** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q/A**

**(Amendment No.1)**

** **

**(Mark One)**

 
| **ý**                                                                                                                                                                             | ** ** | **Quarterly report  pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                             | ** ** | ** **                                                                                               |
| **For the quarterly  period ended July 31, 2005**                                                                                                                                 |
| ** **                                                                                                                                                                             | ** ** | ** **                                                                                               |
| **or**                                                                                                                                                                                 |
| ** **                                                                                                                                                                             | ** ** | ** **                                                                                               |
| **o**                                                                                                                                                                                  | ** ** | **Transition report  pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
| ** **                                                                                                                                                                             | ** ** | ** **                                                                                               |
| **For the transition  period  from            to            ** |
| ** **                                                                                                                                                                             | ** ** | ** **                                                                                               |
| **Commission file  number: 000-27871**                                                                                                                                                 |

 

**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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes  ý    No  o

 

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

 

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

 

Thenumber of shares of the registrant’s common stock outstanding as of August 31,2005 was 42,229,077 shares.

 

 

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**EXPLANATORYNOTE**

 

As previouslyreported in our Current Report on Form 8-K dated September 21, 2005, inSeptember 2005 we determined that our previously issued financial statementsfor the quarters ended April 30, 2005 and July 31, 2005 should not be reliedupon as a result of an error in such financial statements as discussed underAccounting Principles Board Opinion No. 20. This Form 10-Q/A is being filed for the sole purpose of correcting thaterror by amending Item 1, Financial Statements, Item 2, Management's Discussionand Analysis of Financial Condition and Results of Operations, and Item 4,Controls and Procedures.

 

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**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 (as Restated)                              | 3      |
|       | Unaudited Condensed Consolidated Statements  of Operations for the Three and Nine Months Ended July 31, 2005 and  2004 (as Restated) | 4      |
|       | Unaudited Condensed Consolidated Statements  of Cash Flows for the Nine Months Ended July 31, 2005 and 2004 (as Restated)            | 5      |
|       | Notes to Unaudited Condensed Consolidated  Financial Statements                                                                                | 6      |
| Item 2.    | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                                                    | 17     |
|       |                                                                                                                                           |   |
| Item 4.    | Controls and Procedures                                                                                                                        | 35     |
| ** ** | **PART II  OTHER INFORMATION**                                                                                                            |   |
|       |                                                                                                                                           |   |
| Item 6.    | Exhibits                                                                                                                                       | 37     |
| SIGNATURE  | 38                                                                                                                                             |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**ITEM 1.**          FINANCIALSTATEMENTS

 

**GoRemoteInternet Communications, Inc.Condensed ConsolidatedBalance Sheets(in thousands, except per share amounts)**

 
| ** **                                                                                                                                                                                                                                           | ** ** | **July 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                           | ** ** | **(unaudited)**         | ** ** | ** **                 | ** ** |
| ** **                                                                                                                                                                                                                                           | ** ** | **(Restated)**          | ** ** | ** **                 | ** ** |
| **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                                                                                                                                                                                                                          |       | 2,142                   |       | 1,425                      |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                            |       | 971                     |       | 725                        |       |
| Total  current assets                                                                                                                                                                                                                                |       | 27,740                  |       | 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                                                                                                                                                                                                   |       | 664                     |       | 740                        |       |
| Other assets                                                                                                                                                                                                                                         |       | 352                     |       | 442                        |       |
| Total assets                                                                                                                                                                                                                                         |       | $                       | 55,307     |                       | $          | 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                                                                                                                                                                                                                                  |       | (174,445                | )          | (171,122                   | )          |
| Total stockholders’ equity                                                                                                                                                                                                                      |       | 40,042                  |       | 41,962                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                      |       | $                       | 55,307     |                       | $          | 55,897 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements

 

3

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**GoRemoteInternet Communications, Inc.Condensed ConsolidatedStatements of Operations(in thousands, except per share amounts)(unaudited)**

** **

** **
| ** **                                                   | ** ** | **Three Months Ended  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                        | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **(Restated)**                                  | ** ** | ** **                                | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| Revenues                                                     |       | $                                               | 10,952     |                                      | $          | 12,513 |   | $ | 34,958 |   | $ | 37,313 |   |
| Costs and  expenses:                                         |       |                                            |       |                                      |       |   |   |   |   |
| Cost of revenues                                             |       | 5,035                                           |       | 5,131                                     |       | 14,980 |   | 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                                     |       | 12,957                                          |       | 16,533                                    |       | 38,321 |   | 45,956 |   |
| Operating  loss                                              |       | (2,005                                          | )          | (4,020                                    | )          | (3,363 | ) | (8,643 | ) |
| Interest  income and other, net                              |       | 78                                              |       | 29                                        |       | 156 |   | 80 |   |
| Loss before  income taxes                                    |       | (1,927                                          | )          | (3,991                                    | )          | (3,207 | ) | (8,563 | ) |
| Provision  for income taxes                                  |       | 66                                              |       | 27                                        |       | 116 |   | 83 |   |
| Net loss                                                     |       | $                                               | (1,993     | )                                         | $          | (4,018 | ) | $ | (3,323 | ) | $ | (8,646 | ) |
| Basic and  diluted net loss per share                        |       | $                                               | (0.05      | )                                         | $          | (0.10 | ) | $ | (0.08 | ) | $ | (0.22 | ) |
| Shares used to compute basic and diluted  net loss per share |       | 41,740                                          |       | 40,885                                    |       | 41,556 |   | 38,548 |   |

 

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(1)    Amortization of stock-based compensationconsists 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 notes are an integral part of these condensedconsolidated financial statements

 

4

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**GoRemoteInternet Communications, Inc.Condensed ConsolidatedStatements of Cash Flows(in thousands)(unaudited)**

 
| ** **                                                                            | ** ** | **Nine Months Ended  July 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
| ** **                                                                            | ** ** | **(Restated)**                                 | ** ** | ** ** | ** ** |
| ***Cash flows from operating activities:***                                           |       |                                           |       |   |   |
| Net loss                                                                              |       | $                                              | (3,323     | ) | $ | (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                                             |       | (963                                           | )          | (250 | ) |
| Other assets                                                                          |       | 166                                            |       | (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 notes are anintegral part of these condensed consolidated financial statements

 

5

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**GoRemoteInternet Communications, Inc.Notes to CondensedConsolidated Financial Statements(unaudited)**

 

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

 

Thefinancial information at July 31, 2005 and for the three and nine monthsended July 31, 2005 and 2004 is unaudited, but includes all adjustmentsthat GoRemote Internet Communications, Inc. (the “Company”) considersnecessary for a fair presentation of the financial information set forthherein, in accordance with accounting principles generally accepted in the UnitedStates for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, the financialinformation set forth herein does not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for annual financial statements. The results for the three and ninemonths ended July 31, 2005 are not necessarily indicative of the resultsthat may be expected for future periods.

 

Thebalance sheet at October 31, 2004 has been derived from the auditedfinancial statements at that date, but does not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States for complete financial statements.

 

Thefollowing information should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-KT for the ten months ended October 31, 2004.

 

2.  **Restatement of Financial Statements**

 

On September 21, 2005, as part of aninternal audit of its accounting processes in its Irvine, California location,the Company determined that its accounting personnel had erroneously posted aroutine cost of revenues journal entry, an error that was repeated on a monthlybasis during the period from November 2004 through July 2005.  The Company’s broadband service providers donot deliver 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 cost of sales related to broadband services on a monthlybasis, and adjusts them to actual in the subsequent month after receivinginformation from its service providers. The journal entries that were made to reflect these monthly adjustments,instead of being posted to cost of revenues in the Company’s statement ofoperations, were posted to deferred installation costs and deferredinstallation costs less current portion on the Company’s balance sheet, thenamortized over a 24-month period to cost of revenues.  As a result of this error, for thethree-month and nine-month periods ended July 31, 2005 the Company’s costof revenues was understated by approximately $225,000 and $544,000,respectively.   As of July 31, 2005,deferred installation costs were overstated by approximately $318,000 anddeferred installation costs, less current portion were overstated by $226,000.  In addition, for the nine-month period ended July 31,2005, cost of revenues as a percentage of revenues was understated by twopercent, net income was overstated by $544,000, and earnings per share wasoverstated by approximately $0.01 per share.

 
|                                               |   | **As of July 31, 2005** |       |
|----------------------------------------------------|--------|------------------------------|------------|
|                                               |   | **As Previously  Reported**  | ** ** | **Adjustment** | ** ** | **As  Restated** |   |
|                                               |   | **(in thousands)**           |       |
| Balance Sheet                                      |   |                         |       |   |   |   |   |
| Deferred  installation costs                       |   | $                            | 2,460      |   | $ | (318 | ) | $ | 2,142 |   |
| Total  current assets                              |   | $                            | 28,058     |   | $ | (318 | ) | $ | 27,740 |   |
| Deferred  installation costs, less current portion |   | $                            | 890        |   | $ | (226 | ) | $ | 664 |   |
| Total assets                                       |   | $                            | 55,851     |   | $ | (544 | ) | $ | 55,307 |   |
| Accumulated  deficit                               |   | $                            | (173,901   | ) | $ | (544 | ) | $ | (174,445 | ) |
| Total  stockholders’ equity                   |   | $                            | 40,586     |   | $ | (544 | ) | $ | 40,042 |   |
| Total  liabilities and stockholders’equity    |   | $                            | 55,851     |   | $ | (544 | ) | $ | 55,307 |   |

 
|                                  |   | **For the Nine Months Ended July 31, 2005** |       |
|---------------------------------------|--------|--------------------------------------------------|------------|
|                                  |   | **As Previously  Reported**                      | ** ** | **Adjustment** | ** ** | **As Restated** |   |
|                                  |   | **(in thousands,except per share data)**         |       |
| Statement of  Operations              |   |                                             |       |   |   |   |   |
| Cost of  Revenues                     |   | $                                                | 14,436     |   | $ | 544 |   | $ | 14,980 |   |
| Total costs  and expenses             |   | $                                                | 37,777     |   | $ | 544 |   | $ | 38,321 |   |
| Operating  loss                       |   | $                                                | (2,819     | ) | $ | (544 | ) | $ | (3,363 | ) |
| Loss before  income taxes             |   | $                                                | (2,663     | ) | $ | (544 | ) | $ | (3,207 | ) |
| Net loss                              |   | $                                                | (2,779     | ) | $ | (544 | ) | $ | (3,323 | ) |
|                                  |   |                                             |       |   |   |   |   |
| Basic and  diluted net loss per share |   | $                                                | (0.07      | ) | $ | (0.01 | ) | $ | (0.08 | ) |

 

6

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| ** **                            | ** ** | **For the Three Months Ended July 31, 2005** | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **As Previously  Reported**                       | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **                            | ** ** | **(in thousands,except per share data)**          | ** ** |
| Statement of  Operations              |       |                                              |       |   |   |   |   |
| Cost of  Revenues                     |       | $                                                 | 4,810      |   | $ | 225 |   | $ | 5,035 |   |
| Total costs  and expenses             |       | $                                                 | 12,732     |   | $ | 225 |   | $ | 12,957 |   |
| Operating  loss                       |       | $                                                 | (1,780     | ) | $ | (225 | ) | $ | (2,005 | ) |
| Loss before  income taxes             |       | $                                                 | (1,702     | ) | $ | (225 | ) | $ | (1,927 | ) |
| Net loss                              |       | $                                                 | (1,768     | ) | $ | (225 | ) | $ | (1,993 | ) |
|                                  |       |                                              |       |   |   |   |   |
| Basic and  diluted net loss per share |       | $                                                 | (0.04      | ) | $ | (0.01 | ) | $ | (0.05 | ) |

 

**3.****             Summaryof Significant Accounting Policies**

 

*Basis of Presentation.  *Thecondensed consolidated financial statements include all the accounts of theCompany and its wholly owned subsidiaries. All significant intercompanybalances and transactions have been eliminated. The condensed consolidatedfinancial statements have been prepared in conformity with accountingprinciples generally accepted in the United States.

 

*Use of Estimates.  *Thepreparation of the condensed consolidated financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. The Company’s broadbandservice providers do not deliver actual accounting information to the Companyon a timely basis at month-end. Due to this delay, which is outside the Company’scontrol, the Company estimates its revenue and cost of sales related tobroadband services on a monthly basis, and adjusts them to actual in thesubsequent month after receiving information from its service providers.Historically, these adjustments have been immaterial. In addition, the Companymakes estimates as to its accounts receivable allowance and reserves, therecoverability of a prepaid asset, potential liability derived from certain taxobligations and restructuring expenses. Actual results could differ from thoseestimates.

 

*Foreign Currency Remeasurement.  *The Companyconsiders the functional currency of its foreign subsidiaries to be the U.S.dollar. Adjustments resulting from the process of remeasurement into U.S.dollars of the foreign currency financial statements of the Company’s foreignsubsidiaries are included in operations and have not been material.

 

*Cash Equivalents.  *Cashequivalents consist of certificates of deposits, money market funds andcommercial paper with maturities of 90 days or less at the date ofpurchase. Cash and cash equivalents are carried at cost that approximatesmarket value.

 

*Short-term Investments.  *The Company’spolicy is to invest in various short-term instruments with investment gradecredit ratings and ready markets. All of the Company’s investments areclassified as available-for-sale, and the Company views its available-for-saleportfolio as available for use in its current operations. Even though some ofthe Company’s investments have maturities greater than one year they areconsidered short-term because they have interest features that are similar toshort-term investments and therefore they are classified as available-for-salein accordance with Statement of Financial Accounting Standards No. 115, *“Accounting for Certain Investments in Debt andEquity Securities”* (“SFAS No. 115”).

 

7

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Thecost of securities sold is based on the specific identification method. Anyrealized gains or losses and declines in value, judged to beother-than-temporary, are included in interest income and other. The Companyincludes unrealized gains or losses in comprehensive income in stockholders’equity, if material.

 

*Concentration of Credit Risk.  *Financialinstruments that potentially subject the Company to concentrations of creditrisk consist principally of cash equivalents, short-term investments andaccounts receivable. The Company maintains its cash and cash equivalents andshort-term investments principally in domestic financial institutions of highcredit standing. The Company is exposed to credit risks in the event of defaultby these institutions to the extent of the amount recorded on the balancesheet. The credit risk in the Company’s accounts receivable is mitigated by theCompany’s credit evaluation process for both domestic and foreign customers.The Company generally does not require collateral and maintains adequatereserves for potential credit losses. Cash equivalents and short-terminvestments are recorded at fair value. The carrying value of accountsreceivable approximates fair value due to the short-term nature of thisinstrument.

 

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

 

*Property and Equipment.  *Property andequipment are stated at cost, net of accumulated depreciation and amortization.Depreciation and amortization are provided on a straight-line basis over the estimateduseful lives 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 wasdetermined not to be impaired.  Duringfiscal year 2006, the third quarter will end July 31, 2006, and will bethe period during which the Company will conduct its next annual test forimpairment, unless indicators require us to perform the test sooner.

 

*Impairment of Goodwill.  *Circumstancesthat could trigger an impairment test include, but are not limited to, asignificant adverse change in the business climate or legal factors, an adverseaction or assessment by a regulator, unanticipated competition or loss of keypersonnel. In addition, the Company assesses goodwill for recoverability if itsmarket capitalization is less than the recorded value of its net assets. If thecarrying amount of the goodwill exceeds the implied fair value of thatgoodwill, an impairment loss is recorded in net earnings (loss). The Companyhas determined that its service offerings have similar economic characteristicsand as a result the Company treats its single operating segment as its solereporting unit in testing for the impairment of goodwill.

 

*Purchased Intangible Assets.  *Purchasedintangible assets consist of customer relationships, internal use software andother purchased intangibles such as domain names. Intangible assets areamortized on a straight-line basis over the estimated useful lives ranging fromone to five years.

 

*Impairment of 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.

 

*Revenue Recognition 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.

 

8

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TheCompany recognizes revenues when persuasive evidence of an arrangement exists,service has been provided to the customer, the price to the customer is fixedor determinable, and collectibility is probable. Mobile remote Internet accessservices are generally billed on a per-minute basis for usage or at a flat rateper month per user based on negotiated rates. Usage fees are recognized in theperiod the services are rendered to end users, and monthly fees are recognizedratably based 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.

 

TheCompany’s solutions sometimes include installation services, the sale ofcustomer premise equipment and managed security services related to itsbroadband services offerings. Depending on the service provided and the natureof the arrangement, the Company may charge a one-time, annual or monthly feefor these additional services or deliverables. Revenue from installationservices and the sale of equipment is deferred and recognized ratably over theperiod of expected usage by its customers since the Company considers theseservices and products to be an enabler of the related managed remote accessservice contracts. The Company’s estimate of expected usage is 24 monthsfor all periods presented. On a quarterly basis, the Company reviews thisestimate of expected usage based on actual data. Revenues from managed securityservices are recognized in the month the service is provided. To a lesserextent, the Company also derives a portion of its revenues from licenses of itsauthentication software, related maintenance and support services, and otheroptional services related to its remote access solutions, all of which arerecognized ratably over the term of service. These other revenues amounted tofive percent or less of total revenues over the last three years. Feesgenerated from maintenance contracts are recognized over the life of thosecontracts. The majority of the maintenance contracts cover periods of one totwelve months. Amounts billed in advance of revenue recognition are recorded todeferred revenue as collected. The Company recognizes certain broadbandconnectivity revenues generated under agency arrangements on a net basis.Product returns and allowances have not been significant.

 

TheCompany provides services over a heterogeneous virtual network, which wascreated by forming contractual relationships with approximately 500 Internetservice providers, cable companies, DSL companies and telecommunicationscompanies. These companies may provide their services under either a reselleror an agency arrangement. In applying its revenue recognition policy, theCompany must make judgments with regard to the specific facts and circumstancessurrounding each provider relationship to determine which portion of itsrevenues the Company provides under a reseller arrangement, where the Companywould record gross revenues and cost of revenues, and which portion of itsrevenues the Company provides as an agent, where the Company would recordrevenues and cost of revenues combined on a net basis. In excercising itsjudgment, the Company evaluates the contractual arrangements and de factorelationships with each provider together with various other assumptionsbelieved to be applicable and reasonable under the circumstances, to determinewhether revenues are gross versus net.  The Company’s judgements may change as new events occur, as additionalinformation is obtained and as its operating environment changes, any of whichcould cause a material impact on the revenues that the Company has reported.

 

TheCompany records estimated allowances against revenues for returns, disputes andcancellations in the same period the revenues are recorded. These estimates arebased upon historical analysis of the Company’s service level agreements,credit memo data and other known factors for pricing and transaction volumedisputes that arise in the normal course of business. To date, allowancespertaining to the Company’s current business have not been significant. If thehistorical data the Company uses to calculate these estimates does notaccurately reflect amounts associated with future disputes, its actual revenuescould be higher or lower than what the Company has recognized.

 

*Cost of Revenues.  *Cost ofrevenues represents the amounts paid to Internet service providers, cablecompanies, DSL companies and telecommunications companies for the use of theirnetworks, and amounts paid to other third party providers of products orservices that the Company includes in its solutions. The Company has enteredinto minimum purchase commitments with some network service providers foraccess that the Company expects to utilize during the term of the contracts.Costs of minimum purchase contracts are recognized as network access expensesat the greater of the minimum commitment or actual usage. If the Companyestimates that the revenues derived from the purchase commitment will be lessthan the purchase commitment, the Company recognizes a loss on that purchasecommitment to the extent of that difference. No such loss has been recognizedto date.

 

9

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*Allowance for Doubtful Accounts.  *The Companymaintains allowances for doubtful accounts for estimated losses from itscustomers’ inability to make payments they owe. In order to estimate theappropriate level of this allowance, the Company analyzes historical bad debts,customer concentrations, current customer credit-worthiness, current economictrends and changes in its customer payment patterns. If the financial conditionof its customers were to deteriorate and to impair their ability to makepayments to the Company, additional allowances might be required in futureperiods. If the Company determines that collectibility is not probable, revenueis recognized as cash is collected. If the Company’s estimates prove too low,its bad debt expense will increase.

 

*Research and Development.  *The Company’sresearch and development costs, which principally have related to developmentof internal use software that is also marketed to the Company’s customers, areexpensed as incurred until technological feasibility has been established. Todate, the software developed by the Company has generally been available forgeneral release concurrent with the establishment of technological feasibilityand, accordingly, no software development costs have been capitalized.

 

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

 

Proforma information regarding net income and earnings per share is required bySFAS No. 123 and has been determined as if the Company had accounted forawards to employees under the fair-value method of SFAS No. 123. The fairvalue of stock options under the Company’s stock option plan and stock purchaseplan rights under the Company’s stock purchase plan was estimated as of thegrant date using the Black-Scholes option-pricing model.

 

Thefair value of stock options granted during the three and nine months ended July 31,2005 and 2004, respectively, were estimated at the date of grant assuming noexpected dividends and the following weighted average assumptions.

 

*StockOptions*

 
| ** **                       | ** ** | **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 | % |

* *

*StockPurchase*

 
| ** **                       | ** ** | **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 | % |

 

Forpurposes of pro forma disclosure only, the estimated fair value of stock-basedawards is amortized against pro forma net income over the stock-based awards’vesting period for options and over the offering period for stock purchasesunder the Company’s 1999 Employee Stock Purchase Plan.

 

10

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TheCompany’s pro forma information is as follows:

 
| ** **                                                           | ** ** | **Three Months Ended  July 31,**                   | ** ** | **Nine Months Ended  July 31,**                    | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                                          | ** ** | **2004**                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                           | ** ** | **(Restated)**                                                    | ** ** | ** **                                                        | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **(in thousands, except  per share amounts)** | ** ** | **(in thousands, except  per share amounts)** | ** ** |
| Net loss attributable to common  stockholders as reported            |       | $                                                                 | (1,993     | )                                                                 | $          | (4,018 | ) | $ | (3,323 | ) | $ | (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                                                  |       | $                                                                 | (2,923     | )                                                                 | $          | (4,674 | ) | $ | (5,934 | ) | $ | (11,745 | ) |
| Basic and  diluted net loss per share                                |       | $                                                                 | (0.05      | )                                                                 | $          | (0.10 | ) | $ | (0.08 | ) | $ | (0.22 | ) |
| Pro forma  basic and diluted net loss per share                      |       | $                                                                 | (0.07      | )                                                                 | $          | (0.11 | ) | $ | (0.14 | ) | $ | (0.30 | ) |

 

Calculatedunder SFAS No. 123, the weighted-average fair value of the employee stockoptions granted 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 31,2005 and 2004, was $1.53 and $2.90, respectively. The weighted-averageestimated fair value of shares purchased under the Purchase Plan during thethree months ended July 31, 2005 and 2004 was $1.05 and $1.96 per share,respectively, and during the nine months ended July 31, 2005 and 2004, was$1.01 and $2.13, respectively.

 

InDecember 2004, the FASB issued a revision of SFAS No. 123 (“SFAS 123Revised”). The Company will adopt the provisions of SFAS 123 Revised effectiveas of the beginning 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.

 

*Income Taxes.  *The Companyaccounts for income taxes under the provisions of Statement of FinancialAccounting Standards No. 109, *“Accountingfor Income Taxes”* (“SFAS No. 109”), which provides for theestablishment of deferred tax assets and liabilities based on the differencebetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes.

 

*Net Loss Per Share.  *Net loss percommon share and diluted net loss per share are presented in conformity withthe Financial Accounting Standards Board’s Statement of Financial AccountingStandards No. 128, *“Earnings Per Share”*(“SFAS No. 128”) for all years presented. In accordance with SFAS No. 128,basic and diluted net loss per share has been computed using the weighted-averagenumber of shares of common stock outstanding during the period.Weighted-average options outstanding to purchase approximately 8.3 million and8.0 million shares of common stock for the three months ended July 31,2005 and 2004, respectively, and approximately 8.5 and 7.6 million shares ofcommon stock for the nine months ended July 31, 2005 and 2004,respectively, were not included in the computation of diluted net loss pershare because the effect would be antidilutive. The increase in weighted-averageoptions outstanding in the three and nine months ended July 31, 2005,respectively, compared to the same periods in 2004, respectively, was primarilydue to grants of new options to the Company’s employees. Such securities, hadthey been dilutive, would have been included in the computation of diluted netloss per share using the treasury stock method.

 

**4.****             Changein Fiscal Year End**

 

InOctober 2004, the Company changed its fiscal year end from December 31to October 31. The consolidated financial information for 2005 presentedin this 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.

 

11

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**5.****             BusinessCombination**

 

OnDecember 1, 2003, the Company completed its acquisition of Axcelerant, aprivately held provider of broadband Internet remote access services andmanaged security services. The Company’s acquisition of Axcelerant did notresult in a new reportable segment. The results of operations of Axceleranthave been included in the Company’s financial statements subsequent to the dateof the acquisition.

 

*Deferred Stock Compensation.  *Theintrinsic value of unvested stock options assumed in the Axcelerant acquisitionin an amount of approximately $674,000 has been allocated to deferred stockcompensation and is being amortized to expense on a straight-line basis overthe vesting period. The Company assumed options from Axcelerant to purchase atotal of approximately 597,000 shares of the Company’s common stock, of whichapproximately 462,000 were fully vested. Options assumed in connection with theacquisition had exercise prices between $0.02 and $5.05 per share, with aweighted average exercise price of $1.32 per share and a weighted averageremaining vesting period of approximately 2.5 years as of the acquisitiondate. As of July 31, 2005, the Company had an aggregate of $53,000 of deferredcompensation related to the acquisition of Axcelerant remaining to beamortized.

 

**6.****             Propertyand Equipment and Intangible Assets**

 

*Propertyand Equipment*

* *

Propertyand equipment comprised the following (in thousands):

 
| ** **                                      | ** ** | **July 31,  2005** | ** ** | **October 31,  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 |   |

 

*PurchasedIntangible Assets*

* *

Purchasedintangible assets are carried at cost less accumulated amortization.Amortization of purchased intangible assets is computed using the straight-linemethod over their expected useful lives of five years for customerrelationships and website URLs and one year for internal use software.

 

Purchasedintangible assets 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      |   |

 

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Theaggregate estimated remaining amortization expense from August 1, 2005through October 31, 2009, based on fiscal years ending October 31, isas follows (in thousands):

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

 

*OtherIntangible Assets*

 

TheCompany entered into an agreement with a wireless service provider during 2001for the exchange of services, which resulted in a prepayment for futurewireless services and the obligation by the Company to provide future Internetroaming services. As of July 31, 2005, $38,000 of the asset remained to beutilized. The Company believes that this amount will be utilized over theperiod of the agreement.

 

**7.****             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.

 

During2005, the Company expects to continue automating and updating back officeprocesses and procedures that are required for it to efficiently run itsbusiness, however, the Company believes that its capital equipment expendituresin absolute dollars will be relatively flat as compared to 2004. The Companyexpects to continue to provide customer premises equipment to customers for afee, as part of its solution offerings.

 

Thefuture minimum operating 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 |   |

 

Operatinglease commitments related to the August 2004 restructuring have also beenincluded in the restructuring accrual.

 

*Legal Matters.  *The Companyis subject to various legal proceedings and claims arising in the ordinarycourse of business. The Company’s management does not expect that the resultsin any of these legal proceedings will have a material adverse effect on itsfinancial condition, results of operations, or cash flows.

 

InJuly and August 2001, the Company and certain of its officers werenamed as defendants in five purported securities class action lawsuits filed inthe United States District Court, Southern District of New York, captioned asIn re GoRemote Internet Communications, Inc. Initial Public OfferingSecurities Litigation, No. 01 Civ 6771 (SAS), and consolidated with morethan three hundred substantially identical proceedings as In re Initial PublicOffering Securities Litigation, Master File No. 21 MC 92 (SAS). TheConsolidated Amended Class Action Complaint for Violation of the FederalSecurities Laws (“Consolidated Complaint”) was filed on or about April 19,2002, and alleges claims against certain of the Company’s officers and againstCIBC World Markets Corp., Prudential Securities Incorporated, DB Alex. Brown,as successor to Deutsche Bank, and U.S. Bancorp Piper Jaffray Inc.,underwriters of the Company’s December 14, 1999 initial public offering (“underwriterdefendants”), under

 

13

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Sections 11and 15 of the Securities Act of 1933, as amended, and under Section 10(b) and20(a) of the Securities Exchange Act of 1934, as amended.

 

Citingseveral press articles, the Consolidated Complaint alleges that the underwriterdefendants used improper methods in allocating shares in initial publicofferings, and claim the underwriter defendants entered into impropercommission agreements regarding aftermarket trading in the Company’s commonstock purportedly issued pursuant to the registration statement for the initialpublic offering. The Consolidated Complaint also alleges market manipulationclaims against the underwriter defendants based on the activities of theirrespective analysts, who were allegedly compromised by conflicts of interest.The plaintiffs in the Consolidated Complaint seek damages as measured under Section 11and Section 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.

 

InOctober 2002, certain of the Company’s officers and directors who had beennamed as defendants in the In re Initial Public Offering Securities Litigationwere dismissed without prejudice upon order of the presiding judge. In February 2003,the presiding judge dismissed the Section 10(b) claims against theCompany and its named officers and directors with prejudice.

 

FromSeptember 2002 through June 2003, the Company participated insettlement negotiations with a committee of issuers’ litigation counsel,plaintiffs’ executive committee and representatives of various insurancecompanies (the “Insurers”). The Company’s Insurers were actively involved inthe settlement negotiations, and strongly supported a settlement proposalpresented to the Company for consideration in early June 2003. Thesettlement proposed by the plaintiffs would be paid for by the Insurers andwould dispose of all remaining claims against the Company.

 

Aftercareful consideration, the Company decided to approve the settlement proposalin July 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.

 

Thesettlement was presented 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 bemade to its terms.  These modificationswere made and the Court preliminarily approved the modified settlementagreement in August 2005.  Thesettlement agreement will be presented to shareholders in the comingmonths.  While the Court is expected tofinally approve or disapprove the settlement following the period of notice andpossible objections by shareholders, there can be no guarantee that thesettlement will be judicially approved.

 

**8.****             RestructuringEvents**

 

InAugust 2004, the Company undertook a strategic restructuring to reduce itsoperating expense structure by streamlining operations. The activity related tothe restructuring is accounted for under the provisions of Statement ofFinancial Accounting Standards No. 146, *“Accountingfor Costs Associated with Exit or Disposal Activities”* (“SFAS 146”).

 

14

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Theprovision and associated charges against the provision for the August 2004restructuring through 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 |   |

 

**9.****             SegmentInformation**

 

TheCompany operates in one segment, providing managed remote Internet accessservices to corporate enterprises with mobile and remote workforces and to theCompany’s service provider resellers and value-added resellers.

 

Thefollowing is a summary of revenue by geographical area for the periodspresented:

 
| ** **                              | ** ** | **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 |   |

 

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

 

Revenueby external customer is based on the customer’s billing locations. Long-livedassets are those assets used in each geographic location. For the three and ninemonths ended July 31, 2005, no customer accounted for 10 percent or moreof the Company’s total consolidated revenues.

 

15

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**10.****          Stockholders’Equity**

 

*Series A Convertible 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 A Preferred Stock Warrants.  *No Series APreferred Stock warrants were 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.

 

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

 

*The following discussionshould be read in conjunction with the selected consolidated financialinformation and the consolidated financial statements and notes appearingelsewhere in this Form 10-Q. The following discussion containsforward-looking statements, such as statements of expected revenues andexpenses 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.”*

* *

*Unless expressly statedor the context otherwise requires, the terms “we”, “our”, “us”, “the Company”and “GoRemote” refer to GoRemote Internet Communications, Inc. and itssubsidiaries as a whole.*

* *

**Overview**

 

Weprovide managed remote Internet access services to customers through ourvirtual network and provide monthly security and support services and monthlyconnectivity services to broadband Internet remote access customers. Ourservices enable enterprises to securely, reliably, and cost-effectively extendtheir corporate networks and applications to mobile and remote workers outsidethe corporate firewall. These workers include: mobile professionals such assales professionals, project managers and engineers; teleworkers, such as callcenter agents; telecommuters; and employees in branch offices and retailsettings. We provide comprehensive and integrated managed broadband and globalremote access services that include: intelligent client software; multiplenetwork access types, including broadband, Wi-Fi, dial-up, 3G and generalpacket radio service (or GPRS); security capabilities that ensure securitypolicy compliance by remote workers; a real-time remote access managementconsole; end-to-end managed and value-added services including managed securityservices; and design, deployment, monitoring, and technical support. Ourproducts and services enable enterprises to reduce the cost, complexity andrisk of remote office networking, while maximizing the productivity of mobileand remote workers.

 

InDecember 2003, we acquired Axcelerant, Inc., a privately heldprovider of broadband Internet remote access services and managed securityservices. In May 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.

 

Themajority of our revenue comes from providing managed remote Internet access servicesto customers 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 GoRemoteGlobal Network included approximately 28,000 Internet access dial-up locations,over 24,000 public wireless fidelity—or WiFi—hotspots and approximately 1,700public broadband access points in over 150 countries. Through the acquisitionof Axcelerant, we added a virtual broadband cable modem and DSL network thatspans the United States, 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

 

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communicationsservices that may be adopted, deployed and managed on a global scale across theGoRemote Global Network.

 

Wehave incurred substantial losses since our inception as a result of expensesassociated with building the GoRemote Global Network and related networkinfrastructure, developing our software products and marketing our solutions toour customers. We had an accumulated deficit of approximately $173.9 million asof July 31, 2005. We cannot assure you that we will achieve or sustainprofitability. See “Factors That May Affect Future Results—We have ahistory of net losses and may incur future losses.”

 

Ourbusiness model has evolved in the course of our development and we believe thatperiod-to-period comparisons of our operating results should not be relied uponas indicative of future performance. Our future prospects must be considered inlight of the risks, expenses and difficulties frequently encountered bycompanies in the early stages of development, particularly companies in new andrapidly evolving markets. See “Factors That May Affect Future Results—Wehave limited experience in our business, which makes it more difficult for usto execute our business plan and for you to evaluate us.”

 

Wehave changed our fiscal year-end from December 31 to October 31. Theconsolidated financial information for 2005 presented in this Form 10-Qare for the three and nine month periods ended July 31, 2005. The 2004financial results presented in this Form 10-Q are for the three and ninemonth periods ended July 31, 2004.

 

**Critical Accounting Policies and Estimates**

 

Themethods, estimates and judgments we use in applying our most critical accountingpolicies have a significant impact on the results we report in our consolidatedfinancial statements. We evaluate our estimates and judgments on an on-goingbasis. We base our estimates on historical experience and on assumptions thatwe believe to be reasonable under the circumstances when made. Our experienceand assumptions form the basis for our judgments about the carrying value ofassets and liabilities and reported amounts of revenues and expenses that arenot readily apparent from other sources. Actual results may vary from what weanticipate, and different assumptions or estimates about the future couldchange our reported results.

 

*Revenue Recognition 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.

 

Werecognize revenues when persuasive evidence of an arrangement exists, servicehas been provided to the customer, the price to the customer is fixed ordeterminable, and collectibility is probable. Mobile remote Internet accessservices are generally billed on a per-minute basis for usage or at a flat rateper month per user based on negotiated fees. Usage revenues are recognized inthe period the services are rendered to end users, and monthly fees arerecognized ratably based on the number of days that have elapsed. We haveminimum commitment 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.

 

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

 

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twelvemonths. Amounts billed in advance of revenue recognition are recorded todeferred revenue as collected. We recognize certain broadband connectivityrevenues generated under agency arrangements on a net basis. Product returnsand allowances have not been significant.

 

Weprovide services over a heterogeneous virtual network, which was created byforming contractual relationships with approximately 500 access providers,including Internet service providers, cable companies, DSL companies andtelecommunications companies. These companies may provide us their servicesunder either a reseller or an agency arrangement. In applying our revenuerecognition policy we must make judgments with regard to the specific facts andcircumstances surrounding each provider relationship to determine which portionof our revenues we provide under a reseller arrangement, where we would recordgross revenues and cost of revenues, and which portion of our revenues weprovide as an agent, where we would record revenues and cost of revenuescombined on a net basis. In exercising our judgement, we evaluate thecontractual arrangements and de facto relationships with each provider,together with various other assumptions believed to be applicable andreasonable under the circumstances, to determine whether revenues are grossversus net. Our judgments may change as new events occur, as additionalinformation is obtained and as our operating environment changes, any of whichcould cause a material impact on the revenues that we have reported. Ourbroadband service providers do not deliver actual accounting information to uson a timely basis at month-end. Due to this delay, which is outside ourcontrol, we estimate our revenues and cost of sales related to broadbandservices on a monthly basis, and adjust them to actual in the subsequent monthafter receiving information from its service providers. Historically, theseadjustments have been immaterial. In addition, we make estimates as to ouraccounts receivable allowance and reserves, the recoverability of a prepaidasset, potential liability derived from certain tax obligations andrestructuring expenses. Actual results could differ from those estimates. Werecord estimated allowances against revenues for returns and cancellations inthe 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 have recognized.

 

*Cost of Revenues.  *Cost ofrevenues represents the amounts paid to Internet service providers, cablecompanies, DSL companies and telecommunications companies for the use of theirnetworks, and amounts paid to other third party providers of products orservices that we include in our solutions. We have entered into minimumpurchase commitments with some network service providers for access that weexpect to utilize during the term of the contracts. Costs of minimum purchasecontracts are recognized as network access expenses at the greater of theminimum commitment or actual usage. If we estimate that the revenues derivedfrom the purchase commitment will be less than the purchase commitment, werecognize a loss on that purchase commitment to the extent of that difference.No such loss has been recognized to date.

 

*Allowance for Doubtful Accounts.  *We maintainallowances for doubtful accounts for estimated losses from our customers’inability to make payments they owe us. In order to estimate the appropriatelevel of this allowance, we analyze historical bad debts, customerconcentrations, current customer credit-worthiness, current economic trends andchanges in our customer payment patterns. If the financial condition of ourcustomers were to deteriorate and to impair their ability to make payments tous, additional allowances might be required in future periods. If we determinethat collectibility is not probable, revenue is recognized as cash iscollected. If our estimates prove too low, our bad debt expense will increase.

 

*Valuation of 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.

 

*Valuation of Goodwill.  *We testgoodwill for possible impairment on an annual basis in the third fiscal quarterand at any other time if events occur or circumstances indicate that thecarrying amount of goodwill may not be

 

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

 

*Restructuring, Workforce Reductions and Excess FacilitiesAccrual.  *In order to bring our operating expensestructure in line with our current level of revenues, in August 2004 weimplemented a restructuring, workforce reduction and facilities consolidationplan to improve our operating performance. Restructuring and facilitiesconsolidation costs consist of expenses associated with workforce reductions,consolidation of excess facilities and impairment of leasehold improvements andother equipment associated with abandoned facilities. As of July 31, 2005,$456,000 was accrued for future facilities consolidation costs. In connectionwith our restructuring plans, we accrue for severance payments and otherrelated termination benefits provided to employees in connection withinvoluntary staff reductions. We accrue for these benefits in the period whenbenefits are communicated to the terminated employees. Typically, terminatedemployees are not required to provide continued service to receive terminationbenefits. If continued service is required, then the severance liability isaccrued over the required service period. In general, we use a formula based ona combination of the number of years of service and the employee’s positionwithin the Company to calculate the termination benefits to be provided toaffected employees. As of July 31, 2005, all affected employees wereterminated and there was no remaining accrual for future severance andtermination benefits payments.

 

**Business Combination**

 

OnDecember 1, 2003, we completed our acquisition of Axcelerant, a privatelyheld provider of broadband Internet remote access services and managed securityservices. Our acquisition of Axcelerant did not result in a new reportablesegment. The results of operations of Axcelerant have been included in ourfinancial statements subsequent to the date of the acquisition.

 

**Results of OperationsThree and Nine Month Periods Ended July 31, 2005 Compared to Three andNine Month Periods Ended July 31, 2004**

** **

*Overview of the Third Quarter of Fiscal 2005*

 

Duringthe third quarter of 2005, we continued to evolve our business model from onebased principally on a reseller sales model to a model under which we sell asignificant portion of our services directly and through third parties toenterprise customers. During the third quarter of 2005 and 2004, 69 percentand 51 percent, respectively, of our quarterly revenues was derived fromservices sold to enterprise customers both directly and indirectly throughthird parties.

 

Inthe third quarter of 2005, our revenues and expenses each decreased compared tothe third quarter of 2004. Revenues were lower quarter over quarter primarilydue to a reduction in the volume of dial-up based Internet access minutes thatwas partially offset by an increase in managed broadband revenues. Cost ofrevenues was higher as a percentage of revenues principally due to the factthat approximately 51% of our revenues were attributable to broadband services,which generate 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 from new broadband ordersreceived for teleworker solutions to branch office products and services, sincebranch office solution orders typically have longer implementation cycles thanfor teleworkers.  The continuedreplacement of our dialup revenues by broadband revenues may cause our grossmargin to decline further.  We expect thetrend in our cost of revenues to be similar to that of prior quarters andpossibly increase as a percentage of revenues if sales to enterprise customersthrough partners grow and represent a higher percentage of total revenues. Ouroperating expenses were lower in the third quarter of 2005 than in the thirdquarter of 2004 principally due to the cost savings generated from ourstrategic restructuring in August 2004, which included transitioning partsof our operations to our lower cost Indian subsidiary. We expect our quarterlyoperating expenses to remain approximately the same as a percentage of revenuesduring the balance of fiscal year 2005.

 

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Inthe nine month period ended July 31, 2005, our revenues and expensesdecreased compared to the nine month period ended July 31, 2004. Revenueswere lower primarily due to a reduction in the volume of dial-up based Internetaccess minutes that was partially offset by an increase in usage of managedbroadband. Cost of revenues was slightly higher as a percentage of revenuesperiod to period due to the increased percentage mix of broadband revenues. Ouroperating expenses were lower in the nine month period ending July 31,2005 than in the corresponding period of 2004 principally due to the costsavings generated from our strategic restructuring in August 2004, offsetpartially by the inclusion of nine months of costs incurred at our Irvine,California facility.   Only eight monthsof expense from our Irvine location are included in the nine month periodending July 31, 2004 because our acquisition of Axcelerant was noteffective until December 2003.

 

Wecontinue to focus on delivering innovative services for our customers to driverevenues and achieve positive earnings. During the balance of fiscal 2005 andduring fiscal 2006 we plan to release additional new value added services,which we expect over time will augment the revenues we earn from our existing customersand, together with expanding the global footprint of the GoRemote GlobalNetwork, generate revenues from new enterprise customers. Among the factorsthat we expect to impact our ability to achieve and sustain profitability willbe the effectiveness of our sales and marketing efforts through both direct andthird party sales channels, the timely release of new services and theintroduction of new services by existing or new competitors. For a discussionof these and other risk factors, see the section titled “Factors That May AffectFuture Results.”

 

Theresults of operations for the nine months ended July 31, 2005 include ninemonths of revenues and expenses related to the prior Axcelerant operations,while the results of operations for the nine months ended July 31, 2004include eight months of revenues and expenses related to the acquisition ofAxcelerant, which was 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 |   |
|            |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |

 

Totalrevenues decreased approximately $1.6 million in the three months ended July 31,2005, compared to the three months ended July 31, 2004. The net decreaseduring the three months ended July 31, 2005 was principally due to areduction in the volume of dial-up based Internet access minutes, correspondingto a revenue decrease of $3.0 million, that was partially offset by increasedbroadband revenues in the amount of $1.5 million. Our experience leads us tobelieve that the decline in dial-up revenues from service providers will likelycontinue. We believe that the rate and magnitude of future declines in dial-upaccess revenue that may occur over the next twelve months will be less predictable,and possibly greater, than in the prior twelve months. However, no singledial-up access customer currently represents ten percent or more of ourquarterly revenue. Total revenues decreased approximately $2.4 million in thenine months ended July 31, 2005, compared to the nine months ended July 31,2004. The net decrease was principally due to reduced usage of legacy dial-upInternet access service, corresponding to a revenue decrease of $8.2 million,that was partially offset by increased broadband revenues in the amount of $5.8million during the nine months ended July 31, 2005.

 

FiberlinkCommunications Corporation accounted for less than ten percent of ourconsolidated revenues during both the nine months ended July 31, 2005 and2004. Fiberlink is both our customer and in certain markets our competitor,principally with respect to our dial-up access offering. During the secondquarter of 2005, Fiberlink obtained direct access in a number of territoriesthat had represented a majority of its dial-up traffic on our network. Trafficfrom these territories represented approximately $894,000, $475,000 and $1,000of our revenues in the first, second and third fiscal quarters of 2005. Weexpect to receive no traffic from Fiberlink from these territories in thefuture.

 

Weexpect to increase our quarterly revenues derived from sales of our broadbandteleworker and branch office solutions. We also expect a continuing decline in our revenues derived from salesof dial-up Internet access services.  During the next quarter, we are uncertain whether the amount ofdeclining dialup revenue will offset the expected increase in revenues derivedfrom sales of our broadband solutions. Longer term, we currently believe that broadband revenues will grow inan amount that will exceed the amount by which dialup revenues are expected todecline.

 

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*Costsand Expenses*

 
| ** **                                | ** ** | **For the Three Months Ended  July 31,** | ** ** | **For the Nine Months Ended  July 31,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                                          | ** ** | **2004**                                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(Restated)**                                                    | ** ** | ** **                                                       | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **(in millions)**                                            | ** ** | **(in millions)**                                           | ** ** |
| Cost of  revenues                         |       | $                                                                 | 5.0        |                                                             | $          | 5.1 |   | $ | 15.0 |   | $ | 15.2 |   |
| Percentage of revenues                    |       | 46.0                                                              | %          | 41.0                                                             | %          | 42.9 | % | 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 | % | — | % |

 

*Cost of Revenues.  *Cost ofrevenues consists of amounts we pay to access the Internet in order to provideremote Internet access services for our customers and to offer other mobilebroadband services and includes amortization of the deferred installation costswe incur to provide broadband connectivity to our customers.

 

Costof revenues decreased approximately $96,000 in the three months ended July 31,2005 compared to the three months ended July 31, 2004, representing adecrease of two percent. The decrease was primarily due to decreased volumes ofremote Internet access of approximately $1.5 million, and by an increase inbroadband cost of sales of approximately $1.4 million, related to our increasein broadband revenues. We expect that during fiscal year 2005 the cost ofrevenues will increase in absolute dollars as remote Internet access revenuesand broadband revenues increase, but be similar to the nine months ended July 31,2005 as a percentage of revenues.

 

Costof revenues decreased approximately $170,000 in the nine months ended July 31,2005 compared to the nine months ended July 31, 2004, representing adecrease of one percent. The decrease was primarily due to decreased volumes ofremote Internet access of approximately $3.7 million partially offset by anincrease in broadband cost of sales of approximately $3.5 million due to arelated increase in broadband revenues.

 

*Network and Operations.  *Network andoperations expenses consist of salaries and benefits, depreciation on networkequipment, allocated facility and management information systems expenses,administrative expenses, costs of co-location of network equipment and leasedtelecommunication lines and other related costs.

 

Networkand operations expenses decreased approximately $167,000 in the three months endedJuly 31, 2005 compared to the three months ended July 31, 2004,representing a decrease of seven percent. The decrease was due primarily to adecrease in compensation and benefits-related expenses of approximately$246,000 based on lower temporary help costs and reduced internet andtelecommunications costs of approximately $33,000, partially offset by higherprofessional expenses of approximately $157,000 due to the deployment ofoutsourced post-sales customer support. We expect network and operationsexpenses to remain constant as a percentage of revenues during the remainder offiscal year 2005 as we deploy and support new customers.

 

Networkand operations expenses increased approximately $255,000 in the nine monthsended July 31, 2005 compared to the nine months ended July 31, 2004,representing an increase of four percent. The increase was due primarily to anincrease of approximately $390,000 of professional expenses in our Milpitasfacility as a result of

 

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outsourcingof certain customer support activities and increased facility allocation ofapproximately $74,000 partially offset by a decrease in compensation andbenefits-related expenses of approximately $238,000 based primarily on lowertemporary help costs. We expect network and operations expenses to remainconstant as a percentage of revenues during fiscal year 2005 as we deploy andsupport new customers.

 

*Research and Development.  *Research anddevelopment expenses consist of salaries and benefits, allocated facility andmanagement information systems, depreciation costs, outside consultants,facilities costs, administration and other related costs.

 

Researchand development expenses decreased approximately $516,000 in the three monthsended July 31, 2005 compared to the three months ended July 31, 2004,representing a decrease of 45 percent. The decrease was due primarily to areduction of approximately $471,000 of compensation and benefits related toreduced California based personnel resulting from the August 2004strategic restructuring and the relocation of our development activities to ournetwork operations and development center in India. Additionally, there was areduction in the facility allocation expense of approximately $99,000 due to alower share allocation and lower overall facility costs.

 

Researchand development expenses decreased approximately $1.5 million in the ninemonths ended July 31, 2005 compared to the nine months ended July 31,2004, representing a decrease of 46 percent. The decrease was due primarily toa reduction of approximately $1.2 million of compensation and benefits relatedto reduced California based personnel resulting from the August 2004strategic restructuring and the relocation of our development activities to ournetwork operations and development center in India. Additionally, there was areduction in the facility allocation expense of approximately $331,000 due to alower share allocation and lower overall facility costs. We expect research anddevelopment expenses to remain constant as a percentage of revenues duringfiscal year 2005.

 

*Sales and Marketing.  *Sales andmarketing expenses consist of salaries and benefits, allocated facility andmanagement information systems costs, travel and entertainment costs, costs formarketing and promotional programs, outside consultants, commissions earned bysales and marketing personnel, and costs associated with domestic andinternational sales offices and other related costs.

 

Salesand marketing expenses decreased $2.9 million in the three-month period ended July 31,2005 compared with the three-month period ended July 31, 2004,representing a decrease of 49 percent. The decrease is due primarily to adecrease in compensation and benefits and travel and entertainment ofapproximately $1.3 million and $100,000, respectively, as a result of ourstrategic workforce reduction in August 2004. In addition, advertising andpromotional programs decreased by $1.0 million as we scaled back our marketingprograms and our facility allocation expense decreased by $265,000 as a resultof lower facility costs and reduced personnel. We expect sales and marketingexpenses to be constant as a percentage of revenues as we continue to developour sales force and redefine our advertising and marketing strategy during2005.

 

Salesand marketing expenses decreased $6.2 million in the nine-month period ended July 31,2005 compared with the nine-month period ended July 31, 2004, representinga decrease 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 programs decreasedby $1.9 million as we realigned our marketing program focus and our facilityallocation expense decreased by $596,000 as a result of lower facility costsand reduced personnel. We expect sales and marketing expenses to be constant asa percentage of revenues as we continue to develop our sales force and redefineour advertising and marketing strategy during 2005.

 

*General and Administrative.  *General andadministrative expenses consist of general corporate and facility costs as wellas salary, benefits and related costs for executive, finance, legal,administrative, human resources, investor relations and management informationsystems functions and provisions for uncollectible receivables.

 

Generaland administrative expenses increased approximately $279,000 in the threemonths ended July 31, 2005 compared to the three months ended July 31,2004, representing an increase of 17 percent. The increase was due primarily toa net increase 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

 

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$349,000in the nine months ended July 31, 2005 compared to the nine months ended July 31,2004, representing an increase of eight percent. The increase was due primarilyto a net increase in facility allocation expenses of $609,000, as a result ofthe reallocation 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 in2005 and an increase in travel and entertainment expense of approximately$78,000 partially offset by a reduction in compensation and benefits ofapproximately $243,000, a reduction of depreciation of approximately $173,000as our fixed assets become fully depreciated and a $65,000 reduction ofprofessional fees primarily related to fees charged by our previous independentauditors and consultants 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.

 

*Amortization of Purchased Intangibles.  *Amortizationof purchased intangibles includes three months of amortization of theintangible assets acquired in connection with the acquisition of Axcelerant.The initial value assigned to Axcelerant customer relationships was $7.5million, which was amortized on a straight-line basis over a five-year life ata rate of $125,000 per month. At September 30, 2004 an impairment chargeof $2.4 million was recognized and the carrying value of the customerrelationships was adjusted to $3.9 million, which will be amortized over theremaining 50 months of the original five-year life on a straight-line basis ata rate of $78,000 per month. The value assigned to internal use software was$100,000, which is amortized on a straight-line basis over a one-year life at arate of $8,000 per month. The internal use software was fully amortized in November 2004.

 

*Amortization of 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.

 

Asof July 31, 2005, we had an aggregate of $53,000 of deferred compensationrelated to the acquisition of Axcelerant remaining to be amortized. Deferredcompensation is amortized on a straight-line basis over the vesting period ofthe options. We expect amortization of stock-based compensation related tothese options assumed by us to end in 2007.

 

*InterestIncome (Expense) and Other and Taxes*

* *

Interestincome and other, net, interest expense and taxes for the three and nine monthsended July 31, 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 |   |

 

*InterestIncome and Other, Net*

* *

Interestincome and other, net, primarily represents interest income on cash balancesand on short-term investments, gain on disposition of assets, sales, use andvalue-added tax, and interest expense.

 

Interestincome and other, net, increased $49,000 in the three months ended July 31,2005 compared to the three months ended July 31, 2004. This increase wasprimarily due to approximately $59,000 of additional interest income based onhigher interest rate yields and approximately $29,000 of lower foreign currencyremeasurement expense that was partially offset by $38,000 of higher sales, useand value-added taxes and $6,000 of interest expense incurred in 2005.

 

Interestincome and other, net, increased $76,000 in the nine months ended July 31,2005 compared to the nine months ended July 31, 2004. This increase wasprimarily due to $145,000 of additional interest income based on

 

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higherinterest rate yields and approximately $38,000 of lower foreign currencyremeasurement expense partially offset by approximately $68,000 of highersales, use and value-added taxes and $21,000 of interest expense incurred in2005.

 

Interestexpense consists of the amortization of the discount of future facility leasepayments related 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.

 

*IncomeTaxes*

* *

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

 

**Liquidity and Capital Resources**

 
| ** **                                           | ** ** | **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 cashequivalents balance of $4.2 million, we had a short-term investment balance ofapproximately $14.2 million.

 

*Operating Activities.  *Net cashprovided by operating activities in the nine months ended July 31, 2005 of$160,000 was primarily a result of an increase in deferred revenue ofapproximately $1.7 million primarily related to deferred installation revenuesand a reduction in accounts receivable balances of approximately $1.1 million,partially offset by our net operating losses of $2.8 million, increases inprepaid expenses and other current assets of $1.3 million primarily related toan increase in deferred installation costs and decreased accounts payablebalances of approximately $372,000 principally from reductions in restructuringaccruals.

 

*Investing Activities.  *Net cashprovided by investing activities during the nine months ended July 31,2005 of approximately $373,000 was primarily the result of the liquidation ofcertain short-term instruments partially offset by capital expenditures ofapproximately $1.0 million.

 

*Financing Activities.  *Net cashprovided by financing activities during the nine months ended July 31,2005 of approximately $1.3 million was primarily the result of sales of commonstock to our employees and option holders.

 

*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.

 

During2005, we expect to continue automating and updating back office processes andprocedures that are required for us to efficiently run our business, however,we believe that our capital equipment expenditures in absolute dollars will berelatively flat as compared to 2004. We expect to continue to provide customerpremises equipment to customers for a fee, as part of our solution offerings.

 

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Thefuture minimum operating 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 |   |

 

Operatinglease commitments related to the August 2004 restructuring have also beenincluded in the restructuring accrual.

 

*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) divestitureagreements, under which we may provide customary indemnifications to purchasersof our assets; (ii) real estate leases, under which we may be required toindemnify property owners for environmental and other liabilities, and otherclaims arising from our use of the applicable premises; (iii) agreementswith our officers, directors and employees, under which we may be required toindemnify such persons for liabilities arising out of their employmentrelationship; and (iv) agreements with customers and resellers, underwhich we may provide customary indemnifications against claims that ourproducts and services infringe certain copyrights, patents or trademarks, orincorporate misappropriated trade secrets.

 

Theterms of such obligations vary. Generally, a maximum obligation is notexplicitly stated, except for indemnifications involving infringement of thirdparty intellectual property rights. Because the obligated amounts of thesetypes of agreements often are not explicitly stated, the overall maximum amountof the obligations cannot be reasonably estimated. Historically, we have notbeen obligated to make any payments for these obligations, and no liabilitieshave been recorded for these obligations on our balance sheet at July 31,2005.

 

*Summary of Liquidity.  *We believethat our available cash, cash equivalents and short-term investments of $18.5million at July 31, 2005 and cash expected to be generated by operationsduring the next twelve months will fund planned operations for at least thesame period.

 

Weplan to invest in expanding our managed remote access services on a globalbasis by continuing to build strategic partnering relationships. This willrequire us to maintain market acceptance by growing our mobile officecommunications services offerings, continuing our research and developmentactivities and funding planned operating expenses. There can be no assurancethat our managed remote access services will maintain market acceptance, growthand operating margins.

 

Ifwe are unable to attain our revenue and margin goals, significant reductions inspending and the delay or cancellation of planned activities or additionalrestructuring may be necessary to enable us to meet our cash requirementsthrough the next twelve months. These actions could have a material adverseeffect on our business, results of operations and prospects. Furthermore, wemay need to raise additional funds in future periods through public or privatefinancing, or other arrangements, to fund operations and potentialacquisitions, if any. If additional financing is needed, it might not beavailable on reasonable terms or at all. Failure to raise capital when neededcould seriously harm our business and results of operations. If additionalfunds were raised through the issuance of equity securities, the percentage ofownership of our stockholders would be reduced. Furthermore, these equitysecurities might have rights, preferences or privileges senior to our commonstock.

 

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**Recent Accounting Pronouncements**

 

InDecember 2004, the FASB issued a revision of SFAS No. 123 (“SFAS 123Revised”), *Accounting for Stock-BasedCompensation*. SFAS 123 Revised establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods or services. It also addresses transactions in which an entity incursliabilities in exchange for goods or services that are based on the fair valueof the entity’s equity instruments or that may be settled by the issuance ofthose equity instruments. SFAS 123 Revised is effective as of thebeginning of our next fiscal year, which will commence on November 1,2005. We have not completed our evaluation of the impact of adoption ofSFAS 123 Revised on our consolidated financial position or results ofoperations. We expect to complete our evaluation during the fourth quarter offiscal year 2005.

 

**Factors That May Affect Future Results**

 

Inaddition to the information elsewhere in this Quarterly Report on Form 10-Q,the following should be considered in evaluating GoRemote and our business.

 

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

 

Weare aware of many companies in related markets that address particular aspectsof the features and functions that our products provide. Currently, in themanaged broadband services market, our primary competitors include New Edge,Megapath and Netifice.  In the market formanaged dial-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.

 

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

 

Untilour acquisition of Axcelerant in December 2003, we generated our remoteInternet access services revenues almost exclusively from the sale of servicesbased on dial-up access—a narrowband technology. In some countries, includingthe United States, the use of narrowband as a primary means of remote access isexpected to decline at an accelerating rate over time as broadband accesstechnologies, such as cable modem, DSL and Wi-Fi, become more widely adoptedand used. Our experience during the first nine months of 2005 suggests that thedecline in dial-up revenues from service providers will likely continue andpossibly at a more rapid and unpredictable pace. Increasingly, we believe thatthe future growth of our business will depend in large part upon our ability toexpand the broadband elements of our virtual network and generate managedbroadband revenues at a substantially higher level and growth rate. We may notsucceed in this expansion and we may not generate substantial new revenues,which could harm our results and cause our stock price to decline.

 

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

 

Historically,a significant 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

 

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executethis strategy, or if we have underestimated the costs of this strategy, we willlikely miss our revenue and profitability goals.

 

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

 

Ourbusiness strategy has changed over time. For example, we ceased to be anInternet service provider in 1997 and abandoned our Internet telephony servicesbusiness in 2001. We have pursued our current business—secure managed broadbandnetwork services—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 since December 2003,following our acquisition of Axcelerant. There can be no assurance that we willsucceed in our efforts to make our current business profitable.

 

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

 

Wehave taken, and continue to take, various actions to transition our company toa reduced cost structure. In response to declining revenues in our legacy dialaccess and service provider business, we have scaled back our operations,reduced our expenses, initiated facility closures and consolidations, andtransferred additional technical and back office functions to our lower costBangalore, India facility.  As wecontinue these efforts and focus more of our resources on the delivery ofmanaged broadband network services, our dial-up access revenues may decline ata faster than anticipated rate and we may not succeed in growing our broadbandrevenues.

 

Thereare several risks inherent in our efforts to transition to a reduced coststructure. These include the risk that we will not be able to hold expendituresat a level necessary to achieve profitability, and that we may have toundertake further cost-reduction initiatives that would entail additionalcharges.  If we are not able to hold downexpenses or if we are not able to reduce our non-people-related costs inaccordance with our plans, we may have to further reduce our workforce ortransfer additional work to our Bangalore, India facility. There is also a riskthat the cost-cutting actions we have taken and still plan to take will impairour ability to effectively develop and market products, to remain competitivein the industries in which we compete and to operate effectively. Each of theabove measures could have long-term effects on our business by reducing ourpool of technical talent, decreasing or slowing improvements in our products,making it more difficult for us to respond to customers, limiting our abilityto deploy our solutions to our customers quickly if and when the demand for oursolutions increases and limiting our ability to hire and retain key personnel.These circumstances could cause our income to be lower than it otherwise mightbe, which would adversely affect our stock price.

 

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

 

Pricesfor dial-up remote access and Wi-Fi access are declining and our customers aregenerally free to use competing products and services, which could result insignificant customer losses and revenue declines, at unpredictable times. Inprior periods, one of our customers, Fiberlink Communications Corporation,accounted for greater than ten percent of our revenues. During these periods, amajority of the revenue derived from this customer resulted from access to ournetwork in a small number of countries. As a result of obtaining direct dial-upaccess through third parties in some of these countries, however, Fiberlinkceased being 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.

 

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

 

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

 

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

 

Inthe past, the price of our common stock has experienced large swings up anddown. This volatility might occur again in the future. Volatility can ariseparticularly in response to quarter-to-quarter variations in the actual oranticipated financial results of our Company or our customers or competitors,and announcements that our competitors or we make regarding new product andservice introductions. The market price of our common stock can also fluctuatein response to price and volume fluctuations in the stock market, particularlythose that affect the market prices of technology stocks.

 

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

** **

Wehave incurred significant losses to date and we expect to continue to incurlosses for some period of time. We incurred net losses of approximately $2.0million and $3.3 million 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 July 31, 2005, we had an accumulated deficit of$174.4 million.

 

Priorto fiscal year 2005, we have experienced negative cash flows in each year sinceour inception in 1994, and we may continue to do so in the future. In addition,we may also incur significant new costs related to possible acquisitions, thedevelopment of new products and services, the integration of new technologiesor the update of old technologies. Moreover, we might not be able to achieveoperating profitability on a quarterly or annual basis. To achieve profits, wewill need to maintain our relationships with existing customers, generateadditional revenue growth from our existing customers and obtain new customers,while continuing to control our expenses. We expect to continue to invest innetwork and operations, research and development, and sales and marketing, andwe expect to face pressure to adopt new pricing arrangements, including volumediscounts, that may lower our margins. As a result, our ability to achieve andsustain profitability will depend on our ability to sustain and achievesubstantially higher revenue while maintaining reasonable cost and expenselevels. If we fail to achieve profitability, our stock price could decline.

 

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

** **

Ifour cash proves to be insufficient to fund our operations, we may need to raiseadditional funds at some 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 andshort-term investment balance of $18.5 million. If we raise additionalfunds by selling equity or convertible debt securities, our stockholders mayexperience additional dilution and these new securities may have powers,preferences and rights that are senior to those of the rights of our commonstock. We cannot predict whether additional financing will be available onterms favorable to us, or at all. If adequate funds are not available or arenot available on acceptable terms, we may be unable to fund our businessoperations, promote our brand identity, take advantage of acquisition opportunities,develop or enhance services or respond to competitive pressures. Any inabilityto do so could have a negative effect on our business, revenues, financialcondition and results of operations.

 

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**Ifour common stock price falls below and remains under $1.00, or if we otherwisefail to comply with Nasdaq rules, our common stock could be delisted from TheNASDAQ National Market, which could severely limit the trading market for ourcommon stock.**

** **

Ifwe fail to meet the criteria for continued listing on The NASDAQ NationalMarket, our common stock may be delisted, which could make it more difficultfor you to sell your shares. For example, if the market price for our commonstock falls and remains below $1.00 per share for thirty trading days, we wouldbe subject to delisting. On August 31, 2005, the closing price of ourcommon stock was $1.65 per share.

 

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

** **

Thetelecommunications industry continues to experience dramatic technologicalchange and increased competition that have led to significant declines innetwork access pricing. In addition, the revenues of network service providershave declined as a result of the general economic slowdown. Network serviceproviders have experienced related operating difficulties in the last severalyears, leading to poor operating results and declarations of bankruptcy by anumber of these providers. These conditions have already led to attempts atconsolidation, and more service providers may consolidate or otherwise cease operationsin the future, which would reduce the number of network service providers fromwhich we are able to obtain network access. To the extent this were to occur,while we would still be able to maintain operations and provide enterpriseconnectivity services with a small number of network service providers, wewould potentially not be able to provide sufficient alternative access pointsin some geographic areas, which could diminish our ability to provide broad,reliable, redundant coverage. Further, our ability to negotiate favorableaccess rates from network service providers could be impaired, which couldincrease our network access expenses and impact our operating results.

 

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

** **

Ourtarget markets are characterized by rapid technological advances, changes inend-user requirements, and frequent new product introductions. Our futuresuccess will depend on our ability to anticipate or adapt to such changes andto offer, on a timely and cost-effective basis, products that meet changingcustomer demands. For example, our growth prospects will be determined, amongother things, by our ability to grow our new branch office services offering ina highly competitive market with a large number of incumbents. We may lacksufficient resources to anticipate technological and market trends, manage longdevelopment cycles or develop, introduce and market new products andenhancements. In addition, we cannot predict whether our products and serviceswill meet with market acceptance or be profitable.

 

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

** **

Ourproducts and services rely upon intellectual property rights. For example, wehave been issued United States Patent Number 5,898,780 dated April 27,1999 for “Method and Apparatus for Authorizing Remote Internet Access,” andhave other U.S. patents pending. We cannot assure you that patents will issuefrom the pending applications or, if any patents are issued, that they will besufficiently broad to protect our technology adequately. In addition, we have anumber of trademarks and trademark applications and we use copyright and tradesecret protection 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.

 

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

** **

Inthe future, we, or our customers, may become a party to litigation to protectour intellectual property or to respond to allegations that we infringe others’intellectual property. We may receive communications from third parties inquiringabout their interest in licensing certain of the third party’s intellectualproperty or more generally identifying intellectual property that could be thebasis of a future infringement claim. If a party accuses us of infringing uponits proprietary 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.

 

Ifwe are forced to take any of these actions, it may have a material adverseeffect on our business, financial condition and results of operations.

 

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

 

Terroristacts or acts of war, including military actions in Iraq and other parts of theMiddle East and the geo-political uncertainties in other continents are havingan adverse effect on the U.S. economy and could possibly induce or acceleratethe advent of a more severe economic recession. The U.S. government’spolitical, social and economic policies and policy changes as a result of thesecircumstances could have consequences that we cannot predict, including causingfurther weaknesses in the economy. In addition, as a multi-national companywith headquarters and significant operations located in the United States, wemay be impacted by actions against the United States. We will be predominantlyuninsured for losses and interruptions caused by terrorist acts and acts ofwar. Thus, the long-term impact of these events on our business is uncertain.As a result, our operating results and financial condition could be materiallyand adversely affected.

 

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

** **

Oursuccess depends on our ability to assure generally error-free clearinghouseservices, uninterrupted operation of our network and software infrastructure,and a satisfactory experience for our customers’ end users. In the past, wehave experienced problems due to our inability to detect system malfunctionsand due to errors in collecting or processing account usage and settlementdata. Due to the high level of performance required for critical communicationstraffic, any failure to deliver a satisfactory experience to end users, whetheror not caused by our own failures, and any failure to provide accuratesettlement data in connection with acting as a clearinghouse, could reducedemand for our products and services.

 

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

** **

Ourbusiness depends in part on the efforts and success of our Internet serviceprovider and telecommunications service customers in marketing Internet-basedcommunications services to their end users. Although we have recently focusedmore heavily on selling to large enterprise customers, the highest percentageof our revenues is derived from our traditional service provider business. Itis important that we maintain a healthy service provider business while weattempt to grow a more expansive enterprise customer base. Recently, we haveexperienced a faster than projected decline in revenues derived from ourservice provider customers. We have little ability to promote our services, orto promote demand for our reseller customers’ services generally. The use ofthe Internet as a medium for communications services remains unproven. If ourreseller customers fail to market their Internet-based communications serviceseffectively, our revenues will be reduced. Similarly, if the market forInternet-based

 

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

 

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

** **

Ourquarterly revenues and operating results have varied in the past and are likelyto fluctuate unpredictably in the future for many reasons beyond our control.Any of these factors could cause our stock price to decline. The primaryfactors that affect revenues and operating results, in addition to the factorsdiscussed elsewhere in 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.

 

Ouroperating expenses are largely determined based on our expectations aboutrevenues. A high percentage of our expenses are fixed in the short term. As aresult, lower than anticipated revenues for any reason could cause substantialoperating losses.

 

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

 

Oursuccess depends in large part upon our ability to identify, attract and retainqualified sales individuals. Competition for these individuals is oftenintense, and we may not be able to hire the type and number of sales personnelwe need. Once qualified salespersons are hired, they require extensive trainingin our multiple services solution offering. This training typically coversseveral weeks of formal in-class and on-the-job instruction. As of July 31,2005, we had 38 sales personnel. If we are unable to retain our current salesemployees and train new sales personnel as rapidly as necessary, we may not beable to increase market awareness and sales of our services, which may preventus from generating revenue and may negatively impact our ability to maintaincustomer relationships.

 

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

** **

Ourrevenues depend in part on the overall demand for information technologyproducts and services, particularly in the product and service segments inwhich we compete. Softening demand for our products and services caused by theongoing economic downturn has resulted in decreased revenue growth rates, andmay in the future result in decreased revenue, earnings or growth rates andproblems with our ability to realize customer receivables. Global economic andmarket conditions continue to be challenging. As a result, companies aredelaying or reducing expenditures, including those for information technology.In addition, if our customers experience financial difficulties, we couldsuffer losses associated with the outstanding portion of accounts receivable.The global economic downturn contributed to reported declines in our revenuegrowth during fiscal year 2004. Further delays or reductions in informationtechnology spending could have a material adverse effect on demand for ourproducts and services and consequently our results of operations, prospects andstock price.

 

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

** **

Thesecure transmission of confidential information over public networks is asignificant barrier to widespread adoption of electronic commerce andcommunications. The Internet is a public network and information is sent overthis network from many sources. Advances in computer capabilities, newdiscoveries in the field of code breaking or other developments could result incompromised security on our network or the networks of others. Security andauthentication concerns with respect to the transmission over the Internet ofconfidential information, such as corporate access passwords, and the abilityof unauthorized computer users, so-called hackers, to penetrate online securitysystems may reduce the demand for our services. If any well-publicizedcompromises of confidential information were to occur, it could reduce demandfor Internet-based communications and our products and services.

 

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

** **

Wewill be subject to local regulations or laws applicable to access to orcommerce on the Internet, in addition to regulations applicable to businessesgenerally. However, the Federal Communications Commission has initiated severalproceedings that may change the regulatory and legal framework for theprovision of broadband and Internet services and current and future FederalCommunications Commission rules and regulations, as well as judicialinterpretations of these rules and regulations, which could negativelyaffect our business. In addition, international regulatory standards willgovern our products and services in foreign markets and could impair ourability to develop products and services for international service providers inthe future. We may not be able to obtain or maintain all of the regulatoryapprovals that may be required to operate our business. The inability to obtainthese approvals, as well as any delays caused by our compliance and ourcustomers’ compliance with regulatory requirements or resulting fromuncertainty associated with future regulatory decisions, could result inpostponements or cancellations of product orders, which would significantlyreduce our revenue.

 

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

** **

Recentlyenacted and proposed changes in the laws and regulations affecting publiccompanies, including the provisions of the Sarbanes-Oxley Act of 2002, willincrease our expenses as we evaluate the implications of new rules anddevote resources to respond to the new requirements. In particular, we expectto incur additional administrative expense as we implement Section 404 ofthe Sarbanes-Oxley Act, which requires management to report on, and ourindependent auditors to attest to, our internal controls. The Sarbanes-OxleyAct mandates, among other things, that companies adopt new corporate governancemeasures and imposes comprehensive reporting and disclosure requirements, setsstricter independence and financial expertise standards for audit committeemembers and imposes increased civil and criminal penalties for companies, theirchief executive officers, chief financial officers and directors for securitieslaw violations. In addition, The NASDAQ National Market, on which our commonstock is listed, has also adopted comprehensive rules and regulationsrelating to corporate governance. These laws, rules and regulations haveincreased and will continue to increase the scope, complexity and cost of ourcorporate governance, reporting and disclosure practices, which could harm ourresults of operations and divert management’s attention from businessoperations. We also expect these developments to make it more difficult andmore expensive for us to obtain director and officer liability insurance in thefuture, and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage.

 

Further,our board members, Chief Executive Officer and Chief Financial Officer couldface an increased risk of personal liability in connection with the performanceof their duties. As a result, we may have difficultly attracting and retainingqualified board members and executive officers, which would adversely affectour business.

 

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

** **

Effectiveinternal controls are necessary for us to provide reliable financial reportsand to detect and prevent fraud. We are currently performing the system andprocess evaluation required to comply with the management certification andauditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.This evaluation may conclude that enhancements, modifications or changes to ourinternal controls are necessary. Completing this

 

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evaluation,performing testing and implementing any required remedial changes will requiresignificant expenditures in the short term and on a regular basis in thefuture. We cannot be certain as to the timing of completion of our evaluation,testing and remediation actions or the impact of the same on our operations. Wehave in the past discovered, and may in the future discover, areas of ourinternal controls that need improvement. For example, during our 2003 audit,our independent registered public accountant brought to our attention a need toimprove the closing process used at our Irvine, California location by formallydocumenting our policy relating to recognition of revenues derived from agencyarrangements as well as reseller arrangements, ensuring proper recognition ofbroadband service installation revenues, training employees performing keyfinance and accounting functions and documenting certain judgmental accountingmatters. Although these items were subsequently addressed, the auditorinitially identified these items, collectively, as a “reportable condition,”which means that they were matters that in the auditor’s judgment couldadversely affect our ability to record, process, summarize and report financialdata consistent with the assertions of management in the financial statements.During late 2004, we determined that the internal documentation of our revenuerecognition policy was not consistent with our actual practice, which webelieve has been and is consistent with accounting principles generallyaccepted in the United States (“GAAP”). We subsequently revised thisdocumentation to be consistent with our practice. During our 2004 audit, ourindependent registered public accountants noted deficiencies which theyconsidered to be significant in the aggregate, although they noted no mattersinvolving our internal control structure and our operations that they consideredto be a material weakness that had a material impact on the true and fair viewof our consolidated financial statements.  We utilize several manual accounting processes, especially in ourIrvine, California facility.  Inherently,manual processes may be less reliable than automated processes.  As a result, we are currently automatingthese processes.  Until this automationeffort is concluded, there is a risk that our controls over these manualprocesses could be insufficient to ensure the reliability of the accountinginformation generated by these processes, which could adversely affect ourability to generate accurate financial statements.  Going forward, the completion of ourevaluation of internal controls, implemention of any changes that arenecessary, and maintenance of an effective system of internal controls will beexpensive and require considerable management attention. However, if we fail tomaintain an effective system of internal controls or prevent fraud, we could besubject to costly litigation, we may be unable to comply with Section 404of Sarbanes-Oxley, we may be delisted from trading, investors could loseconfidence in our reported financial information and our brand and operatingresults could be harmed, which could have a negative effect on the tradingprice of our common stock.

 

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

** **

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

 

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

** **

Provisionsof our certificate of incorporation, bylaws and Delaware law make it difficultfor a third party to acquire us, despite the possible benefit to ourstockholders, and this may potentially lower the price of our common stock.These provisions of our certificate of incorporation and bylaws:

 

•                  authorizethe board to issue preferred stock without stockholder approval;

 

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•                  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.

 

Inaddition, we have elected to remain subject to the anti-takeover provisions ofDelaware law. These factors may discourage takeover attempts.

 

**ITEM 4.****                             CONTROLSAND PROCEDURES**

 

*Evaluation of Disclosure Controls and Procedures*.   Regulationsunder the Securities Exchange Act of 1934 require public companies to maintain “disclosurecontrols and procedures,” which are defined as a company’s controls and otherprocedures designed to ensure that information required to be disclosed in thereports that it files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the Commission’s rules and forms. At the time of the original filing ofthe Company’s Quarterly Report on Form 10-Q for the period ended July 31,2005, which is amended by this amendment, our Chief Executive Officer and ourChief Financial Officer, based on their evaluation of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport, concluded that our disclosure controls and procedures were effectivefor that purpose.

 

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

 

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

 

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

 

As a result of thisdiscovery and subsequent evaluation, the Company has determined that itsdisclosure controls and procedures were not effective as of July 31, 2005.

 

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

 

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

 

*Changes in Internal Controls.  *During theperiod covered by this report, there were no changes in the Company’s internalcontrol over financial reporting that materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting. However, we have in the past and intend in the future to continue torefine our internal controls on an ongoing basis.

 

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

 

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

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

*Limitations on Effectiveness ofControls and Procedures.  *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; overtime, the control may become inadequate because of changes in conditions, orthe 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.

 

The certifications of the Company’s Chief Executive Officer and ChiefFinancial Officer attached as Exhibits 31.03 and 31.04 to this Amendment No. 1to Quarterly Report on Form 10-Q include, in paragraph 4 of such certifications,information concerning the Company’s disclosure controls and procedures andinternal control over financial reporting.  Such certifications should beread in conjunction with the information contained in this Item 4 for a morecomplete understanding of the matters covered by such certifications.  Thecertifying officers worked to design, or caused to be designed, disclosurecontrols and procedures, for the purpose of ensuring that material informationrelating to the Company, including its consolidated subsidiaries, is made knownto them by other personnel of the Company on a timely basis.  Thesedisclosure controls and procedures were designed and adopted in good faith forthis purpose, but it is recognized that these procedures must be continuallyevaluated and can always merit further improvement.

 

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

 

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**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.  |       | 10-Q                          |       |                   |       | 31.01 |   | 9/9/05 |   |   |   |
| 31.02       |       | Rule 13a-14(a)/15d-14a certification  of Registrant’s Chief Financial Officer, dated September 9, 2005.  |       | 10-Q                          |       |                   |       | 31.02 |   | 9/9/05 |   |   |   |
| 31.03       |       | Rule 13a-14(a)/15d-14a certification  of Registrant’s Chief Executive Officer, dated September 26, 2005. |       |                          |       |                   |       |   |   |   |   | ý |   |
| 31.04       |       | Rule 13a-14(a)/15d-14a certification  of Registrant’s Chief Financial Officer, dated September 26, 2005. |       |                          |       |                   |       |   |   |   |   | ý |   |
| 32.01*      |       | Section 1350 certification of  Registrant’s Chief Executive Officer, dated September 9, 2005.            |       | 10-Q                          |       |                   |       | 32.01 |   | 9/9/05 |   |   |   |
| 32.02*      |       | Section 1350 certification of  Registrant’s Chief Financial Officer, dated September 9, 2005.            |       | 10-Q                          |       |                   |       | 32.02 |   | 9/9/05 |   |   |   |
| 32.03*      |       | Section 1350 certification of  Registrant’s Chief Executive Officer, dated September 26, 2005.           |       |                          |       |                   |       |   |   |   |   | ý* |   |
| 32.04*      |       | Section 1350 certification of  Registrant’s Chief Financial Officer, dated September 26, 2005.           |       |                          |       |                   |       |   |   |   |   | ý* |   |

 

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*                 Thesecertifications accompany GoRemote’s Quarterly Report on Form 10-Q for thequarterly period ended July 31, 2005. These certifications are not deemedfiled with the Securities and Exchange Commission and are not to beincorporated by reference in any filing of GoRemote under the Securities Act of1933 or the Securities Exchange Act of 1934, whether made before or after thedate hereof and irrespective of any general incorporation language in anyfilings.

 

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**SIGNATURE**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on September 26, 2005.

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

 

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**EXHIBIT INDEX**

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

 

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*                 Thesecertifications accompany GoRemote’s Quarterly Report on Form 10-Q for thequarterly period ended July 31, 2005. These certifications are not deemedfiled with the Securities and Exchange Commission and are not to beincorporated by reference in any filing of GoRemote under the Securities Act of1933 or the Securities Exchange Act of 1934, whether made before or after thedate hereof and irrespective of any general incorporation language in anyfilings.

 

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