** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(MarkOne)**

**ý**                                 Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

 

**For the quarterly periodended July 31, 2005**

** **

**or**

 

**o**                                 Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

** **

**For the transitionperiod from                 to                 **

** **

**Commission file number:000-27871**

** **

**GoRemote Internet Communications, Inc.**

(ExactName 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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý    No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).Yes  ý    No  o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes  o    No  ý

 

The number of shares ofthe registrant’s common stock outstanding as of August 31, 2005 was42,229,077 shares.

 

 

----

 

**GoRemoteInternet Communications, Inc.**

**INDEX**

** **
|      | **PART I  FINANCIAL INFORMATION**                                                                                      |   |
|-----------|-----------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.   | Financial  Statements:                                                                                                      |   |
|      | Unaudited Condensed  Consolidated Balance Sheets as of July 31, 2005 and October 31, 2004                              |   |
|      | Unaudited Condensed  Consolidated Statements of Operations for the Three and Nine Months  Ended July 31, 2005 and 2004 |   |
|      | Unaudited Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended July 31,  2005 and 2004           |   |
|      | Notes to Unaudited Condensed  Consolidated Financial Statements                                                             |   |
| Item  2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                 |   |
| Item 3.   | Quantitative  and Qualitative Disclosures About Market Risk                                                                 |   |
| Item 4.   | Controls and  Procedures                                                                                                    |   |
|      | **PART II  OTHER INFORMATION**                                                                                         |   |
| Item 1.   | Legal Proceedings                                                                                                           |   |
| Item 2.   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                |   |
| Item 3.   | Defaults  Upon Senior Securities                                                                                            |   |
| Item 4.   | Submission  of Matters to a Vote of Security Holders                                                                        |   |
| Item 5.   | Other Information                                                                                                           |   |
| Item  6.  | Exhibits                                                                                                                    |   |
| SIGNATURE |                                                                                                                        |

 

2

----

 

**PART I.  FINANCIAL INFORMATION**

 

**ITEM 1.**                             FINANCIALSTATEMENTS

 

**GoRemote InternetCommunications, Inc.Condensed Consolidated Balance Sheets(in thousands, except per share amounts)**

** **
| ** **                                                                                                                                                                                                                                  | ** ** | **July 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                  | ** ** | **(unaudited)**    | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                                                                                                  |       |               |       |                       |       |
| ***Current assets:***                                                                                                                                                                                                                       |       |               |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                                                                                  |       | $                  | 4,239      |                       | $          | 2,407 |   |
| Short-term  investments                                                                                                                                                                                                                     |       | 14,221             |       | 15,614                     |       |
| Accounts  receivable, net of allowances of $255 and $211 at July 31, 2005  and October 31, 2004, respectively                                                                                                                |       | 6,063              |       | 7,243                      |       |
| Inventory                                                                                                                                                                                                                                   |       | 104                |       | 119                        |       |
| Deferred  installation costs                                                                                                                                                                                                                |       | 2,460              |       | 1,425                      |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                  |       | 971                |       | 725                        |       |
| Total current assets                                                                                                                                                                                                                        |       | 28,058             |       | 27,533                     |       |
| Property and equipment, net                                                                                                                                                                                                                 |       | 1,781              |       | 1,694                      |       |
| Goodwill                                                                                                                                                                                                                                    |       | 21,612             |       | 21,612                     |       |
| Intangible assets, net                                                                                                                                                                                                                      |       | 3,158              |       | 3,876                      |       |
| Deferred installation costs, less current portion                                                                                                                                                                                           |       | 890                |       | 740                        |       |
| Other assets                                                                                                                                                                                                                                |       | 352                |       | 442                        |       |
| Total assets                                                                                                                                                                                                                                |       | $                  | 55,851     |                       | $          | 55,897 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                               |       |               |       |                       |       |
| ***Current liabilities:***                                                                                                                                                                                                                  |       |               |       |                       |       |
| Accounts payable                                                                                                                                                                                                                            |       | $                  | 6,572      |                       | $          | 6,571 |   |
| Restructuring  accrual                                                                                                                                                                                                                      |       | 172                |       | 434                        |       |
| Accrued  compensation and benefits                                                                                                                                                                                                          |       | 879                |       | 1,061                      |       |
| Current portion  of deferred revenue                                                                                                                                                                                                        |       | 4,620              |       | 2,741                      |       |
| Other current  liabilities                                                                                                                                                                                                                  |       | 1,577              |       | 1,407                      |       |
| Total current liabilities                                                                                                                                                                                                                   |       | 13,820             |       | 12,214                     |       |
| Deferred revenue, less current portion                                                                                                                                                                                                      |       | 1,161              |       | 1,305                      |       |
| Restructuring accrual, less current portion                                                                                                                                                                                                 |       | 284                |       | 416                        |       |
| Total liabilities                                                                                                                                                                                                                           |       | 15,265             |       | 13,935                     |       |
| Stockholders’ equity:                                                                                                                                                                                                                  |       |               |       |                       |       |
| Series A  redeemable convertible preferred stock, $0.001 par value: 12,801 shares  authorized at July 31, 2005 and October 31, 2004: no  shares issued and outstanding                                             |       | —             |       | —                     |       |
| Preferred stock,  5,000 shares authorized at July 31, 2005 and October 31, 2004:  no shares issued and outstanding                                                                                                           |       | —             |       | —                     |       |
| Common stock,  $0.001 par value; 100,000 shares authorized at July 31, 2005 and  October 31, 2004: 42,228 and 41,159 shares issued and  outstanding at July 31, 2005 and October 31, 2004,  respectively |       | 42                 |       | 41                         |       |
| Additional  paid-in capital                                                                                                                                                                                                                 |       | 214,498            |       | 213,244                    |       |
| Deferred  stock-based compensation                                                                                                                                                                                                          |       | (53                | )          | (201                       | )          |
| Accumulated  deficit                                                                                                                                                                                                                        |       | (173,901           | )          | (171,122                   | )          |
| Total  stockholders’ equity                                                                                                                                                                                                            |       | 40,586             |       | 41,962                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                            |       | $                  | 55,851     |                       | $          | 55,897 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements

 

3

----

 

**GoRemote InternetCommunications, Inc.Condensed Consolidated Statements of Operations(in thousands, except per share amounts)(unaudited)**

** **
| ** **                                                   | ** ** | **Three Months Ended  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                   | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                     |       | $                                          | 10,952     |                                 | $          | 12,513 |   | $ | 34,958 |   | $ | 37,313 |   |
| Costs and expenses:                                          |       |                                       |       |                                 |       |   |   |   |   |
| Cost of revenues                                             |       | 4,810                                      |       | 5,131                                |       | 14,436 |   | 15,150 |   |
| Network and  operations                                      |       | 2,198                                      |       | 2,365                                |       | 6,647 |   | 6,392 |   |
| Research and  development                                    |       | 635                                        |       | 1,151                                |       | 1,733 |   | 3,212 |   |
| Sales and  marketing                                         |       | 2,911                                      |       | 5,761                                |       | 9,078 |   | 15,253 |   |
| General and  administrative                                  |       | 1,921                                      |       | 1,642                                |       | 5,000 |   | 4,651 |   |
| Amortization of  intangible assets                           |       | 236                                        |       | 401                                  |       | 718 |   | 1,067 |   |
| Amortization of  stock-based compensation(1)                 |       | 21                                         |       | 82                                   |       | 105 |   | 231 |   |
| Restructuring  charge                                        |       | —                                     |       | —                               |       | 60 |   | — |   |
| Total costs and  expenses                                    |       | 12,732                                     |       | 16,533                               |       | 37,777 |   | 45,956 |   |
| Operating loss                                               |       | (1,780                                     | )          | (4,020                               | )          | (2,819 | ) | (8,643 | ) |
| Interest income and other, net                               |       | 78                                         |       | 29                                   |       | 156 |   | 80 |   |
| Loss before income taxes                                     |       | (1,702                                     | )          | (3,991                               | )          | (2,663 | ) | (8,563 | ) |
| Provision for income taxes                                   |       | 66                                         |       | 27                                   |       | 116 |   | 83 |   |
| Net loss                                                     |       | $                                          | (1,768     | )                                    | $          | (4,018 | ) | $ | (2,779 | ) | $ | (8,646 | ) |
| Basic and diluted net loss per share                         |       | $                                          | (0.04      | )                                    | $          | (0.10 | ) | $ | (0.07 | ) | $ | (0.22 | ) |
| Shares used to compute basic and diluted net loss  per share |       | 41,740                                     |       | 40,885                               |       | 41,556 |   | 38,548 |   |

 

----

(1)             Amortizationof stock-based compensation consists of:

 
| Network and  operations                         |   | $ | 11     |   | $      | 24 |   | $  | 45     |   | $ | 67  |   |
|-------------------------------------------------|--------|---|--------|--------|--------|----|--------|----|--------|--------|---|-----|--------|
| Research and development                        |   | 1 |   | 13     |   | 8  |   | 45 |   |
| Sales and marketing                             |   | 7 |   | 37     |   | 42 |   | 98 |   |
| General and administrative                      |   | 2 |   | 8      |   | 10 |   | 21 |   |
| Total  amortization of stock-based compensation |   | $ | 21     |   | $      | 82 |   | $  | 105    |   | $ | 231 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements

 

4

----

 

**GoRemote InternetCommunications, Inc.Condensed Consolidated Statements of Cash Flows(in thousands)(unaudited)**

** **
| ** **                                                                            | ** ** | **Nine Months Ended  July 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ***Cash flows from operating  activities:***                                          |       |                                      |       |   |   |
| Net loss                                                                              |       | $                                         | (2,779     | ) | $ | (8,646 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:          |       |                                      |       |   |   |
| Depreciation and  amortization of property and equipment                              |       | 932                                       |       | 1,063 |   |
| Amortization of  stock-based compensation                                             |       | 105                                       |       | 230 |   |
| Amortization of  intangibles                                                          |       | 718                                       |       | 1,068 |   |
| Provision for  accounts receivable allowances                                         |       | 45                                        |       | 67 |   |
| Non-cash portion  of restructuring charge (benefit)                                   |       | (21                                       | )          | — |   |
| Net changes in  assets and liabilities:                                               |       |                                      |       |   |   |
| Accounts  receivable                                                                  |       | 1,135                                     |       | 176 |   |
| Inventories                                                                           |       | 15                                        |       | 20 |   |
| Prepaid expenses  and other current assets                                            |       | (1,281                                    | )          | (250 | ) |
| Other assets                                                                          |       | (60                                       | )          | (776 | ) |
| Accounts payable                                                                      |       | (372                                      | )          | (397 | ) |
| Accrued  compensation and benefits                                                    |       | (183                                      | )          | (106 | ) |
| Deferred revenue                                                                      |       | 1,735                                     |       | 2,800 |   |
| Other current  liabilities                                                            |       | 171                                       |       | (155 | ) |
| Net cash  provided by (used in) operating activities                                  |       | 160                                       |       | (4,906 | ) |
| ***Cash flows from investing  activities:***                                          |       |                                      |       |   |   |
| Short-term investments:                                                               |       |                                      |       |   |   |
| Purchases                                                                             |       | (4,998                                    | )          | (3,194 | ) |
| Sales and  maturities                                                                 |       | 6,390                                     |       | 6,543 |   |
| Acquisition of intangibles                                                            |       | —                                    |       | (50 | ) |
| Cash provided by business combination, net                                            |       | —                                    |       | 1,412 |   |
| Capital expenditures                                                                  |       | (1,019                                    | )          | (1,129 | ) |
| Net cash  provided by investing activities                                            |       | 373                                       |       | 3,582 |   |
| ***Cash flows from financing activities:***                                           |       |                                      |       |   |   |
| Proceeds from sales of common stock, net                                              |       | 1,299                                     |       | 1,417 |   |
| Net cash  provided by financing activities                                            |       | 1,299                                     |       | 1,417 |   |
| Net increase in cash and cash equivalents                                             |       | 1,832                                     |       | 93 |   |
| Cash and cash equivalents at beginning of the period                                  |       | 2,407                                     |       | 3,560 |   |
| Cash and cash equivalents at end of the period                                        |       | $                                         | 4,239      |   | $ | 3,653 |   |
|                                                                                  |       |                                      |       |   |   |
| ***Supplemental disclosures of  cash flow information:***                             |       |                                      |       |   |   |
| Income taxes paid                                                                     |       | $                                         | 194        |   | $ | 62 |   |
| Interest paid                                                                         |       | $                                         | 21         |   | $ | — |   |
|                                                                                  |       |                                      |       |   |   |
| ***Supplemental disclosures of  noncash financing activities:***                      |       |                                      |       |   |   |
| Conversion of Series A redeemable convertible  preferred stock into common stock |       | $                                         | —     |   | $ | 1,326 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements

 

5

----

 

**GoRemote InternetCommunications, Inc.Notes to Condensed Consolidated Financial Statements(unaudited)**

** **

**1.****                                      Basisof Presentation**

 

The financialinformation at July 31, 2005 and for the three and nine months ended July 31,2005 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 andArticle 10 of Regulation S-X. Accordingly, the financial informationset forth herein does not include all of the information and footnotes requiredby accounting principles generally accepted in the United States for annualfinancial statements. The results for the three and nine months ended July 31,2005 are not necessarily indicative of the results that may be expected forfuture periods.

 

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 followinginformation should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s Annual Report onForm 10-KT for the ten months ended October 31, 2004.

 

**2.****                                      Summaryof Significant Accounting Policies**

* *

*Basisof Presentation.  *The condensed consolidated financialstatements include all the accounts of the Company and its wholly ownedsubsidiaries. All significant intercompany balances and transactions have beeneliminated. The condensed consolidated financial statements have been preparedin conformity with accounting principles generally accepted in the UnitedStates.

 

*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 makes estimates asto its accounts receivable allowance and reserves, the recoverability of aprepaid asset, potential liability derived from certain tax obligations andrestructuring expenses. Actual results could differ from those estimates.

 

*ForeignCurrency Remeasurement.  *The Company considers the functionalcurrency of its foreign subsidiaries to be the U.S. dollar. Adjustmentsresulting from the process of remeasurement into U.S. dollars of the foreigncurrency financial statements of the Company’s foreign subsidiaries areincluded 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.

 

*Short-termInvestments.  *The Company’s policy is to invest invarious short-term instruments with investment grade credit ratings and readymarkets. All of the Company’s investments are classified as available-for-sale,and the Company views its available-for-sale portfolio as available for use inits current operations. Even though some of the Company’s investments havematurities greater than one year they are considered short-term because theyhave interest features that are similar to short-term investments and thereforethey are classified as available-for-sale in accordance with Statement ofFinancial Accounting Standards No. 115, *“Accountingfor Certain Investments in Debt and Equity Securities”* (“SFAS No. 115”).

 

6

----

 

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 60 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.   Goodwill wastested for impairment during the quarter ended July 31, 2005, and it was determinednot to be impaired.  During fiscal year2006, the third quarter will end July 31, 2006, and will be the periodduring which the Company will conduct its next annual test for impairment,unless indicators require us to perform the test sooner.

 

*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 consist ofcustomer relationships, internal use software and other purchased intangiblessuch as domain names. Intangible assets are amortized on a straight-line basisover the estimated useful lives ranging from one to five 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 haveoccurred, which indicate the carrying amount of such assets may not be fullyrealizable. Determination of impairment is based on an estimate of undiscountedfuture cash flows resulting from the use of the assets and their eventualdisposition. If the Company determines that any of these assets have beenimpaired, the impairment charge is recorded based on a comparison of the netbook value of the assets and the fair value. The fair value of the assets isdetermined by either discounted future cash flows resulting from the use of theassets over their average remaining useful lives or specific appraisal.

 

*RevenueRecognition and Related Allowances.  *The Companyderives revenues primarily from providing remote Internet access services tocustomers through its virtual network and by providing monthly security andsupport services and monthly connectivity services to broadband Internet remoteaccess customers. 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.

 

7

----

 

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 monthper user 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 of equipmentis deferred and recognized ratably over the period of expected usage by itscustomers since the Company considers these services and products to be anenabler 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 with regard to the specific facts and circumstances surrounding eachprovider relationship to determine which portion of its revenues the Companyprovides under a reseller arrangement, where the Company would record grossrevenues and cost of revenues, and which portion of its revenues the Companyprovides as an agent, where the Company would record revenues and cost ofrevenues combined on a net basis. In excercising its judgment, the Companyevaluates the contractual arrangements and de facto relationships with eachprovider together with various other assumptions believed to be applicable andreasonable under the circumstances, to determine whether revenues are grossversus net.   The Company’s judgementsmay change as new events occur, as additional information is obtained and asits operating environment changes, any of which could cause a material impacton the 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.

 

*Costof Revenues.  *Cost of revenues represents the amountspaid to 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 purchase commitment will be less than the purchase commitment, theCompany recognizes a loss on that purchase commitment to the extent of thatdifference. No such loss has been recognized to date.

 

8

----

 

*Allowancefor Doubtful Accounts.  *The Company maintains allowances fordoubtful accounts for estimated losses from its customers’ inability to makepayments 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 Company determinesthat collectibility is not probable, revenue is recognized as cash iscollected. If the Company’s estimates prove too low, its bad debt expense willincrease.

 

*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 OpinionNo. 25, *“Accounting for Stock Issued toEmployees”* (“APB No. 25”), using an intrinsic value approach tomeasure compensation expense, if any. Under APB No. 25, the Companygenerally recognizes no compensation expense with respect to such awards. Appropriatedisclosures using a fair-value based method, as provided by SFAS No. 123,are also reflected herein. Options issued to non-employees are accounted for inaccordance with SFAS 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 nine months ended July 31, 2005 and 2004,respectively, were estimated at the date of grant assuming no expecteddividends and the following weighted average assumptions.

 

*Stock Options*

* *
| ** **                      | ** ** | **Three Months Ended  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life (years)           |       | 2.10                                       |       | 4.91                                      |       | 2.55 |   | 4.07 |   |
| Expected stock price volatility |       | 246                                        | %          | 268                                       | %          | 269 | % | 337 | % |
| Risk-free interest rate         |       | 4.09                                       | %          | 2.63                                      | %          | 3.17 | % | 2.21 | % |

 

*Stock Purchase*

* *
| ** **                      | ** ** | **Three Months Ended  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life (years)           |       | 0.49                                       |       | 0.50                                      |       | 0.50 |   | 0.50 |   |
| Expected stock price volatility |       | 185                                        | %          | 77                                        | %          | 227 | % | 87 | % |
| Risk-free interest rate         |       | 3.69                                       | %          | 2.46                                      | %          | 3.38 | % | 3.27 | % |

 

For purposes of proforma disclosure only, the estimated fair value of stock-based awards isamortized against pro forma net income over the stock-based awards’ vestingperiod for options and over the offering period for stock purchases under theCompany’s 1999 Employee Stock Purchase Plan.

 

9

----

 

The Company’s pro formainformation is as follows:

 
| ** **                                                           | ** ** | **Three Months Ended  July 31,**                       | ** ** | **Nine Months Ended  July 31,**                        | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                                         | ** ** | **2004**                                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                           | ** ** | **(in thousands, except per share amounts)** | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net loss attributable to common stockholders as reported             |       | $                                                                | (1,768     | )                                                                | $          | (4,018 | ) | $ | (2,779 | ) | $ | (8,646 | ) |
| Add:  Amortization of stock compensation measured under APB 25       |       | 21                                                               |       | 82                                                               |       | 105 |   | 231 |   |
| Less:  Stock-based compensation expense measured under SFAS 123 |       | (951                                                             | )          | (738                                                             | )          | (2,716 | ) | (3,330 | ) |
| Pro forma net loss                                                   |       | $                                                                | (2,698     | )                                                                | $          | (4,674 | ) | $ | (5,390 | ) | $ | (11,745 | ) |
| Basic and diluted net loss per share                                 |       | $                                                                | (0.04      | )                                                                | $          | (0.10 | ) | $ | (0.07 | ) | $ | (0.22 | ) |
| Pro forma basic and diluted net loss per share                       |       | $                                                                | (0.06      | )                                                                | $          | (0.11 | ) | $ | (0.13 | ) | $ | (0.30 | ) |

 

Calculated under SFASNo. 123, the weighted-average fair value of the employee stock optionsgranted during the three months ended July 31, 2005 and 2004 was $1.44 and$1.58 per share, respectively, and during the nine months ended July 31, 2005and 2004, was $1.53 and $2.90, respectively. The weighted-average estimatedfair value of shares purchased under the Purchase Plan during the three monthsended July 31, 2005 and 2004 was $1.05 and $1.96 per share, respectively, andduring the nine months ended July 31, 2005 and 2004, was $1.01 and $2.13, respectively.

 

In December 2004,the FASB issued a revision of SFAS No. 123 (“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 taxesunder the provisions of Statement of Financial Accounting StandardsNo. 109, *“Accounting for Income Taxes”*(“SFAS No. 109”), which provides for the establishment of deferred taxassets and liabilities based on the difference between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes.

 

*NetLoss Per Share.  *Net loss per common share and diluted netloss 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 8.3 million and 8.0 millionshares of common stock for the three months ended July 31, 2005 and 2004,respectively, and approximately 8.5 and 7.6 million shares of common stock forthe nine months ended July 31, 2005 and 2004, respectively, were not includedin the computation of diluted net loss per share because the effect would beantidilutive. The increase in weighted-average options outstanding in the threeand nine months ended July 31, 2005, respectively, compared to the same periodsin 2004, respectively, was primarily due to grants of new options to theCompany’s employees. Such securities, had they been dilutive, would have beenincluded in the computation of diluted net loss per share using the treasurystock method.

 

**3.****                                      Changein Fiscal Year End**

** **

In October 2004,the Company changed its fiscal year end from December 31 toOctober 31. The consolidated financial information for 2005 presented inthis Form 10-Q is for the three and nine month periods ended July 31,2005. The 2004 financial results presented in this Form 10-Q are for thethree and nine month periods ended July 31, 2004.

 

10

----

 

**4.****                                      BusinessCombination**

** **

On December 1,2003, the Company completed its acquisition of Axcelerant, a privately heldprovider of broadband Internet remote access services and managed securityservices. The Company’s acquisition of Axcelerant did not result in a newreportable segment. The results of operations of Axcelerant have been includedin the Company’s financial statements subsequent to the date of theacquisition.

 

*DeferredStock Compensation.  *The intrinsic value of unvested stockoptions assumed in the Axcelerant acquisition in an amount of approximately$674,000 has been allocated to deferred stock compensation and is beingamortized to expense on a straight-line basis over the vesting period. TheCompany 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 July31, 2005, the Company had an aggregate of $53,000 of deferred compensationrelated to the acquisition of Axcelerant remaining to be amortized.

 

**5.****                                      Propertyand Equipment and Intangible Assets**

** **

*Property and Equipment*

* *

Property and equipmentcomprised the following (in thousands):

 
| ** **                                     | ** ** | **July 31,** | ** ** | **October 31,** | ** ** |
|------------------------------------------------|------------|--------------|------------|----------------------|------------|
| ** **                                     | ** ** | **2005**     | ** ** | **2004**             | ** ** |
| Computer hardware                              |       | $            | 6,786      |                 | $          | 6,319 |   |
| Software                                       |       | 5,018        |       | 4,495                |       |
| Office furniture and equipment                 |       | 1,536        |       | 1,506                |       |
| Leasehold improvements                         |       | 422          |       | 422                  |       |
|                                           |       | 13,762       |       | 12,742               |       |
| Less accumulated depreciation and amortization |       | (11,981      | )          | (11,048              | )          |
| Total                                          |       | $            | 1,781      |                 | $          | 1,694 |   |

 

*Purchased Intangible 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):

 
| ** **                    | ** ** | **July 31,** | ** ** |
|-------------------------------|------------|--------------|------------|
| ** **                    | ** ** | **2005**     | ** ** |
| Customer relationships        |       | $            | 5,150      |   |
| Internal use software         |       | 100          |       |
| Website URL                   |       | 50           |       |
|                          |       | 5,300        |       |
| Less accumulated amortization |       | (2,142       | )          |
| Total                         |       | $            | 3,158      |   |

 

11

----

 

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

 
| ** ** | ** ** | **Amortization** | ** ** |
|------------|------------|------------------|------------|
| 2005       |       | 237              |       |
| 2006       |       | 946              |       |
| 2007       |       | 946              |       |
| 2008       |       | 946              |       |
| 2009       |       | 83               |       |
|       |       | $                | 3,158      |   |
|            |            |                  |            |  |

 

*Other Intangible 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 ofJuly 31, 2005, $38,000 of the asset remained to be utilized. The Company believesthat this amount will be utilized over the period of the agreement.

 

**6.****                                      Commitmentsand Contingencies**

** **

*Commitments.  *The Companyleases all of its facilities under operating leases that expire at variousdates through 2008. It has entered into certain purchase commitments fromsuppliers who provide network access, software and related services that areutilized by us in order to deliver its products and services.

 

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 July 31, 2005,based on fiscal years ending October 31 (in thousands):

 
| ** ** | ** ** | **Operating  Leases** | ** ** | **Purchase  Commitments** | ** ** |
|------------|------------|-----------------------|------------|---------------------------|------------|
| 2005       |       | $                     | 406        |                      | $          | 454 |   |
| 2006       |       | 1,433                 |       | 1,076                     |       |
| 2007       |       | 817                   |       | 174                       |       |
| 2008       |       | 181                   |       | —                    |       |
| Thereafter |       | —                |       | —                    |       |
|       |       | $                     | 2,837      |                      | $          | 1,704 |   |

 

Operating lease commitments related tothe August 2004 restructuring have also been included in the restructuringaccrual.

 

*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 andAugust 2001, the Company and certain of its officers were named asdefendants in five purported securities class action lawsuits filed in theUnited States District Court, Southern District of New York, captioned as In reGoRemote Internet Communications, Inc. Initial Public Offering SecuritiesLitigation, No. 01 Civ 6771 (SAS), and consolidated with more than threehundred substantially identical proceedings as In re Initial Public OfferingSecurities Litigation, Master File No. 21 MC 92 (SAS). The ConsolidatedAmended Class Action Complaint for Violation of the Federal SecuritiesLaws (“Consolidated Complaint”) was filed on or about April 19, 2002, andalleges claims against certain of the Company’s officers and against CIBC WorldMarkets Corp., Prudential Securities Incorporated, DB Alex. Brown, as successorto Deutsche Bank, and U.S. Bancorp Piper Jaffray Inc., underwriters of theCompany’s December 14, 1999 initial public offering (“underwriter defendants”),under

 

12

----

 

Sections 11 and 15of the Securities Act of 1933, as amended, and underSection 10(b) and 20(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 andSection 10(b) of the Securities Act of 1933, pre-judgment andpost-judgment interest, and reasonable attorneys’ and expert witnesses’ feesand other costs; no specific amount is claimed in the plaintiffs’ prayer in theConsolidated Complaint. By Order of the Court, no responsive pleading is yetdue, although motions to dismiss on global issues affecting all of the issuershave 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. InFebruary 2003, the presiding judge dismissed theSection 10(b) claims against the Company and its named officers anddirectors 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 inJuly 2003. Although the Company believes that plaintiffs’ claims arewithout merit, it has decided to accept the settlement proposal (which does notadmit wrongdoing) to avoid the cost and distraction of continued litigation.Because the settlement will be funded entirely by its Insurers, the Companydoes not believe that the settlement will have any effect on the Company’sfinancial condition, results of operations or cash flows.

 

The settlement waspresented to the Court for preliminary approval in June 2004.  The Court preliminarily approved most of thesettlement in February 2005, but requested a few minor modifications be made toits terms.  These modifications were madeand the Court preliminarily approved the modified settlement agreement inAugust 2005.  The settlement agreementwill be presented to shareholders in the coming months.  While the Court is expected to finallyapprove or disapprove the settlement following the period of notice andpossible objections by shareholders, there can be no guarantee that thesettlement will be judicially approved.

 

**7.****                                      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”).

 

13

----

 

The provision andassociated charges against the provision for the August 2004 restructuringthrough July 31, 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       |       |
| Non-cash charges  (recoveries)                                   |       | —                             |       | —                                             |       | —                                    |       | —                                              |       | —    |       |
| Cash payments                                                    |       | —                             |       | (43                                                | )          | —                                    |       | —                                              |       | (43       | )          |
| Accruals at July  31, 2005                                       |       | $                                  | —     |                                               | $          | 456                                       |       | $                                                   | —     |      | $          | — |   | $ | 456 |   |

 

**8.****                                      SegmentInformation**

 

The Company operates inone segment, providing managed remote Internet access services to corporateenterprises with mobile and remote workforces and to the Company’s serviceprovider resellers and value-added resellers.

 

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

 
| ** **                               | ** ** | **Three months ended  July 31,** | ** ** | **Nine months ended  July 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(in thousands)**                    | ** ** | **(in thousands)**                   | ** ** |
| Revenue by customer:                     |       |                                       |       |                                      |       |   |   |   |   |
| United States,  Canada and Latin America |       | $                                          | 8,628      |                                      | $          | 8,825 |   | $ | 27,404 |   | $ | 24,895 |   |
| Japan/Korea                              |       | 744                                        |       | 1,791                                     |       | 2,699 |   | 6,656 |   |
| Asia Pacific                             |       | 761                                        |       | 876                                       |       | 2,201 |   | 2,595 |   |
| Europe, Middle  East and Africa          |       | 819                                        |       | 1,021                                     |       | 2,654 |   | 3,167 |   |
|                                     |       | $                                          | 10,952     |                                      | $          | 12,513 |   | $ | 34,958 |   | $ | 37,313 |   |

 

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

 
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | **July 31,  2005**  | ** ** | **October 31,  2004** | ** ** |
|--------------------|------------|------------|------------|------------|------------|---------------------|------------|----------------------------|------------|
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | **(in  thousands)** | ** ** |
| Long-lived assets: |       |       |       |       |       |                |       |                       |       |   |   |
| United States      |       |       |       |       |       | $                   | 26,451     |                       | $          | 27,169 |   |
| Rest of World      |       |       |       |       |       |                | 138        |                       |       | 67 |   |
|               |       |       |       |       |       | $                   | 26,589     |                       | $          | 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 three and nine monthsended July 31, 2005, no customer accounted for 10 percent or more of theCompany’s total consolidated revenues.

 

14

----

 

**9.****                                      Stockholders’Equity**

** **

*Series AConvertible Preferred Stock.  *During thethree months ended April 30, 2004, 1.0 million shares of Series APreferred Stock were converted into common stock. No shares of Series APreferred Stock were outstanding as of July 31, 2005 and 2004.

 

*Series APreferred Stock Warrants.  *No Series A Preferred Stock warrantswere exercised during the three and nine months ended July 31, 2005 and 2004,respectively. Warrants to purchase 1.5 million shares of Series APreferred Stock were outstanding at July 31, 2005.

 

15

----

 

**ITEM 2.**                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

*Thefollowing discussion should be read in conjunction with the selectedconsolidated financial information and the consolidated financial statementsand notes appearing elsewhere in this Form 10-Q. The following discussioncontains forward-looking statements, such as statements of expected revenuesand expenses that involve risks and uncertainties. We assume no obligation toupdate any such forward-looking statements. Our actual results could differmaterially from those anticipated in these forward-looking statements. Factorsthat could cause or contribute to such differences include, but are not limitedto, those detailed from time to time in our filings with the Securities andExchange Commission and those discussed in this Form 10-Q, particularly inthis Management’s Discussion and Analysis of Financial Condition and Results ofOperations and under “Factors That May Affect Future Results.”*

* *

*Unlessexpressly 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 managedremote Internet access services to customers through our virtual network andprovide monthly security and support services and monthly connectivity servicesto broadband Internet remote access customers. Our services enable enterprisesto securely, 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, such as call center agents; telecommuters;and employees in branch offices and retail settings. We provide comprehensiveand integrated managed broadband and global remote access services thatinclude: intelligent client software; multiple network access types, includingbroadband, Wi-Fi, dial-up, 3G and general packet radio service (or GPRS);security capabilities that ensure security policy compliance by remote workers;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,we acquired Axcelerant, Inc., a privately held provider of broadbandInternet remote access services and managed security services. InMay 2004, we changed our corporate name from GRICCommunications, Inc. to GoRemote Internet Communications, Inc. toreflect our current vision and service offerings. On August 12, 2004, weannounced a restructuring of our global operations to reduce operating expenseand 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 July 31, 2005, the GoRemote GlobalNetwork included approximately 28,000 Internet access dial-up locations, over24,000 public wireless fidelity—or WiFi—hotspots and approximately 1,700 publicbroadband access points in over 150 countries. Through the acquisition ofAxcelerant, we added a virtual broadband cable modem and DSL network that spansthe United States, Canada and the United Kingdom. This network is anaggregation of the networks of more than 150 broadband providers, includingvirtually all of the leading cable companies, incumbent local exchange carriers(ILECs) and competitive local exchange carriers (CLECs) in the United States.By utilizing 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 network facilities ofGoRemote Global Network members to conduct Internet-based communications. Weintend to continue developing our solutions offering to introduce new managedInternet-based remote

 

16

----

 

communications servicesthat may be adopted, deployed and managed on a global scale across the GoRemoteGlobal Network.

 

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 $173.9 million as of July 31,2005. 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 nine month periods ended July 31, 2005. The 2004 financial resultspresented in this Form 10-Q are for the three and nine month periods endedJuly 31, 2004.

 

**Critical Accounting 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 couldchange our reported results.

 

*RevenueRecognition and Related Allowances.  *We deriverevenues primarily 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. 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 month peruser based on negotiated fees. Usage revenues 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. 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. Dependingon the service provided and the nature of the arrangement, we may charge aone-time, annual or monthly fee for these additional services or deliverables.Revenue from installation services and the sale of equipment is deferred andrecognized ratably over the period of expected usage by our customers since weconsider these services and products to be an enabler of the related remoteaccess service contracts. Our estimate of expected usage is 24 months forall periods presented. On a quarterly basis, we review this estimate ofexpected usage based on actual data. Revenues from managed security servicesare recognized in the month the service is provided. To a lesser extent, wealso derive a portion of our revenues from licenses of our authentication software,related maintenance and support services, and other optional services relatedto our managed remote access solutions, all of which revenues are recognizedratably over the term of service. These other revenues amounted to five percentor less of total revenues over the last three years. Fees generated frommaintenance contracts are recognized over the life of those contracts. Themajority of the maintenance contracts cover periods of one to

 

17

----

 

twelve months. Amountsbilled in advance of revenue recognition are recorded to deferred revenue ascollected. We recognize certain broadband connectivity revenues generated underagency arrangements on a net basis. Product returns and allowances have notbeen 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 with regard to the specific facts and circumstancessurrounding each provider relationship to determine which portion of ourrevenues we provide under a reseller arrangement, where we would record grossrevenues and cost of revenues, and which portion of our revenues we provide asan agent, where we would record revenues and cost of revenues combined on a netbasis. In exercising our judgement, we evaluate the contractual arrangementsand de facto relationships with each provider, together with various otherassumptions believed to be applicable and reasonable under the circumstances,to determine whether revenues are gross versus net. Our judgments may change asnew events occur, as additional information is obtained and as our operatingenvironment changes, any of which could cause a material impact on the revenuesthat we have reported. Our broadband service providers do not deliver actualaccounting information to us on a timely basis at month-end. Due to this delay,which is outside our control, we estimate our revenues and cost of salesrelated to broadband services on a monthly basis, and adjust them to actual inthe subsequent month after receiving information from its service providers.Historically, these adjustments have been immaterial. In addition, we makeestimates as to our accounts receivable allowance and reserves, the recoverabilityof a prepaid asset, potential liability derived from certain tax obligationsand restructuring expenses. Actual results could differ from those estimates.We record estimated allowances against revenues for returns and cancellationsin the same period the revenues are recorded. These estimates are based uponhistorical analysis of our service level agreements, credit memo data and otherknown factors for pricing and transaction volume disputes that arise in thenormal course of business. To date, allowances pertaining to our currentbusiness have not been significant. If the historical data we use to calculatethese estimates does not accurately reflect amounts associated with futuredisputes, our actual revenues could be higher or lower than what we haverecognized.

 

*Costof Revenues.  *Cost of revenues represents the amountspaid to 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 for doubtfulaccounts for estimated losses from our customers’ inability to make paymentsthey owe us. In order to estimate the appropriate level of this allowance, weanalyze historical bad debts, customer concentrations, current customer credit-worthiness,current economic trends and changes in our customer payment patterns. If thefinancial condition of our customers were to deteriorate and to impair theirability to make payments to us, additional allowances might be required infuture periods. If we determine that collectibility is not probable, revenue isrecognized as cash is collected. If our estimates prove too low, our bad debtexpense will increase.

 

*Valuationof Long-Lived Assets including Intangible Assets.  *We evaluatethe carrying amount of our long-lived assets, including purchased intangibleassets, whenever events or circumstances indicate the amount of the assets maynot be recoverable. Determination of impairment of property and equipment,goodwill and intangible assets is highly subjective and requires significantjudgment at many points during the analysis. This analysis is based on ourestimate of future cash flows that the assets are expected to generate andtheir eventual disposition. If we determine that any of these assets have beenimpaired, the impairment charge will be charged to earnings in the period suchdetermination 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

 

18

----

 

recoverable. Circumstances that couldtrigger an impairment test include, but are not limited to, a significantadverse change in the business climate or legal factors, an adverse action orassessment by a regulator, unanticipated competition and loss of key personnel.In addition, we assess goodwill for recoverability if our market capitalizationis less than the value of our net assets. The determination as to whether awrite-down of goodwill is necessary involves significant judgment based on theshort-term and long-term projections of our future performance. The assumptionssupporting the estimated future cash flows, including the discount rate usedand estimated terminal value reflect our best estimates.

 

*Restructuring,Workforce Reductions and Excess Facilities Accrual.  *In order tobring our operating expense structure in line with our current level ofrevenues, 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. As of July 31, 2005, $456,000 was accruedfor future facilities consolidation costs. In connection with our restructuringplans, we accrue for severance payments and other related termination benefitsprovided to employees in connection with involuntary staff reductions. Weaccrue for these benefits in the period when benefits are communicated to theterminated employees. Typically, terminated employees are not required toprovide continued service to receive termination benefits. If continued serviceis required, then the severance liability is accrued over the required serviceperiod. In general, we use a formula based on a combination of the number ofyears of service and the employee’s position within the Company to calculatethe termination benefits to be provided to affected employees. As of July 31,2005, all affected employees were terminated and there was no remaining accrualfor future severance and termination benefits payments.

 

**Business Combination**

** **

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.

 

**Resultsof OperationsThree and Nine Month Periods Ended July 31, 2005 Compared to Three and NineMonth Periods Ended July 31, 2004**

** **

*Overview of the Third Quarter of Fiscal 2005*

* *

During the third 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 third quarter of 2005 and 2004, 69 percent and 51 percent,respectively, of our quarterly revenues was derived from services sold toenterprise customers both directly and indirectly through third parties.

 

In the third quarter of2005, our revenues and expenses each decreased compared to the third quarter of2004. Revenues were lower quarter over quarter primarily due to a reduction inthe volume of dial-up based Internet access minutes that was partially offsetby an increase in managed broadband revenues. Cost of revenues was slightlyhigher as a percentage of revenues principally due to the fact thatapproximately 51% of our revenues were attributable to broadband services, whichgenerate lower gross margin than our dialup revenues.  During the quarterly period ending July 31,2004, approximately 33% of our revenues were generated by sales of broadbandservices.  In the third quarter of 2005,the Company activated fewer net new broadband endpoints than in the priorquarter.  This short term slowing inimplementations was due to the shift in the mix of new broadband ordersreceived for teleworker solutions to branch office products and services.  Since branch office solution orders typicallyhave longer implementation cycles than for teleworkers.  The continued replacement of our dialuprevenues by broadband revenues may cause our gross margin to declinefurther.  We expect the trend in our costof revenues to be similar to that of prior quarters and possibly increase ifsales to enterprise customers through partners grow and represent a higherpercentage of total revenues. Our operating expenses were lower in the thirdquarter of 2005 than in the third quarter of 2004 principally due to the costsavings generated from our strategic restructuring in August 2004, whichincluded transitioning parts of our operations to our lower cost Indiansubsidiary. We expect our quarterly operating expenses to remain approximatelythe same as a percentage of revenues during the balance of fiscal year 2005.

 

19

----

 

In the nine month periodended July 31, 2005, our revenues and expenses decreased compared to the ninemonth period ended July 31, 2004. Revenues were lower primarily due to areduction in the volume of dial-up based Internet access minutes that waspartially offset by an increase in usage of managed broadband. Cost of revenuesas a percentage of revenues was flat period to period. Our operating expenseswere lower in the nine month period ending July 31, 2005 than in thecorresponding period of 2004 principally due to the cost savings generated fromour strategic restructuring in August 2004, offset partially by theinclusion of nine months of costs incurred at our Irvine, Californiafacility.   Only eight months of expensefrom our Irvine location are included in the nine month period ending July 31,2004 because our acquisition of Axcelerant was not effective until December2003.

 

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. Among the factors that we expect toimpact our ability to achieve and sustain profitability will be theeffectiveness of our sales and marketing efforts through both direct and thirdparty sales channels, the timely release of new services and the introductionof new services by existing or new competitors. For a discussion of these andother risk factors, see the section titled “Factors That May AffectFuture Results.”

 

The results ofoperations for the nine months ended July 31, 2005 include nine months ofrevenues and expenses related to the prior Axcelerant operations, while theresults of operations for the nine months ended July 31, 2004 include eightmonths of revenues and expenses related to the acquisition of Axcelerant, whichwas completed in December 2003.

 

Revenues

 
| ** ** | ** ** | **Three Months Ended  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** ** | ** ** | **(in millions)**                     | ** ** | **(in millions)**                    | ** ** |
| Revenues   |       | $                                          | 11.0       |                                      | $          | 12.5 |   | $ | 35.0 |   | $ | 37.3 |   |
|            |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |

 

Total revenues decreasedapproximately $1.6 million in the three months ended July 31, 2005, compared tothe three months ended July 31, 2004. The net decrease during the three monthsended July 31, 2005 was principally due to a reduction in the volume of dial-upbased Internet access minutes, corresponding to a revenue decrease of $3.0million, that was partially offset by increased broadband revenues in theamount of $1.5 million. Our experience leads us to believe that the decline indial-up revenues from service providers will likely continue. We believe thatthe rate and magnitude of future declines in dial-up access revenue that mayoccur over the next twelve months will be less predictable, and possiblygreater, than in the prior twelve months. However, no single dial-up accesscustomer currently represents ten percent or more of our quarterly revenue.Total revenues decreased approximately $2.4 million in the nine months endedJuly 31, 2005, compared to the nine months ended July 31, 2004. The netdecrease was principally due to reduced usage of legacy dial-up Internet accessservice, corresponding to a revenue decrease of $8.2 million, that waspartially offset by increased broadband revenues in the amount of $5.8 millionduring the nine months ended July 31, 2005.

 

Fiberlink CommunicationsCorporation accounted for less than ten percent of our consolidated revenuesduring both the nine months ended July 31, 2005 and 2004. Fiberlink is both ourcustomer and in certain markets our competitor, principally with respect to ourdial-up access offering. During the second quarter of 2005, Fiberlink obtaineddirect access in a number of territories that had represented a majority of itsdial-up traffic on our network. Traffic from these territories representedapproximately $894,000, $475,000 and $1,000 of our revenues in the first,second and third fiscal quarters of 2005. We expect to receive no traffic fromFiberlink from these territories in the future.

 

We expect to increaseour quarterly revenues derived from sales of our broadband teleworker andbranch office solutions.  We also expecta continuing decline in our revenues derived from sales of dial-up Internetaccess services.   During the nextquarter, we are uncertain whether the amount of declining dialup revenue willoffset the expected increase in revenues derived from sales of our broadbandsolutions.  Longer term, we currentlybelieve that broadband revenues will grow in an amount that will exceed theamount by which dialup revenues are expected to decline.

 

20

----

 

*Costs and Expenses*

* *
| ** **                               | ** ** | **For the Three Months Ended  July 31,** | ** ** | **For the Nine Months Ended  July 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                                     | ** ** | **2004**                                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(in millions)**                                       | ** ** | **(in millions)**                                      | ** ** |
| Cost of revenues                         |       | $                                                            | 4.8        |                                                        | $          | 5.1 |   | $ | 14.4 |   | $ | 15.2 |   |
| Percentage of  revenues                  |       | 43.9                                                         | %          | 41.0                                                        | %          | 41.3 | % | 40.6 | % |
| Network and operations                   |       | $                                                            | 2.2        |                                                        | $          | 2.4 |   | $ | 6.6 |   | $ | 6.4 |   |
| Percentage of  revenues                  |       | 20.1                                                         | %          | 18.9                                                        | %          | 19.0 | % | 17.1 | % |
| Research and Development                 |       | $                                                            | 0.6        |                                                        | $          | 1.2 |   | $ | 1.7 |   | $ | 3.2 |   |
| Percentage of  revenues                  |       | 5.8                                                          | %          | 9.2                                                         | %          | 5.0 | % | 8.6 | % |
| Sales and Marketing                      |       | $                                                            | 2.9        |                                                        | $          | 5.8 |   | $ | 9.1 |   | $ | 15.3 |   |
| Percentage of  revenues                  |       | 26.6                                                         | %          | 46.0                                                        | %          | 26.0 | % | 40.9 | % |
| General and administrative               |       | $                                                            | 1.9        |                                                        | $          | 1.6 |   | $ | 5.0 |   | $ | 4.7 |   |
| Percentage of  revenues                  |       | 17.5                                                         | %          | 13.1                                                        | %          | 14.3 | % | 12.5 | % |
| Amortization of purchased intangibles    |       | $                                                            | 0.2        |                                                        | $          | 0.4 |   | $ | 0.7 |   | $ | 1.1 |   |
| Percentage of  revenues                  |       | 2.2                                                          | %          | 3.2                                                         | %          | 2.1 | % | 2.9 | % |
| Amortization of stock-based compensation |       | $                                                            | 0.02       |                                                        | $          | 0.08 |   | $ | 0.1 |   | $ | 0.2 |   |
| Percentage of  revenues                  |       | 0.2                                                          | %          | 0.7                                                         | %          | 0.3 | % | 0.6 | % |
| Restructuring charge                     |       | $                                                            | —     |                                                        | $          | — |   | $ | 0.06 |   | $ | — |   |
| Percentage of  revenues                  |       | —                                                       | %          | —                                                      | %          | 0.2 | % | — | % |

 

*Costof Revenues.  *Cost of revenues consists of amounts wepay to access the Internet in order to provide remote Internet access servicesfor our 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 $321,000 in the three months ended July 31, 2005compared to the three months ended July 31, 2004, representing a decrease of sixpercent. The decrease was primarily due to decreased volumes of remote Internetaccess of approximately $1.5 million, and by an increase in broadband cost ofsales of approximately $1.2 million, related to our increase in broadbandrevenues. We expect that during fiscal year 2005 the cost of revenues willincrease in absolute dollars as remote Internet access revenues and broadbandrevenues increase, but be similar to the nine months ended July 31, 2005 as apercentage of revenues and possibly increase as sales through partnersrepresent a greater percentage of total revenues.

 

Cost of revenuesdecreased approximately $714,000 in the nine months ended July 31, 2005compared to the nine months ended July 31, 2004, representing a decrease offive percent. The decrease was primarily due to decreased volumes of remoteInternet access of approximately $3.7 million partially offset by an increasein broadband cost of sales of approximately $3.0 million due to a relatedincrease 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 $167,000 in the three months ended July 31,2005 compared to the three months ended July 31, 2004, representing a decreaseof seven percent. The decrease was due primarily to a decrease in compensationand benefits-related expenses of approximately $246,000 based on lowertemporary help costs and reduced internet and telecommunications costs ofapproximately $33,000, partially offset by higher professional expenses ofapproximately $157,000 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 $255,000 in the nine months ended July 31,2005 compared to the nine months ended July 31, 2004, representing an increaseof four percent. The increase was due primarily to an increase of approximately$390,000 of professional expenses in our Milpitas facility as a result of

 

21

----

 

outsourcing of certaincustomer support activities and increased facility allocation of approximately$74,000 partially offset by a decrease in compensation and benefits-relatedexpenses of approximately $238,000 based primarily on lower temporary helpcosts. We expect network and operations expenses to remain constant as apercentage of revenues during fiscal year 2005 as we deploy and support newcustomers.

 

*Researchand Development.  *Research and development expenses consistof salaries and benefits, allocated facility and management informationsystems, depreciation costs, outside consultants, facilities costs, administrationand other related costs.

 

Research and developmentexpenses decreased approximately $516,000 in the three months ended July 31,2005 compared to the three months ended July 31, 2004, representing a decreaseof 45 percent. The decrease was due primarily to a reduction of approximately$471,000 of compensation and benefits related to reduced California basedpersonnel resulting from the August 2004 strategic restructuring and therelocation of our development activities to our network operations and developmentcenter in India. Additionally, there was a reduction in the facility allocationexpense of approximately $99,000 due to a lower share allocation and loweroverall facility costs.

 

Research and developmentexpenses decreased approximately $1.5 million in the nine months ended July 31,2005 compared to the nine months ended July 31, 2004, representing a decreaseof 46 percent. The decrease was due primarily to a reduction of approximately$1.2 million of compensation and benefits related to reduced California basedpersonnel resulting from the August 2004 strategic restructuring and therelocation of our development activities to our network operations anddevelopment center in India. Additionally, there was a reduction in thefacility allocation expense of approximately $331,000 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 $2.9 million in the three-month period ended July 31, 2005compared with the three-month period ended July 31, 2004, representing adecrease of 49 percent. The decrease is due primarily to a decrease incompensation and benefits and travel and entertainment of approximately $1.3million and $100,000, respectively, as a result of our strategic workforce reductionin August 2004. In addition, advertising and promotional programsdecreased by $1.0 million as we scaled back our marketing programs and ourfacility allocation expense decreased by $265,000 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 $6.2 million in the nine-month period ended July 31, 2005compared with the nine-month period ended July 31, 2004, representing adecrease of 40 percent. The decrease is due primarily to a decrease incompensation and benefits and travel and entertainment of approximately $2.9million and $332,000, respectively, as a result of our strategic workforcereduction in late 2004. In addition, advertising and promotional programsdecreased by $1.9 million as we realigned our marketing program focus and ourfacility allocation expense decreased by $596,000 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.

 

*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 increased approximately $279,000 in the three monthsended July 31, 2005 compared to the three months ended July 31, 2004,representing an increase of 17 percent. The increase was due primarily to a netincrease in facility allocation expenses of $240,000, as a result of thereallocation of facilities costs following our strategic workforce reductionand a reduction in the allowance for doubtful accounts of approximately $235,000in the three months ended July 31, 2004, which did not reoccur in 2005,partially offset by a decrease in compensation and benefits of approximately$162,000. General and administrative expenses increased approximately 

 

22

----

 

$349,000 in the ninemonths ended July 31, 2005 compared to the nine months ended July 31, 2004,representing an increase of eight percent. The increase was due primarily to anet increase in facility allocation expenses of $609,000, as a result of thereallocation of facilities costs as a result of our strategic workforcereduction, a reduction in the allowance for doubtful accounts of approximately$235,000 in the three months ended July 31, 2004, which did not reoccur in 2005and an increase in travel and entertainment expense of approximately $78,000partially offset by a reduction in compensation and benefits of approximately$243,000, a reduction of depreciation of approximately $173,000 as our fixedassets become fully depreciated and a $65,000 reduction of professional feesprimarily related to fees charged by our previous independent auditors andconsultants for Sarbanes-Oxley compliance activities.  We expect general and administrative expensesto increase in fiscal year 2005 in absolute dollars as we continue to updateback office processes and procedures company-wide to meet the requirements ofthe Sarbanes-Oxley Act of 2002 and related regulations, but to decrease as apercentage of revenues.

 

*Amortizationof Purchased Intangibles.  *Amortization of purchased intangiblesincludes three months of amortization of the intangible assets acquired inconnection with the acquisition of Axcelerant. The initial value assigned toAxcelerant customer relationships was $7.5 million, which was amortized on astraight-line basis over a five-year life at a rate of $125,000 per month. AtSeptember 30, 2004 an impairment charge of $2.4 million was recognized andthe carrying value of the customer relationships was adjusted to $3.9 million,which will be amortized over the remaining 50 months of the original five-yearlife on a straight-line basis at a rate of $78,000 per month. The valueassigned 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.  *Inconnection with our acquisition of Axcelerant, we recorded $674,000 ofadditional deferred stock-based compensation, which is being amortized over thevesting period of the underlying stock options assumed during the acquisition.As a result, we recorded amortization of deferred compensation expense of$21,000 and $82,000 during the three months ended July 31, 2005 and 2004,respectively, and $105,000 and $231,000 during the nine months ended July 31,2005 and 2004, respectively. We expect to record amortization of deferredcompensation expense of approximately $16,000 in the remainder of fiscal year2005, related to options assumed by us in connection with our acquisition ofAxcelerant.

 

As of July 31, 2005, wehad an aggregate of $53,000 of deferred compensation related to the acquisitionof Axcelerant remaining to be amortized. Deferred compensation is amortized ona straight-line basis over the vesting period of the options. We expectamortization of stock-based compensation related to these options assumed by usto end in 2007.

 

*Interest Income (Expense) and Other and Taxes*

* *

Interest income andother, net, interest expense and taxes for the three and nine months ended July31, 2005 and 2004 were as follows:

 
| ** **                     | ** ** | **For the three months ended  July 31,** | ** ** | **For the nine months ended  July 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                                     | ** ** | **2004**                                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(in thousands)**                                      | ** ** | **(in thousands)**                                     | ** ** |
| Interest income and other, net |       | $                                                            | 78         |                                                        | $          | 29 |   | $ | 156 |   | $ | 80 |   |
| Provision for income taxes     |       | $                                                            | 66         |                                                        | $          | 27 |   | $ | 116 |   | $ | 83 |   |

 

*Interest Income 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, increased $49,000 in the three months ended July 31, 2005 comparedto the three months ended July 31, 2004. This increase was primarily due to approximately$59,000 of additional interest income based on higher interest rate yields andapproximately $29,000 of lower foreign currency remeasurement expense that waspartially offset by $38,000 of higher sales, use and value-added taxes and$6,000 of interest expense incurred in 2005.

 

Interest income andother, net, increased $76,000 in the nine months ended July 31, 2005 comparedto the nine months ended July 31, 2004. This increase was primarily due to$145,000 of additional interest income based on

 

23

----

 

higher interest rateyields and approximately $38,000 of lower foreign currency remeasurementexpense partially offset by approximately $68,000 of higher sales, use andvalue-added taxes and $21,000 of interest expense incurred in 2005.

 

Interest expenseconsists of the amortization of the discount of future facility lease paymentsrelated to 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 ninemonths ended July 31, 2005, $6,000 and $21,000, respectively, of interestexpense was recorded.

 

*Income Taxes*

* *

The provision for incometaxes was $66,000 and $27,000 for the three months ended July 31, 2005 and2004, respectively. The provision for income taxes was $116,000 and $83,000 forthe nine months ended July 31, 2005 and 2004, respectively. The provision forincome taxes consists of foreign tax provisions and state taxes.

 

**Liquidity and CapitalResources**

 
| ** **                                          | ** ** | **For the nine months ended** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **July 31,**                                      | ** ** |
| ** **                                          | ** ** | **2005**                                          | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                           | ** ** |
| Cash and cash equivalents                           |       | $                                                 | 4,239      |   | $ | 3,653 |   |
| Net cash provided by (used in) operating activities |       | 160                                               |       | (4,906 | ) |
| Net cash provided by investing activities           |       | 373                                               |       | 3,582 |   |
| Net cash provided by financing activities           |       | 1,299                                             |       | 1,417 |   |
|                                                     |            |                                                   |            |  |  |  |  |

 

*Cash,Cash Equivalents and Short-Term Investments.  *Ourprincipal source of liquidity is our cash, cash equivalents and short-terminvestments. As of July 31, 2005, in addition to our cash and cash equivalentsbalance of $4.2 million, we had a short-term investment balance ofapproximately $14.2 million.

* *

*OperatingActivities.  *Net cash provided by operating activitiesin the nine months ended July 31, 2005 of $160,000 was primarily a result of anincrease in deferred revenue of approximately $1.7 million primarily related todeferred installation revenues and a reduction in accounts receivable balancesof approximately $1.1 million, partially offset by our net operating losses of$2.8 million, increases in prepaid expenses and other current assets of $1.3million primarily related to an increase in deferred installation costs anddecreased accounts payable balances of approximately $372,000 principally fromreductions in restructuring accruals.

* *

*InvestingActivities.  *Net cash provided by investing activitiesduring the nine months ended July 31, 2005 of approximately $373,000 wasprimarily the result of the liquidation of certain short-term instrumentspartially offset by capital expenditures of approximately $1.0 million.

* *

*FinancingActivities.  *Net cash provided by financing activitiesduring the nine months ended July 31, 2005 of approximately $1.3 million wasprimarily the result of sales of common stock to our employees and optionholders.

* *

*Commitments.  *We lease allof our facilities under operating leases that expire at various dates through2008. We have entered into certain purchase commitments from suppliers whoprovide network access, software and related services that are utilized by usin order to deliver our products and services.

 

During 2005, we expectto continue automating and updating back office processes and procedures thatare required for us to efficiently run our business, however, we believe thatour capital equipment expenditures in absolute dollars will be relatively flatas compared to 2004. We expect to continue to provide customer premisesequipment to customers for a fee, as part of our solution offerings.

 

24

----

 

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

 
| ** ** | ** ** | **Operating  Leases** | ** ** | **Purchase  Commitments** | ** ** |
|------------|------------|-----------------------|------------|---------------------------|------------|
| 2005       |       | $                     | 406        |                      | $          | 454 |   |
| 2006       |       | 1,433                 |       | 1,076                     |       |
| 2007       |       | 817                   |       | 174                       |       |
| 2008       |       | 181                   |       | —                    |       |
| Thereafter |       | —                |       | —                    |       |
|       |       | $                     | 2,837      |                      | $          | 1,704 |   |

 

Operating lease commitments related tothe August 2004 restructuring have also been included in the restructuringaccrual.

 

*Indemnifications.  *From time totime we enter into types of contracts that contingently require us to indemnifyparties against third party claims. These contracts primarily relate to:(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 July 31, 2005.

 

*Summaryof Liquidity.  *We believe that our available cash, cashequivalents and short-term investments of $18.5 million at July 31, 2005 andcash expected to be generated by operations during the next twelve months willfund planned operations for at least the same period.

 

We plan to invest inexpanding our managed remote access services on a global basis by continuing tobuild 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.

 

25

----

 

**Recent AccountingPronouncements**

** **

In December 2004,the FASB issued a revision of SFAS No. 123 (“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.

 

**Factors ThatMay 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.

 

**The markets that weserve are highly competitive and there is no assurance that we will be able toachieve 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, even though each of thesecompanies is also a reseller of our services. Many of our competitors have longeroperating histories, greater name recognition or larger customer bases, whichthey 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.

 

**If we are unable toincrease revenues associated with broadband services, our ability to grow ourbusiness 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 at an accelerating rate over time as broadband access technologies,such as cable modem, DSL and Wi-Fi, become more widely adopted and used. Ourexperience during the first nine months of 2005 suggests that the decline indial-up revenues from service providers will likely continue and possibly at amore rapid and unpredictable pace. Increasingly, we believe that the futuregrowth of our business will depend in large part upon our ability to expand thebroadband elements of our virtual network and generate managed broadbandrevenues at a substantially higher level and growth rate. We may not succeed inthis expansion and we may not generate substantial new revenues, which couldharm our results and cause our stock price to decline.

 

**If we fail in ourstrategy of focusing our sales efforts on larger companies, our revenue andprofitability 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 largeenterprises 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

 

26

----

 

execute this strategy,or if we have underestimated the costs of this strategy, we will likely missour revenue and profitability goals.

 

**Our business strategyhas shifted over time and remains unproven, so the success of our strategycannot be assured.**

** **

Our business strategyhas changed over time. For example, we ceased to be an Internet serviceprovider in 1997 and abandoned our Internet telephony services business in2001. We have pursued our current business—secure managed broadband networkservices—for a relatively brief period, and in markets that are rapidlychanging. We have only been offering secure managed broadband network servicesto enterprises with branch offices and large teleworker populations sinceDecember 2003, following our acquisition of Axcelerant. There can be noassurance that we will succeed in our efforts to make our current businessprofitable.

 

**We may not be successfulin our efforts to transition to a reduced cost structure, and the actions thatwe take in order to accomplish this transition could have long-term adverseeffects 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, initiated facility closures and consolidations, and transferredadditional technical and back office functions to our lower cost Bangalore,India facility.  As we continue theseefforts and focus more of our resources on the delivery of managed broadbandnetwork services, our dial-up access revenues may decline at a faster than anticipatedrate and we may not succeed in growing our broadband revenues.

 

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 not able to hold down expenses orif we are not able to reduce our non-people-related costs in accordance with ourplans, we may have to further reduce our workforce or transfer additional workto our Bangalore, India facility. There is also a risk that the cost-cuttingactions we have taken and still plan to take will impair our ability toeffectively develop and market products, to remain competitive in theindustries in which we compete and to operate effectively. Each of the abovemeasures could have long-term effects on our business by reducing our pool oftechnical talent, decreasing or slowing improvements in our products, making itmore difficult for us to respond to customers, limiting our ability to deployour solutions to our customers quickly if and when the demand for our solutionsincreases and limiting 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.

 

**Since we have noassurance that customers will continue to use our services or that our customerbase will expand, we will have little ability to predict revenue growth oroperating results.**

** **

Prices for dial-upremote access and Wi-Fi access are declining and our customers are generallyfree to use competing products and services, which could result in significantcustomer losses and revenue declines, at unpredictable times. In prior periods,one of our customers, Fiberlink Communications Corporation, accounted forgreater than ten percent of our revenues. During these periods, a majority ofthe revenue derived from this customer 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 starting in the three-month period ended July 31,2005, causing a negative revenue impact. We have not replaced these lostdial-up revenues with new dial-up revenues and do not expect to do so.  Revenue concentrations in one or a smallgroup of customers can make our business more risky. In addition, largecustomers have significant negotiating power during contract discussions or inthe event of a customer dispute, which may make it more likely that the termsof 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 diversify the composition of our customer base. If we areunable to expand our customer base and increase our average revenues percustomer, our business success will be less likely.

 

27

----

 

**We may not succeed incost-effectively automating, integrating and updating critical back officesystems and processes, which could limit our ability to achieve and maintainprofitability.**

** **

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.

 

**The market price of ourcommon stock has traditionally been highly volatile, and if we do not meet theexpectations of analysts, the market price of our common stock could declinefurther.**

** **

In the past, the priceof our 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.

 

**We have incurredsignificant losses to date and we may continue to incur losses in the future.If we fail to generate sufficient revenue to achieve and sustain positive cashflow or profits, our stock price could 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 $1.7 million and $2.7million for the three and nine months ending July 31, 2005, respectively, and$40.7 million for the ten months ending October 31, 2004. As of July31, 2005, we had an accumulated deficit of $173.9 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.

 

**We may requireadditional capital for our operations, which could have a negative effect onyour 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 July 31, 2005 we used$1.3 million of cash, leaving us with a cash, cash equivalent and short-terminvestment balance of $18.5 million. If we raise additional funds by sellingequity or convertible debt securities, our stockholders may experienceadditional dilution and these new securities may have powers, preferences andrights that are senior to those of the rights of our common stock. We cannotpredict whether additional financing will be available on terms favorable tous, or at all. If adequate funds are not available or are not available onacceptable terms, we may be unable to fund our business operations, promote ourbrand identity, take advantage of acquisition opportunities, develop or enhanceservices or respond to competitive pressures. Any inability to do so could havea negative effect on our business, revenues, financial condition and results ofoperations.

 

28

----

 

**If our common stockprice falls below and remains under $1.00, or if we otherwise fail to complywith Nasdaq rules, our common stock could be delisted from The NASDAQ NationalMarket, which could severely limit the trading market for our common 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 August 31, 2005, the closing price of our common stock was$1.65 per share.

 

**The telecommunicationsindustry continues to experience instability, which may cause consolidation amongnetwork service providers and impair our ability to provide reliable, redundantservice coverage and negotiate favorable network access 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.

 

**If we fail to enhanceour existing products or if new services, products or features we introduce donot succeed in the marketplace, we will not be able to generate new revenuesand we will have increased costs without the expected returns.**

** **

Our target markets arecharacterized by rapid technological advances, changes in end-user requirements,and frequent new product introductions. Our future success will depend on ourability to anticipate or adapt to such changes and to offer, on a timely andcost-effective basis, products that meet changing customer demands. Forexample, our growth prospects will be determined, among other things, by ourability to grow our new branch office services offering in a highly competitivemarket with a large number of incumbents. We may lack sufficient resources toanticipate technological and market trends, manage long development cycles ordevelop, introduce and market new products and enhancements. In addition, wecannot predict whether our products and services will meet with marketacceptance or be profitable.

 

**Our ability to competecould be jeopardized if we are unable to protect our intellectual property.**

** **

Our products andservices rely upon intellectual property rights. For example, we have beenissued United States Patent Number 5,898,780 dated April 27, 1999 for “Methodand Apparatus for Authorizing Remote Internet Access,” and have other U.S.patents pending. 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 are evolvingrapidly, current intellectual property rights may not adequately protect us. Inaddition, despite efforts to protect our proprietary rights, unauthorizedparties may attempt to copy or otherwise obtain and use our products ortechnology. Monitoring unauthorized use of technology is difficult, and wecannot assure you that the steps we have taken will prevent unauthorized use ofthe technology. Moreover, effective patent, trademark, copyright and tradesecret protection may not be available in some countries in which we provide,or may anticipate providing, our products. Furthermore, our competitors mayindependently develop similar technologies that limit the value of ourintellectual property. If competitors are able to use our technology, ourcompetitive edge would be reduced or eliminated.

 

29

----

 

**We may become involvedin litigation regarding intellectual property rights that could be costly,could cause us to lose significant rights, and divert our management time andattention.**

** **

In the future, we, orour customers, 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.

 

**Terrorist acts and actsof war may seriously harm our business and revenue, costs and expenses andfinancial condition.**

** **

Terrorist acts or actsof war, including military actions in Iraq and other parts of the Middle Eastand the 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.

 

**Our customers require ahigh degree of reliability in the delivery of our services, and if we cannotmeet their expectations for any reason, demand for our products and services willsuffer.**

** **

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 have experiencedproblems due to our inability to detect system malfunctions and due to errorsin collecting or processing account usage and settlement data. Due to the highlevel of performance required for critical communications traffic, any failureto deliver a satisfactory experience to end users, whether or not caused by ourown failures, and any failure to provide accurate settlement data in connectionwith acting as a clearinghouse, could reduce demand for our products andservices.

 

**We depend on our resellercustomers to market Internet-based communications services to their end users,so if our reseller customers fail to market their services effectively, ourrevenues 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 

 

30

----

 

communications servicesfails to grow, or expands more slowly than anticipated, our revenues will belower than expected. The Internet-based services we provide are relatively newand have not achieved widespread market acceptance. Network service providersand communication solutions providers may be reluctant to promote or rely uponour services until they gain greater commercial acceptance, which may neveroccur.

 

**The unpredictability ofour quarterly results may cause the trading price of our common stock todecline.**

** **

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.

 

**If we fail to attractand retain qualified sales personnel, our business might be harmed.**

** **

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 July 31, 2005, we had 38sales 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.

 

**The uncertain economicenvironment in general could adversely affect our revenue, gross margins andexpenses.**

** **

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.

 

31

----

 

**Security concerns maydeter the use of the Internet for Internet-based communications, which wouldreduce 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.

 

**Government regulationsand legal uncertainties regarding the Internet could harm our business.**

** **

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 Commissionrules and regulations, as well as judicial interpretations of theserules and regulations, which could negatively affect our business. Inaddition, international regulatory standards will govern our products andservices in foreign markets and could impair our ability to develop productsand services for international service providers in the future. We may not beable to obtain or maintain all of the regulatory approvals that may be requiredto operate our business. The inability to obtain these approvals, as well as anydelays caused by our compliance and our customers’ compliance with regulatoryrequirements or resulting from uncertainty associated with future regulatorydecisions, could result in postponements or cancellations of product orders,which would significantly reduce our revenue.

 

**Recently enacted andproposed 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 the Sarbanes-OxleyAct, which requires management to report on, and our independent auditors toattest to, our internal controls. The Sarbanes-Oxley Act mandates, among otherthings, that companies adopt new corporate governance measures and imposescomprehensive reporting and disclosure requirements, sets stricter independenceand financial expertise standards for audit committee members and imposesincreased civil and criminal penalties for companies, their chief executiveofficers, chief financial officers and directors for securities law violations.In addition, The NASDAQ National Market, on which our common stock is listed,has also adopted comprehensive rules and regulations relating to corporategovernance. These laws, rules and regulations have increased and will continueto increase the scope, complexity and cost of our corporate governance,reporting and disclosure practices, which could harm our results of operationsand divert management’s attention from business operations. We also expectthese developments to make it more difficult and more expensive for us toobtain 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.

 

**If we fail to maintainan effective system of internal controls, we may not be able to report ourfinancial results accurately or detect fraud. As a result, we could be subjectto costly litigation, and current and potential shareholders could loseconfidence in our financial reporting, which could harm our business and thetrading 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

 

32

----

 

evaluation, performingtesting and implementing any required remedial changes will require significantexpenditures in the short term and on a regular basis in the future. We cannotbe certain as to the timing of completion of our evaluation, testing andremediation actions or the impact of the same on our operations. We have in thepast discovered, and may in the future discover, areas of our internal controlsthat need improvement. For example, during our 2003 audit, our independentregistered public accountant brought to our attention a need to improve theclosing process used at our Irvine, California location by formally documentingour policy relating to recognition of revenues derived from agency arrangementsas well as reseller arrangements, ensuring proper recognition of broadbandservice installation revenues, training employees performing key finance andaccounting functions and documenting certain judgmental accounting matters.Although these items were subsequently addressed, the auditor initiallyidentified these items, collectively, as a “reportable condition,” which meansthat they were matters that in the auditor’s judgment could adversely affectour ability to record, process, summarize and report financial data consistentwith the assertions of management in the financial statements. During late2004, we determined that the internal documentation of our revenue recognitionpolicy was not consistent with our actual practice, which we believe has beenand is consistent with accounting principles generally accepted in the UnitedStates (“GAAP”). We subsequently revised this documentation to be consistentwith our practice. During our 2004 audit, our independent registered publicaccountants noted deficiencies which they considered to be significant in theaggregate, 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.   We utilizeseveral manual accounting processes, especially in our Irvine, Californiafacility.  Inherently, manual processesmay be less reliable than automated processes. As a result, we are currently automating these processes.  Until this automation effort is concluded,there is a risk that our controls over these manual processes could beinsufficient to ensure the reliability of the accounting information generatedby these processes, which could adversely affect our ability to generateaccurate financial statements.  Goingforward, the completion of our evaluation of internal controls, implemention ofany changes that are necessary, and maintenance of an effective system ofinternal controls will be expensive and require considerable managementattention. However, if we fail to maintain an effective system of internalcontrols or prevent fraud, we could be subject to costly litigation, we may beunable to comply with Section 404 of Sarbanes-Oxley, we may be delistedfrom trading, investors could lose confidence in our reported financialinformation and our brand and operating results could be harmed, which couldhave a negative effect on the trading price of our common stock.

 

**The current regulatoryenvironment affecting accounting principles generally accepted in the UnitedStates is uncertain and volatile, and significant changes in current principlescould affect our financial statements going forward.**

** **

Recent actions andpublic comments 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. InDecember 2004, the FASB issued SFAS 123 Revised, which is effective as ofthe beginning of the first annual reporting period that begins afterJune 15, 2005. We have not completed our evaluation of the impact ofadoption of SFAS 123 Revised on our consolidated financial position orresults of operations. We expect to complete our evaluation during the fourthquarter of fiscal year 2005.

 

**Provisions in ourcharter documents might deter a company from acquiring us, which could inhibityour 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;

 

33

----

 

•                  prohibitcumulative voting in the election of directors;

 

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

 

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

 

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

 

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

** **

*ForeignCurrency Risk.  *We have limited exposure to financialmarket risks, including changes in foreign currency exchange rates and interestrates. Although we have foreign operations in Europe and Asia, to date, ourexposure to foreign currency fluctuations has not been material. We primarilyinvoice and settle in U.S. dollars amongst our customers and providers. We donot participate in any foreign currency hedging activities.

 

*InterestRate Risk.  *Our exposure to interest rate riskrelates primarily to our investment portfolio. Interest rate risk occurs whenwe cannot hold a purchased investment to its maturity. The weighted-averagematurity of our investment portfolio, when taking into account the resetfeature of floating rate municipal bonds, is limited to 90 days. We intendto have our securities available for sale. We do not expect to recognize anadverse impact on income or cash flows, although there can be no assurance ofthis result. We have established policies and business practices regarding ourinvestment portfolio to preserve principal while obtaining reasonable rates ofreturn without significantly increasing risk. We place investments with highcredit quality issuers according to our investment policy. We do not usederivative financial instruments in our investment portfolio. All investmentsare carried at fair market value at July 31, 2005 and are considered availablefor sale. Due to the short-term nature of our investments, we believe thatthere is no material exposure to interest fluctuation. Therefore, no accompanyingtable has been provided.

 

**ITEM 4.****                             CONTROLSAND 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. 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 this purpose.

 

*Changesin Internal Controls.  *During the period covered by this report,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.

 

*Limitations on Effectiveness of Controls andProcedures.  *Our management, including our ChiefExecutive Officer and Chief Financial Officer, does not expect that ourdisclosure controls and procedures or our internal controls will prevent allerror and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected. These inherent limitations include,but are not limited to, the realities that judgments in decision-making can befaulty and that breakdowns can occur because of simple error or mistake.Additionally, controls can be circumvented by the individual acts, by collusionof two or more people, or by management override of the control. The design ofany system of controls also is based in part upon certain assumptions about thelikelihood of future events and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions;over time, the control may become inadequate because of changes in conditions,or the degree of compliance with the policies or procedures may deteriorate.Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected.

 

34

----

** **

**PART II.  OTHER INFORMATION**

** **

**ITEM 1.**                             LEGALPROCEEDINGS

** **

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

 

In July andAugust 2001, we and certain of our officers were named as defendants infive purported securities class action lawsuits filed in the United StatesDistrict Court, Southern District of New York, captioned as In re GRICCommunications, Inc. Initial Public Offering Securities Litigation,No. 01 Civ 6771 (SAS), and consolidated with more than three hundredsubstantially identical proceedings as In re Initial Public Offering SecuritiesLitigation, 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 our officers and against CIBC World Markets Corp., Prudential SecuritiesIncorporated, DB Alex. Brown, as successor to Deutsche Bank, and U.S. BancorpPiper Jaffray Inc., underwriters of our December 14, 1999 initialpublic offering (“underwriter defendants”), under Sections 11 and 15 of theSecurities Act of 1933, as amended, and under Section 10(b) and 20(a) ofthe 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, andclaims the underwriter defendants entered into improper commission agreementsregarding aftermarket trading in our common stock purportedly issued pursuantto the registration statement for the initial public offering. The ConsolidatedComplaint also alleges market manipulation claims against the underwriterdefendants based on the activities of their respective analysts, who wereallegedly compromised by conflicts of interest. The plaintiffs in theConsolidated Complaint seek damages as measured under Section 11 andSection 10(b) of the Securities Act of 1933, pre-judgment andpost-judgment interest, and reasonable attorneys’ and expert witnesses’ feesand other costs; no specific amount is claimed in the plaintiffs’ prayer in theConsolidated Complaint. By Order of the Court, no responsive pleading is yetdue, although motions to dismiss on global issues affecting all of the issuershave been filed.

 

In October 2002,certain of our officers and directors who had been named as defendants in theIn re Initial Public Offering Securities Litigation were dismissed withoutprejudice upon order of the presiding judge. In February 2003, thepresiding judge dismissed the Section 10(b) claims against us and ournamed officers and directors with prejudice.

 

From September 2002through June 2003, we participated in settlement negotiations with acommittee of issuers’ litigation counsel, plaintiffs’ executive committee andrepresentatives of various insurance companies (the “Insurers”). Our Insurerswere actively involved in the settlement negotiations, and strongly supported asettlement proposal presented to us for consideration in early June 2003.The settlement proposed by the plaintiffs would be paid for by the Insurers andwould dispose of all remaining claims against us.

 

After careful consideration,we decided to approve the settlement proposal in July 2003. Although webelieve that plaintiffs’ claims are without merit, we have decided to acceptthe settlement proposal (which does not admit wrongdoing) to avoid the cost anddistraction of continued litigation. Because the settlement will be fundedentirely by our Insurers, we do not believe that the settlement will have anyeffect on our consolidated financial condition, results or operations or cashflows.

 

The settlement waspresented to the Court for preliminary approval in June 2004.  The Court preliminarily approved most of thesettlement in February 2005, but requested a few minor modifications be made toits terms.  These modifications were madeand the Court preliminarily approved the modified settlement agreement inAugust 2005.  The settlement agreementwill be presented to shareholders in the coming months.  While the Court is expected to finallyapprove or disapprove the settlement following the period of notice andpossible objections by shareholders, there can be no guarantee that thesettlement will be judicially approved.

 

**ITEM 2.****                             UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

** **

Not applicable.

 

**ITEM 3.****                             DEFAULTSUPON SENIOR SECURITIES**

** **

Not applicable.

 

35

----

 

**ITEM 4.****                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

** **

Not applicable.

 

**ITEM 5.****                             OTHERINFORMATION**

** **

On September 7, 2005,Walter Sousa, a member of the Company’s Board of Directors, notified theCompany of his decision to resign from its Board of Directors, its CompensationCommittee and its Nominating and Corporate Governance Committee, effective thesame date.  Mr. Sousa’s resignation wasnot due to a disagreement with the Company on any matter relating to its operations,policies or practices.

 

**ITEM 6.****                             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 September 9, 2005. |       |                           |       |                    |       |   |   |   |   | X |   |
| 31.02       |       | Rule 13a-14(a)/15d-14a certification of  Registrant’s Chief Financial Officer, dated September 9, 2005. |       |                           |       |                    |       |   |   |   |   | X |   |
| 32.01*      |       | Section 1350 certification of Registrant’s  Chief Executive Officer, dated September 9, 2005.                |       |                           |       |                    |       |   |   |   |   | X* |   |
| 32.02*      |       | Section 1350 certification of Registrant’s  Chief Financial Officer, dated September 9, 2005.           |       |                           |       |                    |       |   |   |   |   | X* |   |

 

----

*                 Thesecertifications accompany GoRemote’s Quarterly Report on Form 10-Q for thequarterly period ended July 31, 2005. These certifications are not deemed filedwith the Securities and Exchange Commission and are not to be incorporated byreference in any filing of GoRemote under the Securities Act of 1933 or theSecurities Exchange Act of 1934, whether made before or after the date hereofand irrespective of any general incorporation language in any filings.

 

36

----

 

**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 9, 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) |

 

37

----

 

**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 September 9, 2005. |       |                           |       |                    |       |   |   |   |   | X |   |
| 31.02       |       | Rule 13a-14(a)/15d-14a certification of  Registrant’s Chief Financial Officer, dated September 9, 2005. |       |                           |       |                    |       |   |   |   |   | X |   |
| 32.01*      |       | Section 1350 certification of Registrant’s  Chief Executive Officer, dated September 9, 2005.                |       |                           |       |                    |       |   |   |   |   | X* |   |
| 32.02*      |       | Section 1350 certification of Registrant’s  Chief Financial Officer, dated September 9, 2005.           |       |                           |       |                    |       |   |   |   |   | X* |   |

 

----