research and development, and sales and marketing, and weexpect to face pressure to adopt new pricing arrangements, including volumediscounts, that may lower our margins. As a result, our ability to achieve andsustain profitability will depend on our ability to sustain and achievesubstantially higher revenue while maintaining reasonable cost and expenselevels. If we fail to achieve profitability, our stock price could decline.

 

**Wemay require additional capital for our operations, which could have a negativeeffect on your investment.**

** **

If our cash proves to beinsufficient to fund our operations, we may need to raise additional funds atsome point in the future. In the three-month period ended April 30, 2005we generated $430,000 of cash, leaving us with a cash, cash equivalent andshort-term investment balance of $19.8 million. If we raise additionalfunds by selling equity or convertible debt securities, our stockholders mayexperience additional dilution and these new securities may have powers, preferencesand rights that are senior to those of the rights of our common stock. 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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**Ifour common stock price falls below and remains under $1.00, or if we otherwisefail to comply with Nasdaq rules, our common stock could be delisted from TheNASDAQ National Market, which could severely limit the trading market for ourcommon stock.**

 

If we fail to meet thecriteria for continued listing on The NASDAQ National Market, our common stockmay be delisted, which could make it more difficult for you to sell yourshares. For example, if the market price for our common stock falls and remainsbelow $1.00 per share for thirty trading days, we would be subject todelisting. On May 31, 2005, the closing price of our common stock was$1.56 per share.

 

**Thetelecommunications industry continues to experience instability, which maycause consolidation among network service providers and impair our ability toprovide reliable, redundant service coverage and negotiate favorable networkaccess terms.**

 

The telecommunicationsindustry continues to experience dramatic technological change and increasedcompetition that have led to significant declines in network access pricing. Inaddition, the revenues of network service providers have declined as a resultof the general economic slowdown. Network service providers have experiencedrelated operating difficulties in the last several years, leading to pooroperating results and declarations of bankruptcy by a number of theseproviders. These conditions have already led to attempts at consolidation, andmore service providers may consolidate or otherwise cease operations in thefuture, which would reduce the number of network service providers from whichwe are able to obtain network access. To the extent this were to occur, whilewe would still be able to maintain operations and provide enterpriseconnectivity services with a small number of network service providers, wewould potentially not be able to provide sufficient alternative access pointsin some geographic areas, which could diminish our ability to provide broad,reliable, redundant coverage. Further, our ability to negotiate favorableaccess rates from network service providers could be impaired, which couldincrease our network access expenses and impact our operating results.

 

**Ifwe fail to enhance our existing products or if new services, products orfeatures we introduce do not succeed in the marketplace, we will not be able togenerate new revenues and we will have increased costs without the expectedreturns.**

 

Our target markets arecharacterized by rapid technological advances, changes in end-userrequirements, and frequent new product introductions. Our future success willdepend on our ability to anticipate or adapt to such changes and to offer, on atimely and cost-effective basis, products that meet changing customer demands.For example, our growth prospects will be determined, among other things, byour ability to grow our new branch office services offering in a highlycompetitive market with a large number of incumbents. We may lack sufficientresources to anticipate technological and market trends, manage longdevelopment cycles or develop, introduce and market new products andenhancements. In addition, we cannot predict whether our products and serviceswill meet with market acceptance or be profitable.

 

**Ourability to compete could be jeopardized if we are unable to protect ourintellectual property.**

 

Our products and servicesrely upon intellectual property rights. For example, we have been issued UnitedStates Patent Number 5,898,780 dated April 27, 1999 for “Method andApparatus for Authorizing Remote Internet Access,” and have other U.S. patentspending. We cannot assure you that patents will issue from the pendingapplications or, if any patents are issued, that they will be sufficientlybroad to protect our technology adequately. In addition, we have a number oftrademarks and trademark applications and we use copyright and trade secretprotection to protect our software and other original works. Because thetechnology and intellectual property associated with these products areevolving rapidly, current intellectual property rights may not adequatelyprotect us. In addition, despite efforts to protect our proprietary rights,unauthorized parties may attempt to copy or otherwise obtain and use ourproducts or technology. Monitoring unauthorized use of technology is difficult,and we cannot assure you that the steps we have taken will prevent unauthorizeduse of the technology. Moreover, effective patent, trademark, copyright andtrade secret protection may not be available in some countries in which weprovide, or may anticipate providing, our products. Furthermore, ourcompetitors may independently develop similar technologies that limit the valueof our intellectual property. If competitors are able to use our technology,our competitive edge would be reduced or eliminated.

 

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**Wemay become involved in litigation regarding intellectual property rights thatcould be costly, could cause us to lose significant rights, and divert ourmanagement time and attention.**

 

In the future, we, or ourcustomers, may become a party to litigation to protect our intellectualproperty or to respond to allegations that we infringe others’ intellectualproperty. We may receive communications from third parties inquiring abouttheir interest in licensing certain of the third party’s intellectual propertyor more generally identifying intellectual property that could be the basis ofa future infringement claim. If a party accuses us of infringing upon itsproprietary rights, we would have to defend our company and possibly ourcustomers against the alleged infringement. These lawsuits, regardless of theirsuccess, would likely be time-consuming and expensive to resolve and woulddivert management’s time and attention. Any potential intellectual propertylitigation could also force us to:

 

•       stop ordelay selling, incorporating or using products that use the challengedintellectual property;

 

•       obtain alicense to sell or use the relevant technology, which license might not beavailable on reasonable terms or at all; and

 

•       redesign theproducts and services that use that technology.

 

If we are forced to takeany of these actions, it may have a material adverse effect on our business,financial condition and results of operations.

 

**Terroristacts and acts of war may seriously harm our business and revenue, costs andexpenses and financial condition.**

** **

Terrorist acts or acts ofwar, including military actions in Iraq and other parts of the Middle East andthe geo-political uncertainties in other continents are having an adverseeffect on the U.S. economy and could possibly induce or accelerate the adventof a more severe economic recession. The U.S. government’s political, socialand economic policies and policy changes as a result of these circumstancescould have consequences that we cannot predict, including causing furtherweaknesses in the economy. In addition, as a multi-national company withheadquarters and significant operations located in the United States, we may beimpacted by actions against the United States. We will be predominantlyuninsured for losses and interruptions caused by terrorist acts and acts ofwar. Thus, the long-term impact of these events on our business is uncertain.As a result, our operating results and financial condition could be materiallyand adversely affected.

 

**Ourcustomers require a high degree of reliability in the delivery of our services,and if we cannot meet their expectations for any reason, demand for ourproducts and services will suffer.**

** **

Our success depends onour ability to assure generally error-free clearinghouse services,uninterrupted operation of our network and software infrastructure, and asatisfactory experience for our customers’ end users. In the past, we haveexperienced problems due to our inability to detect system malfunctions and dueto errors in collecting or processing account usage and settlement data. Due tothe high level of performance required for critical communications traffic, anyfailure to deliver a satisfactory experience to end users, whether or notcaused by our own failures, and any failure to provide accurate settlement datain connection with acting as a clearinghouse, could reduce demand for ourproducts and services.

 

**Wedepend on our reseller customers to market Internet-based communicationsservices to their end users, so if our reseller customers fail to market theirservices effectively, our revenues may be reduced.**

 

Our business depends inpart on the efforts and success of our Internet service provider andtelecommunications service customers in marketing Internet-based communicationsservices to their end users. Although we have recently focused more heavily onselling to large enterprise customers, the highest percentage of our revenuesis derived from our traditional service provider business. It is important thatwe maintain a healthy service provider business while we attempt to grow a moreexpansive enterprise customer base. Recently, we have experienced a faster thanprojected decline in revenues derived from our service provider customers. Wehave little ability to promote our services, or to promote demand for ourreseller customers’ services generally. The use of the Internet as a medium forcommunications services remains unproven. If our reseller customers fail tomarket their Internet-based communications services effectively, our revenueswill be reduced. Similarly, if the market for Internet-based

 

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communicationsservices fails to grow, or expands more slowly than anticipated, our revenueswill be lower than expected. The Internet-based services we provide arerelatively new and have not achieved widespread market acceptance. Networkservice providers and communication solutions providers may be reluctant topromote or rely upon our services until they gain greater commercialacceptance, which may never occur.

 

**Theunpredictability of our quarterly results may cause the trading price of ourcommon stock to decline.**

 

Our quarterly revenuesand operating results have varied in the past and are likely to fluctuateunpredictably in the future for many reasons beyond our control. Any of thesefactors could cause our stock price to decline. The primary factors that affectrevenues and operating results, in addition to the factors discussed elsewherein this section, include the following:

 

•       the volumeof transaction-based revenues;

 

•       the timingof deployment of services by our customers;

 

•       competitivepricing pressure;

 

•       the mix ofservices used by our customers’ end users;

 

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

 

•       changes inglobal travel patterns due to past and potential future terrorist activities inthe U.S. and the military responses to them in the Middle East, Southern Asiaand elsewhere; and

 

•       regulation,domestically and internationally.

 

Our operating expensesare largely determined based on our expectations about revenues. A highpercentage of our expenses are fixed in the short term. As a result, lower thananticipated revenues for any reason could cause substantial operating losses.

 

**Ifwe fail to attract and retain qualified sales personnel, our business might beharmed.**

 

Our success depends inlarge part upon our ability to identify, attract and retain qualified salesindividuals. Competition for these individuals is often intense, and we may notbe able to hire the type and number of sales personnel we need. Once qualifiedsalespersons are hired, they require extensive training in our multipleservices solution offering. This training typically covers several weeks offormal in-class and on-the-job instruction. As of May 31, 2005, we had 35sales personnel. If we are unable to retain our current sales employees andtrain new sales personnel as rapidly as necessary, we may not be able toincrease market awareness and sales of our services, which may prevent us fromgenerating revenue and may negatively impact our ability to maintain customerrelationships.

 

**Theuncertain economic environment in general could adversely affect our revenue,gross margins and expenses.**

 

Our revenues depend inpart on the overall demand for information technology products and services,particularly in the product and service segments in which we compete. Softeningdemand for our products and services caused by the ongoing economic downturnhas resulted in decreased revenue growth rates, and may in the future result indecreased revenue, earnings or growth rates and problems with our ability torealize customer receivables. Global economic 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 downturncontributed to reported declines in our revenue growth during fiscal year 2004.Further delays or reductions in information technology spending could have amaterial adverse effect on demand for our products and services andconsequently our results of operations, prospects and stock price.

 

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**Securityconcerns may deter the use of the Internet for Internet-based communications,which would reduce demand for our products and services.**

 

The secure transmissionof confidential information over public networks is a significant barrier towidespread adoption of electronic commerce and communications. The Internet isa public network and information is sent over this network from many sources.Advances in computer capabilities, new discoveries in the field of codebreaking or other developments could result in compromised security on ournetwork or the networks of others. Security and authentication concerns withrespect to the transmission over the Internet of confidential information, suchas corporate access passwords, and the ability of unauthorized computer users,so-called hackers, to penetrate online security systems may reduce the demandfor our services. If any well-publicized compromises of confidentialinformation were to occur, it could reduce demand for Internet-basedcommunications and our products and services.

 

**Governmentregulations and legal uncertainties regarding the Internet could harm ourbusiness.**

 

We will be subject tolocal regulations or laws applicable to access to or commerce on the Internet,in addition to regulations applicable to businesses generally. However, theFederal Communications Commission has initiated several proceedings that maychange the regulatory and legal framework for the provision of broadband andInternet services and current and future Federal Communications Commission rules andregulations, as well as judicial interpretations of these rules andregulations, which could negatively affect our business. In addition,international regulatory standards will govern our products and services inforeign markets and could impair our ability to develop products and servicesfor international service providers in the future. We may not be able to obtainor maintain all of the regulatory approvals that may be required to operate ourbusiness. The inability to obtain these approvals, as well as any delays causedby our compliance and our customers’ compliance with regulatory requirements orresulting from uncertainty associated with future regulatory decisions, couldresult in postponements or cancellations of product orders, which wouldsignificantly reduce our revenue.

 

**Recentlyenacted and proposed regulatory changes may cause us to incur increased costs.**

 

Recently enacted andproposed changes in the laws and regulations affecting public companies,including the provisions of the Sarbanes-Oxley Act of 2002, will increase ourexpenses as we evaluate the implications of new rules and devote resourcesto respond to the new requirements. In particular, we expect to incuradditional administrative expense as we implement Section 404 of theSarbanes-Oxley Act, which requires management to report on, and our independentauditors to attest to, our internal controls. The Sarbanes-Oxley Act mandates,among other things, that companies adopt new corporate governance measures andimposes comprehensive reporting and disclosure requirements, sets stricterindependence and financial expertise standards for audit committee members andimposes increased civil and criminal penalties for companies, their chiefexecutive officers, chief financial officers and directors for securities lawviolations. In addition, The NASDAQ National Market, on which our common stockis listed, has also adopted comprehensive rules and regulations relatingto corporate governance. These laws, rules and regulations have increasedand will continue to increase the scope, complexity and cost of our corporategovernance, reporting and disclosure practices, which could harm our results ofoperations and divert management’s attention from business operations. We alsoexpect these developments to make it more difficult and more expensive for usto obtain director and officer liability insurance in the future, and we may berequired to accept reduced coverage or incur substantially higher costs toobtain coverage.

 

Further, our boardmembers, Chief Executive Officer and Chief Financial Officer could face anincreased risk of personal liability in connection with the performance oftheir duties. As a result, we may have difficultly attracting and retainingqualified board members and executive officers, which would adversely affectour business.

 

**Ifwe fail to maintain an effective system of internal controls, we may not beable to report our financial results accurately or detect fraud. As a result,we could be subject to costly litigation, and current and potentialshareholders could lose confidence in our financial reporting, which could harmour business and the trading price of our common stock.**

 

Effective internalcontrols are necessary for us to provide reliable financial reports and todetect and prevent fraud. We are currently performing the system and processevaluation required to comply with the management certification and auditorattestation requirements of Section 404 of the Sarbanes-Oxley Act. Thisevaluation may conclude that enhancements, modifications or changes to ourinternal controls are necessary. Completing this

 

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evaluation,performing testing and implementing any required remedial changes will requiresignificant expenditures in the short term and on a regular basis in thefuture. We cannot be certain as to the timing of completion of our evaluation,testing and remediation actions or the impact of the same on our operations. Wehave in the past discovered, and may in the future discover, areas of ourinternal controls that need improvement. For example, during our 2003 audit,our independent registered public accountant brought to our attention a need toimprove the closing process used at our Irvine, California location by formallydocumenting our policy relating to recognition of revenues derived from agencyarrangements as well as reseller arrangements, ensuring proper recognition ofbroadband service installation revenues, training employees performing keyfinance and accounting functions and documenting certain judgmental accountingmatters. Although these items were subsequently addressed, the auditorinitially identified these items, collectively, as a “reportable condition,”which means that they were matters that in the auditor’s judgment couldadversely affect our ability to record, process, summarize and report financialdata consistent with the assertions of management in the financial statements.During late 2004, we determined that the internal documentation of our revenuerecognition policy was not consistent with our actual practice, which webelieve has been and is consistent with accounting principles generally acceptedin the United States (“GAAP”). We subsequently revised this documentation to beconsistent with our practice. During our 2004 audit, our independent registeredpublic accountant noted deficiencies which they considered to be significant inthe aggregate, although they noted no matters involving our internal controlstructure and our operations that they considered to be a material weaknessthat had a material impact on the true and fair view of our consolidatedfinancial statements. Going forward, the completion of our evaluation ofinternal controls, implemention of any changes that are necessary, andmaintenance of an effective system of internal controls will be expensive andrequire considerable management attention. However, if we fail to maintain aneffective system of internal controls or prevent fraud, we could be subject tocostly litigation, we may be unable to comply with Section 404 of Sarbanes-Oxley,we may be delisted from trading, investors could lose confidence in ourreported financial information and our brand and operating results could beharmed, which could have a negative effect on the trading price of our commonstock.

 

**Thecurrent regulatory environment affecting accounting principles generallyaccepted in the United States is uncertain and volatile, and significantchanges in current principles could affect our financial statements goingforward.**

 

Recent actions and publiccomments from the Securities and Exchange Commission have focused on theintegrity of financial reporting generally. In addition, the FinancialAccounting Standards Board (“FASB”) and other regulatory accounting agencieshave recently introduced new accounting standards, such as accounting for stockoptions, and continue to develop new proposed standards, some of which wouldrepresent a significant change from current industry practices. While webelieve that our financial statements have been prepared in accordance withaccounting principles generally accepted in the United States, we cannotpredict the impact of the adoption of any such proposals on our financialstatements going forward. For example, we currently are not required to recordstock-based compensation charges if the employee’s stock option exercise priceequals or exceeds the fair value of our common stock at the date of grant.However, several companies have elected to change their accounting policies andbegun to record the fair value of stock options as an expense. In December 2004,the FASB issued SFAS 123 Revised, which is effective as of the beginning of thefirst annual reporting period that begins after June 15, 2005. We have notcompleted our evaluation of the impact of adoption of SFAS 123 Revised onour consolidated financial position or results of operations. We expect tocomplete our evaluation during the fourth quarter of fiscal year 2005.

 

**Provisionsin our charter documents might deter a company from acquiring us, which couldinhibit your ability to receive an acquisition premium for your shares.**

 

Provisions of ourcertificate of incorporation, bylaws and Delaware law make it difficult for athird party to acquire us, despite the possible benefit to our stockholders,and this may potentially lower the price of our common stock. These provisionsof our certificate of incorporation and bylaws:

 

•       authorizethe board to issue preferred stock without stockholder approval;

 

•       prohibitcumulative voting in the election of directors;

 

•       limit thepersons who may call special meetings of stockholders; and

 

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•       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 haveelected to remain subject to the anti-takeover provisions of Delaware law.These factors may discourage takeover attempts.

 

**ITEM 4.   CONTROLS AND PROCEDURES**

 

*Evaluationof Disclosure Controls and Procedures*.   Regulationsunder the Securities Exchange Act of 1934 require public companies to maintain “disclosurecontrols and procedures,” which are defined as a company’s controls and otherprocedures designed to ensure that information required to be disclosed in thereports that it files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the Commission’s rules and forms. At the time of the original filing ofthe Company’s Quarterly Report on Form 10-Q for the period ended April 30,2005, which is amended by this amendment, our Chief Executive Officer and ourChief Financial Officer, based on their evaluation of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport, concluded that our disclosure controls and procedures were effectivefor that purpose.

 

In September 2005, subsequent to the originalfiling of the Company’s Quarterly Report on Form 10-Q for the period endedJuly 31, 2005, in the course of reviewing the preliminary results of aninternal audit of the manual accounting processes used in its Irvine location,the Company’s Chief Financial Officer discovered that the Company haderroneously calculated cost of revenues for the quarters ended April 30,2005 and July 31, 2005.   Uponmaking this discovery, the Chief Financial Officer immediately launched adetailed investigation of the extent and source of the accounting error andadvised the Company’s Audit Committee and independent accountants of thematter.

 

On September 21, 2005, after a full review, the Company’s AuditCommittee concluded that the previously issued financial statements shouldno longer be relied upon because of an error in those financial statements asaddressed in Accounting Principles Board Opinion No. 20.

 

The Company alsodetermined that this error resulted from a combination of control deficienciesthat together the Company considers to be a material weakness.  Those deficiencies were: inadequate processfor change control management of its accounting procedures; lack of a defined procedurefor reviewing cost of revenues journal entries; and inadequate care inconducting those reviews.

 

As a result of thisdiscovery and subsequent evaluation, the Company has determined that itsdisclosure controls and procedures were not effective as of April 30, 2005.

 

The Company’s actions toimprove the control deficiencies defined above are described in Item 4(b) below.

 

The Company’s ChiefFinancial Officer and the Company’s Audit Committee have discussed the mattersdisclosed in this Item 4(a) with the Company’s independent registeredpublic accounting firm.

 

*Changesin Internal Controls.  *During the period covered by thisreport, there were no changes in the Company’s internal control over financialreporting that materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting. However, wehave in the past and intend in the future to continue to refine our internalcontrols on an ongoing basis.

 

Subsequent to the detection of the controldeficiencies identified above in September 2005, the Company made the followingchanges to its internal control over financial reporting that are reasonablylikely to materially affect the Company’s internal control over financialreporting:

 

•                  TheCompany documented the proper journal entry procedure for cost of revenues andrevised the procedure governing change control management of its accountingprocedures; and

•                  TheCompany simplified the reconciliation and summary processes in use for thepreparation of cost of revenues and revenues journals;

 

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•                  TheCompany reorganized responsibilities within its accounting organization toprovide a stronger focus on the review function of its closing process; and

•                  TheCompany launched a search for a new Controller for its Irvine, Californialocation.

 

The following tasks represent what theCompany currently believes to be the most significant actions necessary toaddress the deficiencies in the Company’s internal controls described above aswell as actions it has taken to date to pursue these actions:

 

•                  *Review the closing procedures for each manualaccounting process to ensure that entries are properly prepared; simplifysummary schedules and reconciliations to improve the quality of the reviewprocess. *To address this goalthe Company is expanding the work plan of the current internal audit project inprocess at its Irvine location.  Itsmanager of internal audit, who was hired in June 2005, is currentlyperforming this work and completion is expected by October 31, 2005.

 

•                  *Develop an automated system to replace the manualaccounting processes performed in the Irvine, California location. *To address this objective theCompany has been actively documenting its manual accounting processes in itsIrvine, California location and is preparing the requirements specificationsfor the automation of these manual systems. The production deployment of the automated system is expected by the endof the second fiscal quarter of 2006.

* *

•                  *Enhance closing procedures to provide for morerigorous review of all account reconciliations and journal entries. *To address this goal, the Companyis assessing the skill levels in its accounting personnel to ensure that whenreviews are performed, assigned staff members have the requisite skills andexperience to perform an effective review. For accounting reviews related to broadband revenues and cost ofrevenues processes, a second review--performed by the Irvine Controller (to behired) or the Vice President of Finance until the Irvine Controller ishired--in addition to the Corporate Controller review, will be performed forthe quarterly period ending October 31, 2005.

* *

•                  *Reorganize the responsibilities within the accountingorganization and add additional experienced accounting personnel to preventoverloading our current staff. *The Company plans to hire additionalsenior accounting personnel in the Irvine, California location, including aSenior Accounting Manager.

* *

*Limitations on Effectiveness of Controls and Procedures.  *Ourmanagement, including our Chief Executive Officer and Chief Financial Officer,does not expect that our disclosure controls and procedures or our internalcontrols will prevent all error and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints and the benefits of controls must be considered relative to theircosts. 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. Theseinherent limitations include, but are not limited to, the realities thatjudgments in decision-making can be faulty and that breakdowns can occurbecause of simple error or mistake. Additionally, controls can be circumventedby the individual acts, by collusion of two or more people, or by managementoverride of the control. The design of any system of controls also is based inpart upon certain assumptions about the likelihood of future events and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions; over time, the control may becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of the inherent limitationsin a cost-effective control system, misstatements due to error or fraud mayoccur and not be detected.

 

The certifications of the Company’s Chief Executive Officer and ChiefFinancial Officer attached as Exhibits 31.03 and 31.04 to this Amendment No. 1to Quarterly Report on Form 10-Q include, in paragraph 4 of suchcertifications, information concerning the Company’s disclosure controls andprocedures and internal control over financial reporting.  Suchcertifications should be read in conjunction with the information contained inthis Item 4 for a more complete understanding of the matters covered by suchcertifications.  The certifying officers worked to design, or caused to bedesigned, disclosure controls and procedures, for the purpose of ensuring thatmaterial

 

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information relating to the Company,including its consolidated subsidiaries, is made known to them by otherpersonnel of the Company on a timely basis.  These disclosure controls andprocedures were designed and adopted in good faith for this purpose, but it isrecognized that these procedures must be continually evaluated and can alwaysmerit further improvement.

 

The Company’s certifyingofficers and the Company have been and continue to be engaged in efforts topromptly change and improve the Company’s internal controls and procedures asdescribed in this Item 4.  The Companyexpects that these efforts will, over time, positively address the identifiedweaknesses.

 

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**PART II.  OTHER INFORMATION**

 

**ITEM6.  EXHIBITS**

 

(a)  Exhibits

 
| **Exhibit** | ** ** | ** **                                                                                                               | ** ** | **Incorporated by Reference** | ** ** | **Filed or Furnished** |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------|
| **Number**  | ** ** | **Exhibit Description**                                                                                             | ** ** | **Form**                      | ** ** | **File No.**           | ** ** | **Exhibit** | ** ** | **Filing Date** | ** ** | **Herewith** |
| 31.01       |       | Rule 13a-14(a)/15d-14a  certification of Registrant’s Chief Executive Officer, dated June 9,  2005.       |       | 10-Q                          |       |                   |   | 31.01 |   | 6/9/05 |   |   |
| 31.02       |       | Rule 13a-14(a)/15d-14a  certification of Registrant’s Chief Financial Officer, dated June 9,  2005.       |       | 10-Q                          |       |                   |   | 31.02 |   | 6/9/05 |   |   |
| 31.03       |       | Rule 13a-14(a)/15d-14a  certification of Registrant’s Chief Executive Officer, dated September 26,  2005. |       |                          |       |                   |   |   |   |   |   | ý |
| 31.04       |       | Rule 13a-14(a)/15d-14a  certification of Registrant’s Chief Financial Officer, dated September 26,  2005. |       |                          |       |                   |   |   |   |   |   | ý |
| 32.01*      |       | Section 1350  certification of Registrant’s Chief Executive Officer, dated June 9,  2005.                 |       | 10-Q                          |       |                   |   | 32.01 |   | 6/9/05* |   |   |
| 32.02*      |       | Section 1350  certification of Registrant’s Chief Financial Officer, dated June 9,  2005.                 |       | 10-Q                          |       |                   |   | 32.02 |   | 6/9/05* |   |   |
| 32.03*      |       | Section 1350  certification of Registrant’s Chief Executive Officer, dated September 26,  2005.           |       |                          |       |                   |   |   |   |   |   | ý |
| 32.04*      |       | Section 1350  certification of Registrant’s Chief Financial Officer, dated September 26,  2005.           |       |                          |       |                   |   |   |   |   |   | ý |

 

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*                    Thesecertifications accompany GoRemote’s Quarterly Report on Form 10-Q for thequarterly period ended April 30, 2005. These certifications are not deemedfiled with the Securities and Exchange Commission and are not to beincorporated by reference in any filing of GoRemote under the Securities Act of1933 or the Securities Exchange Act of 1934, whether made before or after thedate hereof and irrespective of any general incorporation language in anyfilings.

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on September 26, 2005.

 
|       | GoRemote  Internet Communications, Inc.               |
|------------|------------------------------------------------------------|
|       |                                                       |
|       |                                                       |
| ** ** | /s/ DANIEL W. FAIRFAX                                      |
|       | Daniel W. Fairfax                                          |
|       | Senior Vice President and Chief Financial Officer          |
|       | (principal financial officer and  duly authorized officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                              | ** ** | **Incorporated by Reference** | ** ** | **Filed or Furnished** | ** ** |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------|------------|
| **Number**  | ** ** | **Exhibit Description**                                                                                            | ** ** | **Form**                      | ** ** | **File No.**           | ** ** | **Exhibit** | ** ** | **Filing Date** | ** ** | **Herewith** | ** ** |
| 31.01       |       | Rule 13a-14(a)/15d-14a certification  of Registrant’s Chief Executive Officer, dated June 9, 2005.       |       | 10-Q                          |       |                   |       | 31.01 |   | 6/9/05 |   |   |   |
| 31.02       |       | Rule 13a-14(a)/15d-14a certification  of Registrant’s Chief Financial Officer, dated June 9, 2005.       |       | 10-Q                          |       |                   |       | 31.02 |   | 6/9/05 |   |   |   |
| 31.03       |       | Rule 13a-14(a)/15d-14a certification  of Registrant’s Chief Executive Officer, dated September 26, 2005. |       |                          |       |                   |       |   |   |   |   | ý |   |
| 31.04       |       | Rule 13a-14(a)/15d-14a certification  of Registrant’s Chief Financial Officer, dated September 26, 2005. |       |                          |       |                   |       |   |   |   |   | ý |   |
| 32.01*      |       | Section 1350 certification of  Registrant’s Chief Executive Officer, dated June 9, 2005.                 |       | 10-Q                          |       |                   |       | 32.01 |   | 6/9/05* |   |   |   |
| 32.02*      |       | Section 1350 certification of  Registrant’s Chief Financial Officer, dated June 9, 2005.                 |       | 10-Q                          |       |                   |       | 32.02 |   | 6/9/05* |   |   |   |
| 32.03*      |       | Section 1350 certification of  Registrant’s Chief Executive Officer, dated September 26, 2005.           |       |                          |       |                   |       |   |   |   |   | ý* |   |
| 32.04*      |       | Section 1350 certification of  Registrant’s Chief Financial Officer, dated September 26, 2005.           |       |                          |       |                   |       |   |   |   |   | ý* |   |

 

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*                    Thesecertifications accompany GoRemote’s Quarterly Report on Form 10-Q for thequarterly period ended April 30, 2005. These certifications are not deemedfiled with the Securities and Exchange Commission and are not to beincorporated by reference in any filing of GoRemote under the Securities Act of1933 or the Securities Exchange Act of 1934, whether made before or after thedate hereof and irrespective of any general incorporation language in anyfilings.

 

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