** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)** |
|----------------|
|           |   |   |
| **ý**     |   | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|           |   |   |
|           |   | **For  the quarterly period ended March 31, 2004** |
|           |   |   |
|           |   | **or** |
|           |   |   |
| **o**          |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|           |   |   |
|           |   | **For  the transition period from                     to                 ** |
|           |   |   |
|           |   | **Commission file number: 000-27871** |

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

 

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 of 1934during 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 inRule 12b-2 of the Exchange Act).

 

Yes  ý    No  o

 

Thenumber of shares of the registrant’s common stock outstanding as of April 30,2004 was 40,855,874 shares.

 

 

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**GRIC COMMUNICATIONS, INC.**

**INDEX**
|      | **PART I  FINANCIAL INFORMATION**                                                                   |   |
|-----------|-----------------------------------------------------------------------------------------------------|--------|
| Item 1.   | Financial Statements:                                                                               |   |
|      | Condensed Consolidated Balance Sheets as of  March 31, 2004 and  December 31, 2003             |   |
|      | Condensed Consolidated Statements of  Operations for the Three Months Ended March 31, 2004 and 2003 |   |
|      | Condensed Consolidated Statements of Cash  Flows for the Three Months Ended March 31, 2004 and 2003 |   |
|      | Notes to Condensed Consolidated Financial  Statements                                               |   |
| Item 2.   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations         |   |
| Item 3.   | Quantitative and Qualitative Disclosures  About Market Risk                                         |   |
| Item 4.   | Controls and Procedures                                                                             |   |
|      |                                                                                                |   |
|      | **PART II  OTHER INFORMATION**                                                                      |   |
|      |                                                                                                |   |
| Item 1.   | Legal Proceedings                                                                                   |   |
| Item 2.   | Changes in Securities and Use of Proceeds                                                           |   |
| Item 3.   | Defaults Upon Senior Securities                                                                     |   |
| Item 4.   | Submission of Matters to a Vote of Security  Holders                                                |   |
| Item 5.   | Other Information                                                                                   |   |
| Item 6.   | Exhibits and Reports on Form 8-K                                                                    |   |
| SIGNATURE |                                                                                                |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

 

**GRIC COMMUNICATIONS, INC.**

**Condensed Consolidated Balance Sheets**

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

 
|                                                                                                                                                                                                                                |   | **Mar 31,  2004** |   | **Dec 31,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|-------------------|--------|
|                                                                                                                                                                                                                                |   | **(unaudited)**   |   |              |   |
| **ASSETS**                                                                                                                                                                                                                          |   |              |   |              |   |
| ***Current assets:***                                                                                                                                                                                                               |   |              |   |              |   |
| Cash and cash equivalents                                                                                                                                                                                                           |   | $                 | 4,442  |              | $      | 5,299 |   |
| Short-term investments                                                                                                                                                                                                              |   | 18,005            |   | 19,913            |   |
| Accounts receivable, net of allowances of  $799 and $949 at March 31, 2004 and December 31, 2003, respectively                                                                                                            |   | 8,168             |   | 7,446             |   |
| Inventory                                                                                                                                                                                                                           |   | 130               |   | 158               |   |
| Prepaid expenses and other current assets                                                                                                                                                                                           |   | 1,683             |   | 1,435             |   |
| Total current assets                                                                                                                                                                                                                |   | 32,428            |   | 34,251            |   |
| Property and equipment, net                                                                                                                                                                                                         |   | 1,970             |   | 2,009             |   |
| Goodwill                                                                                                                                                                                                                            |   | 46,680            |   | 46,680            |   |
| Intangible assets                                                                                                                                                                                                                   |   | 7,067             |   | 7,467             |   |
| Other assets                                                                                                                                                                                                                        |   | 1,037             |   | 721               |   |
| Total assets                                                                                                                                                                                                                        |   | $                 | 89,182 |              | $      | 91,128 |   |
|                                                                                                                                                                                                                                |   |              |   |              |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                       |   |              |   |              |   |
| ***Current liabilities:***                                                                                                                                                                                                          |   |              |   |              |   |
| Accounts payable                                                                                                                                                                                                                    |   | $                 | 6,194  |              | $      | 7,205 |   |
| Accrued compensation and benefits                                                                                                                                                                                                   |   | 1,540             |   | 1,311             |   |
| Current portion of deferred revenue                                                                                                                                                                                                 |   | 1,041             |   | 661               |   |
| Other current liabilities                                                                                                                                                                                                           |   | 714               |   | 691               |   |
| Current portion of long-term debt and  capital lease obligations                                                                                                                                                                    |   | —            |   | 14                |   |
| Total current liabilities                                                                                                                                                                                                           |   | 9,489             |   | 9,882             |   |
| Deferred revenue                                                                                                                                                                                                                    |   | 555               |   | 114               |   |
| Commitments and contingencies                                                                                                                                                                                                       |   |              |   |              |   |
| Stockholders’ equity:                                                                                                                                                                                                          |   |              |   |              |   |
| Series A redeemable convertible preferred  stock, $0.001 par value: 12,801 shares authorized, no shares issued and  outstanding at March 31, 2004 and 3,019 shares issued and outstanding at  December 31, 2003           |   | —            |   | 3,927             |   |
| Preferred stock, 5,000 shares authorized  March 31, 2004 and December 31, 2003: no shares issued and outstanding                                                                                                               |   | —            |   | —            |   |
| Common stock, $0.001 par value; 50,000  shares authorized at March 31, 2004 and December 31, 2003: 40,833  and 37,242 shares issued and outstanding at March 31, 2004 and  December 31, 2003, respectively |   | 41                |   | 37                |   |
| Additional paid-in capital                                                                                                                                                                                                          |   | 212,944           |   | 208,228           |   |
| Deferred stock-based compensation                                                                                                                                                                                                   |   | (554              | )      | (644              | )      |
| Accumulated deficit                                                                                                                                                                                                                 |   | (133,293          | )      | (130,416          | )      |
| Total stockholders’ equity                                                                                                                                                                                                     |   | 79,138            |   | 81,132            |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                     |   | $                 | 89,182 |              | $      | 91,128 |   |

 

See accompanying notes

 

3

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**GRIC COMMUNICATIONS, INC.**

**Condensed Consolidated Statements ofOperations**

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

 
|                                                        |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------------------|--------|------------------------------------|--------|
|                                                        |   | **2004**                           |   | **2003** |   |
| Revenues                                                    |   | $                                  | 12,960 |   | $ | 9,491 |   |
| Costs and expenses:                                         |   |                               |   |   |   |
| Cost of revenues                                            |   | 5,293                              |   | 4,365 |   |
| Network and operations                                      |   | 2,305                              |   | 947 |   |
| Research and development                                    |   | 1,167                              |   | 645 |   |
| Sales and marketing                                         |   | 5,063                              |   | 2,697 |   |
| General and administrative                                  |   | 1,590                              |   | 1,400 |   |
| Amortization of intangible assets                           |   | 400                                |   | — |   |
| Amortization of stock-based compensation (1)                |   | 90                                 |   | 41 |   |
| Total costs and expenses                                    |   | 15,908                             |   | 10,095 |   |
| Operating loss                                              |   | (2,948                             | )      | (604 | ) |
| Interest income and other, net                              |   | 93                                 |   | (9 | ) |
| Loss before income taxes                                    |   | (2,855                             | )      | (613 | ) |
| Provision for income taxes                                  |   | 22                                 |   | 8 |   |
| Net loss                                                    |   | $                                  | (2,877 | ) | $ | (621 | ) |
|                                                        |   |                               |   |   |   |
| Basic and diluted net loss per share                        |   | $                                  | (0.07  | ) | $ | (0.03 | ) |
| Shares used to compute basic and diluted net loss per share |   | 39,476                             |   | 20,729 |   |

 

----

(1) Amortization of stock-basedcompensation consists of:

 
| Network and operations                          |   | $  | 26     |   | $      | 1  |   |
|-------------------------------------------------|--------|----|--------|--------|--------|----|--------|
| Research and development                        |   | 19 |   | 2      |   |
| Sales and marketing                             |   | 37 |   | 1      |   |
| General and administrative                      |   | 8  |   | 37     |   |
| Total amortization of stock-based  compensation |   | $  | 90     |   | $      | 41 |   |

 

See accompanying notes

 

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**GRICCOMMUNICATIONS, INC.****CondensedConsolidated Statements of Cash Flows********(inthousands)(unaudited)**

 
|                                                                             |   | **Three  Months Ended** |   |
|----------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                             |   | **March 31,  2004**     |   | **March 31,  2003** |   |
| ***Cash flows from operating  activities:***                                     |   |                    |   |   |   |
| Net loss                                                                         |   | $                       | (2,877 | ) | $ | (621 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:     |   |                    |   |   |   |
| Depreciation and amortization of property and equipment                          |   | 399                     |   | 330 |   |
| Amortization of stock-based compensation                                         |   | 90                      |   | 41 |   |
| Amortization of intangibles                                                      |   | 400                     |   | — |   |
| Gain on sales of assets                                                          |   | —                  |   | (104 | ) |
| Accounts receivable allowances                                                   |   | —                  |   | (5 | ) |
| Net changes in assets and liabilities:                                           |   |                    |   |   |   |
| Accounts receivable                                                              |   | (722                    | )      | (649 | ) |
| Inventories                                                                      |   | 28                      |   | — |   |
| Prepaid expenses and other current assets                                        |   | (248                    | )      | (568 | ) |
| Other assets                                                                     |   | (316                    | )      | 87 |   |
| Accounts payable                                                                 |   | (1,011                  | )      | 252 |   |
| Accrued compensation and benefits                                                |   | 229                     |   | 12 |   |
| Deferred revenue                                                                 |   | 821                     |   | 273 |   |
| Other current liabilities                                                        |   | 23                      |   | 1 |   |
| Other long-term liabilities                                                      |   | —                  |   | (70 | ) |
| Net cash used in operating activities                                            |   | (3,184                  | )      | (1,021 | ) |
| ***Cash flows from investing  activities:***                                     |   |                    |   |   |   |
| Available-for-sale investments:                                                  |   |                    |   |   |   |
| Purchases                                                                        |   | (8,300                  | )      | (2,700 | ) |
| Maturities                                                                       |   | 10,208                  |   | 301 |   |
| Proceeds from sales of assets                                                    |   | —                  |   | 104 |   |
| Capital expenditures                                                             |   | (360                    | )      | (62 | ) |
| Net cash provided by (used in) investing activities                              |   | 1,548                   |   | (2,357 | ) |
| ***Cash flows from financing  activities:***                                     |   |                    |   |   |   |
| Payments of capital lease obligations                                            |   | (14                     | )      | — |   |
| Proceeds from sales of common stock, net                                         |   | 793                     |   | 286 |   |
| Net cash provided by financing activities                                        |   | 779                     |   | 286 |   |
|                                                                             |   |                    |   |   |   |
| Net decrease in cash and cash equivalents                                        |   | (857                    | )      | (3,092 | ) |
| Cash and cash equivalents at beginning of the period                             |   | 5,299                   |   | 7,314 |   |
| Cash and cash equivalents at end of the period                                   |   | $                       | 4,442  |   | $ | 4,222 |   |
|                                                                             |   |                    |   |   |   |
| ***Supplemental  disclosures of cash flow information:***                        |   |                    |   |   |   |
| Income taxes paid                                                                |   | $                       | — |   | $ | 8 |   |
|                                                                             |   |                    |   |   |   |
| ***Supplemental  disclosures of noncash financing activities:***                 |   |                    |   |   |   |
| Conversion of Series A redeemable convertible preferred stock into  common stock |   | $                       | 3,927  |   | $ | — |   |

 

See accompanying notes

 

5

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**GRIC COMMUNICATIONS, INC.**

**Notes to CondensedConsolidated Financial Statements********(unaudited)**

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

 

Thefinancial information at March 31, 2004 and for the three months ended March31, 2004 and 2003 is unaudited, but includes all adjustments that GRICCommunications, Inc. (the “Company”) considers necessary for a fairpresentation of the financial information set forth herein, in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, the financial information set forth herein does not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for annual financial statements. Theresults for the three months ended March 31, 2004 are not necessarilyindicative of the results that may be expected for future periods.

 

Thebalance sheet at December 31, 2003 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-K for the year ended December 31, 2003.

 

**2.****                  ****Summary of SignificantAccounting Policies**

 

*Basis of Presentation.*  The consolidated financial statementsinclude all the accounts of GRIC and its wholly owned subsidiaries. Allsignificant intercompany balances and transactions have been eliminated. Allconsolidated financial statements have been prepared in conformity with accountingpronouncements generally accepted in the United States.

 

*Use of Estimates.*  The preparation of the consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

*Foreign Currency Remeasurement.*  The Company considers the functionalcurrency of its foreign subsidiaries to be the U.S. dollar. Adjustmentsresulting from the process of remeasurement into U.S. dollars of the foreigncurrency financial statements of the Company’s foreign subsidiaries areincluded in operations and have not been material.

 

*Cash Equivalents.*  Cash equivalents consist of certificates ofdeposits, money market funds and commercial paper with maturities of90 days or less at the date of purchase. Cash and cash equivalents arecarried at cost which approximates market value.

 

*Short-term Investments.*  The Company’s policy is to invest in variousshort-term instruments with investment grade credit ratings. All of theCompany’s Investments are classified as available-for-sale, and the Companyviews its available-for-sale portfolio as available for use in its currentoperations. Accordingly, the Company has classified all investments asshort-term, even though the stated maturity date may be one year or more pastthe current balance sheet date. Investments with maturities greater than oneyear are considered short-term and they are classified as available-for-sale inaccordance with Statement of Financial Accounting Standards No. 115,“Accounting for Certain Investments in Debt and Equity Securities” (“SFASNo. 115”).

 

The cost of securities sold is based on the specific identificationmethod. Any realized 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.*  Financial instruments that potentiallysubject the Company to concentrations of credit risk consist principally ofcash equivalents, short-term investments and accounts receivable. The Companymaintains its cash and cash equivalents and short-term investments principallyin domestic financial institutions of high credit standing. The Company isexposed to credit risks in the event of default by these institutions to theextent of the amount recorded on the balance sheet. The credit risk in theCompany’s accounts receivable is mitigated by the Company’s credit evaluationprocess for both domestic and foreign customers. The Company generally does notrequire collateral and maintains adequate

 

6

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reserves forpotential credit losses. Cash equivalents and short-term investments arerecorded at fair value. The carrying value of accounts receivable approximatesfair value due to the short-term nature of this instrument.

 

*Inventories.*  Inventories consist of finished goods andare stated at the lower of cost or market, cost being determined using thefirst-in, first-out method.

 

*Property and Equipment.*  Property and equipment are stated at cost,net of accumulated depreciation and amortization. Depreciation and amortizationare provided on a straight-line basis over the estimated useful lives of therespective assets, generally over the lease term or two to three years.

 

*Impairment of Long-Lived Assets and IntangibleAssets.*  TheCompany evaluates the carrying amount of its long-lived assets and otherintangible 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 these assets have been impaired, theimpairment charge is recorded based on a comparison of the net book value ofthe assets and the fair value. The fair value of the assets is determined byeither discounted future cash flows resulting from the use of the assets overtheir average remaining useful lives or specific appraisal.

 

*Goodwill.*  Goodwill represents the excess of thepurchase price of an acquired enterprise or assets over the fair value of theidentifiable assets acquired and liabilities assumed. The Company does notamortize goodwill, but tests for impairment of goodwill on an annual basis andat any other time if events occur or circumstances indicate that the carryingamount of goodwill may not be recoverable.

 

Circumstances that could trigger an impairment test include, but arenot limited to, a significant adverse change in the business climate or legalfactors, an adverse action or assessment by a regulator, unanticipatedcompetition or loss of key personnel. If the carrying amount of the goodwillexceeds the implied fair value of that goodwill, an impairment loss is recordedin net earnings (loss). Goodwill was not considered impaired as ofMarch 31, 2004.

 

*Intangible Assets.*  Intangible assets consist of customerrelationships and internal use software. Intangible assets are amortized on astraight-line method basis over the estimated useful lives ranging from 1 to5 years. Intangible assets were not considered impaired as ofMarch 31, 2004.

 

*Revenue Recognition.*  Revenues are recognized when a bindingagreement or purchase order from the customer has been received, the serviceshave been delivered, the fee or price was fixed or determinable, the collectionof the receivable was reasonably assured, and no significant post-deliveryobligations remained. The Company derives revenues primarily from remoteInternet access services to customers through its virtual network and byproviding monthly security and support services and monthly connectivityservices for broadband Internet remote access customers.  Remote Internet access services aregenerally billed on a per-minute basis for usage or at a flat rate per monthper user based on negotiated rates. The Company has some customers with minimumcommitment arrangements, which are recognized as revenue in the month it hasbeen determined that the minimum commitments have not been achieved.  Revenues from monthly connectivityservices  for broadband remote accessare recognized as earned and amounts billed in advance are recorded as deferredrevenue if collected. Revenues from security and support services arerecognized in the month the service is provided.  Revenues from licenses of the Company’s authentication software,related maintenance and support services, and other optional services relatedto its GRIC MobileOffice offering are recognized ratably over the life of thecontract under which they are provided, which typically ranges from 1 to 12months. Revenues from installation services and the sale of equipment relatedto broadband Internet remote access services and managed security services arerecognized ratably over 24 months, the expected term of the user relationship.

 

The Company records estimated allowances against revenues in the sameperiod the revenues are recorded. These estimated allowances are based uponhistorical analysis of our credit memo data and other known factors for pricingand transaction volume disputes that arise in the normal course of business. Todate, allowances pertaining to our current business have not been significant.

 

The Company treats the incremental direct costs of installationservices related to broadband Internet remote access services and managedsecurity services (which consist primarily of customer premise equipment andinstallation and service activation fees paid to broadband providers andtelecommunications companies) as deferred charges in amounts that do not exceedthe upfront fees that are deferred. The deferred incremental direct costs ofinstallation services are amortized to cost of revenues ratably over24 months, the expected term of the user relationship.

 

7

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From time to time, the Company’s customers, including significantcustomers, may seek protection under bankruptcy laws. When this occurs, theCompany determines its risk that an account receivable will prove to be uncollectible,and establishes appropriate reserves for that contingency as necessary. Inaddition, for each continuing customer in bankruptcy, the Company evaluates thecreditworthiness of the customer and determines whether revenue should berecognized on an accrual basis or when cash payments are received. When revenueis recorded on an accrual basis, the Company has based its judgment on thecreditworthiness of the debtor-in-possession, its payment experience, andwhether the collectability of receivables is reasonably assured, in addition toother revenue recognition criteria having been met.

 

*Allowance for Doubtful Accounts.*  The Company maintains allowances fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. In order to estimate the appropriate levelof allowance, the Company analyzes historical bad debts, customerconcentrations, customer credit-worthiness, current economic trends andchanges in its customer payment patterns. If the financial condition of itscustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required.

 

*Research and Development.*  Research and development costs are expensedas incurred until technological feasibility has been established. To date, thesoftware developed by the Company has generally been available for generalrelease concurrent with the establishment of technological feasibility and,accordingly, no software development costs have been capitalized.

 

*Stock-based Compensation.*  The Company accounts for employee stock-basedcompensation in accordance with Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”),using an intrinsic value approach to measure compensation expense, if any.Under APB No. 25, the Company generally recognizes no compensation expense withrespect to such awards. Appropriate disclosures using a fair-value basedmethod, as provided by Statement of Financial Accounting Standards No. 123.  “Accounting for Stock-BasedCompensation” (“SFAS No. 123”), are also reflected herein. Options issuedto non-employees are accounted for in accordance with SFAS 123 using afair value approach.

 

Pro forma information regarding net income and earnings per share isrequired by SFAS No. 123 and has been determined as if the Company hadaccounted for awards to employees under the fair value method of SFASNo. 123. The fair value of stock options under the Equity Plan and stockpurchase plan rights under the Purchase Plan was estimated as of the grant dateusing the Black-Scholes option-pricing model.

 

The fair value of stock options granted during the three months endedMarch 31, 2004 and 2003 were estimated at the date of grant assuming noexpected dividends and the following weighted average assumptions.

 

##### ***Stock Options***

 
|                            |   | **Three  Months Ended March 31,** |   |
|---------------------------------|--------|-----------------------------------|--------|
|                            |   | **2004**                          |   | **2003** |   |
|                            |   |                              |   |   |   |
| Expected life (years)           |   | 3.10                              |   | 1.64 |   |
| Expected stock price volatility |   | 6.73                              |   | 1.14 |   |
| Risk-free interest rate         |   | 1.25                              | %      | 2.91 | % |

 

***Stock Purchase***

 
|                            |   | **Three  Months Ended March 31,** |   |
|---------------------------------|--------|-----------------------------------|--------|
|                            |   | **2004**                          |   | **2003** |   |
|                            |   |                              |   |   |   |
| Expected life (years)           |   | 0.50                              |   | 0.50 |   |
| Expected stock price volatility |   | 5.19                              |   | 1.07 |   |
| Risk-free interest rate         |   | 1.01                              | %      | 2.78 | % |

 

For purposes of pro forma disclosures, the estimated fair value ofstock-based awards is amortized against pro forma net income over thestock-based awards’ vesting period for options and over the offering period forstock purchases under the Company’s 1999 Employee Stock Purchase Plan.

 

The Company’s pro forma information is as follows:

 
|                                                           |   | **Three  Months Ended March 31,**             |   |
|----------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                           |   | **2004**                                      |   | **2003** |   |
|                                                           |   | **(in  thousands, except per share amounts)** |   |
| Net loss attributable to common  stockholders as reported      |   | $                                             | (2,877 | ) | $ | (621 | ) |
| Add: Amortization of stock compensation  measured under APB 25 |   | 90                                            |   | 41 |   |
| Less: Stock-based compensation expense  measured under FAS 123 |   | (1,370                                        | )      | (693 | ) |
| Pro forma net loss                                             |   | $                                             | (4,157 | ) | $ | (1,273 | ) |
|                                                           |   |                                          |   |   |   |
| Basic and diluted net loss per share                           |   | $                                             | (0.07  | ) | $ | (0.03 | ) |
| Pro forma basic and diluted net loss per  share                |   | $                                             | (0.11  | ) | $ | (0.06 | ) |

 

Calculated under SFAS No. 123, the weighted-average fair values ofthe employee stock options granted during the three months ended March 31, 2004and 2003 were $5.30 and $1.12 per share, respectively.  The weighted-average estimated fairvalue of shares purchased under the Purchase Plan during the three months endedMarch 31, 2004 and 2003 were $5.76 and $0.63 per share, respectively.

 

*Income Taxes.*  The Company accounts for income taxes underthe provisions of Statement of Financial Accounting Standards No. 109,“Accounting for 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 per common share and diluted netloss per share are presented in conformity with the Financial AccountingStandards Board’s Statement of Financial Accounting Standards No. 128,“Earnings Per Share” (“SFAS No. 128”) for all years presented.

 

In accordance with SFAS No. 128, basic and diluted net loss pershare has been computed using the weighted-average number of shares ofcommon stock outstanding during the period. Potentially dilutive securitieshave been excluded from the computation of basic and diluted net loss pershare, as their effect is antidilutive.

 

Weighted-average options outstanding to purchase approximately3.0 million and 1.1 million shares of common stock for the three months endedMarch 31, 2004 and 2003, respectively, were not included in the computation ofdiluted net loss per share because the effect would be antidilutive. Theincrease in weighted-average options outstanding in 2003 was primarilydue to the grant of new options to the Company’s employees and assumption ofoptions held by former Axcelerant employees in connection with the Company’sacquisition of Axcelerant. Such securities, had they been dilutive, would havebeen included in the computation of diluted net loss per share using thetreasury stock method.

 

*Reclassifications*.  To conform to the 2004 presentation,$114,000 previously reported on the 2003 consolidated balance sheet undercurrent liabilities as the current portion of deferred revenue has beenreclassified by the Company and is now included in long-term liabilities underdeferred revenue.

 

*Recent Accounting Pronouncements.*  In January 2003, the FASB issuedInterpretation No. 46 (FIN 46), “*Consolidationof Variable Interest Entities*.” FIN 46 requires an investor with amajority of the variable interests (primary beneficiary) in a variable interestentity (VIE) to consolidate the entity and also requires majority andsignificant variable interest investors to provide certain disclosures. A VIEis an entity in which the voting equity investors do not have a

 

8

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controllinginterest, or the equity investment at risk is insufficient to finance theentity’s activities without receiving additional subordinated financial supportfrom other parties. For arrangements entered into with VIEs created prior toJanuary 31, 2003, the provisions of FIN 46 are required to be adopted atthe beginning of the first interim or annual period beginning after March 31,2004. The provisions of FIN 46 were effective immediately for all arrangementsentered into with new VIEs created after January 31, 2003. The Company hasadopted the provisions of FIN 46 and as of March 31, 2004, there were noentities identified that would require consolidation.

 

**3. Business Combination**

 

On December 1, 2003, the Company completed its acquisition ofAxcelerant, Inc., a privately held provider of broadband Internet remoteaccess services and managed security services. The Company acquired Axcelerantto extend their service offerings, enhance retention of existing customers andimprove their ability to obtain new enterprise customers. The purchase pricewas $58.6 million and the transaction was accounted for as a purchase.

 

The purchase price is not final and may be adjusted for a period of oneyear from the transaction close date based on higher than expected acquisitioncosts or unforeseen liabilities. A total of approximately 1.5 millionshares of the total consideration that was to be delivered to Axcelerant’sstockholders as a result of the acquisition has been set aside as an escrowfund, serving as collateral for the indemnification obligations of Axcelerantstockholders. The Company may make claims against the escrow fund through December 1,2004.

 

The results of operations of Axcelerant have been included in theCompany’s financial statements subsequent to the date of acquisition.

 

9

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*Deferred Stock Compensation.  *The intrinsic valueof unvested stock options assumed of approximately $674,000 have been allocatedto deferred stock compensation and is being amortized to expense on astraight-line basis over the vesting period. The Company assumed options fromAxcelerant to purchase a total of approximately 597,000 shares of the Company’scommon stock, of which approximately 462,000 were fully vested. Options assumedin connection with the acquisition had exercise prices between $0.02 and $5.05per share, with a weighted average exercise price of $1.32 per share and aweighted average remaining vesting period of approximately 2.5 years.

 

10

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**4. Property and Equipment and Intangible Assets**

 

*Property and Equipment*

 

Property and equipment comprised the following:

 

|                                            |   | **March 31,  2004** |   | **December  31,  2003** |   |
|-------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                            |   |                |   |                    |   |
| Computer hardware                               |   | $                   | 6,023  |                    | $      | 7,843 |   |
| Software                                        |   | 4,337               |   | 4,241                   |   |
| Office furniture and equipment                  |   | 1,757               |   | 1,726                   |   |
| Leasehold improvements                          |   | 418                 |   | 418                     |   |
|                                            |   | 12,535              |   | 14,228                  |   |
|                                            |   |                |   |                    |   |
| Less accumulated depreciation and  amortization |   | (10,565             | )      | (12,219                 | )      |
| Total                                           |   | $                   | 1,970  |                    | $      | 2,009 |   |

 

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*Purchased Intangible Assets*

 

Purchased intangible assets are carried at cost less accumulatedamortization. Amortization of purchased intangible assets is computed using thestraight-line method over their expected useful lives ranging from one to fiveyears.

 

Purchased intangible assets consisted of the following (in thousands):

 
|                          |   | **March 31,** |   |   |
|-------------------------------|--------|---------------|--------|--------|
|                          |   | **2004**      |   |   |
|                          |   |          |   |   |
| Customer relationships        |   | $             | 7,500  |   |   |
| Internal use software         |   | 100           |   |   |
|                          |   | 7,600         |   |   |
| Less accumulated amortization |   | (533          | )      |   |
| Total                         |   | $             | 7,067  |   |   |

 

*Other Intangible Assets*

 

The Company entered into an agreement with a wireless service providerduring 2001 for the exchange of services, which resulted in a prepayment forfuture wireless services and the obligation by the Company to provide futureInternet roaming services.  DuringSeptember 2003, because these assets had not yet been utilized, theCompany and the provider amended the underlying agreement to modify the scopeof their business relationship and extend the term of the agreement untilSeptember 2007, thus permitting the Company to utilize the assets duringthe extended term. As a result of this amended agreement, the Company enteredinto a nonmonetary transaction for the exchange of prepaid wireless servicesfor prepaid roaming services and wireless cards. Because this nonmonetarytransaction did not represent a culmination of an earnings process, no revenuesor expenses have been, or will be recorded by the Company pursuant to thistransaction. In addition, there was no indicated loss on this exchange ofservices. As of March 31, 2004, there was $547,000 of the asset remaining to beutilized, which the Company believes will be utilized over the period of theagreement.

 

**5. Commitments and Contingencies**

 

#### *Lease Commitments. *The Company leases all of its facilities under operatingleases that expire at various dates through 2008. As of March 31, 2004, the Companyhad $3.9 million in future operating lease commitments.

 

*Purchase Commitments. *The Company hasentered into certain non-cancelable purchase commitments from suppliers whoprovide network access, software and related services that are utilized by theCompany in order to deliver its GRIC MobileOffice solution. As of March 31,2004 the Company had $707,000 in future purchase commitments that expire atvarious dates through 2005.

 

*Legal Matters. *The Company is subject to various legalproceedings and claims arising in the ordinary course of business. TheCompany’s management does not expect that the results in any of these legalproceedings will have a material adverse effect on its financial condition,results of operations, or cash flows.

 

In July and August 2001, the Company and certain of its officerswere named as defendants in five purported securities class action lawsuitsfiled in the United States District Court, Southern District of New York,captioned as In re GRIC Communications, Inc. Initial Public OfferingSecurities Litigation, No. 01 Civ 6771 (SAS), and consolidated withmore than three hundred substantially identical proceedings as In re InitialPublic Offering Securities Litigation, Master File No. 21 MC 92(SAS). The Consolidated Amended Class Action Complaint for Violation of theFederal Securities Laws (“Consolidated Complaint”) was filed on or aboutApril 19, 2002, and alleges claims against certain of the Company’sofficers and against CIBC World Markets Corp., Prudential Securities Incorporated,DB Alex. Brown, as successor to Deutsche Bank, and U.S. Bancorp PiperJaffray Inc., underwriters of the Company’s December 14, 1999 initialpublic offering (“underwriter defendants”), under Sections 11 and 15 ofthe Securities Act of 1933, as amended, and under Section 10(b) and 20(a)of the Securities Exchange Act of 1934, as amended.

 

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Citing several press articles, the Consolidated Complaint alleges thatthe underwriter defendants used improper methods in allocating shares ininitial public offerings, and claim the underwriter defendants entered intoimproper commission agreements regarding aftermarket trading in the Company’scommon stock purportedly issued pursuant to the registration statement for theinitial public offering. The Consolidated Complaint also alleges marketmanipulation claims against the underwriter defendants based on the activitiesof their respective analysts, who were allegedly compromised by conflicts ofinterest. The plaintiffs in the Consolidated Complaint seek damages as measuredunder Section 11 and Section 10(b) of the Securities Act of 1933,pre-judgment and post-judgment interest, and reasonable attorneys’ and expertwitnesses’ fees and other costs; no specific amount is claimed in theplaintiffs’ prayer in the Consolidated Complaint. By Order of the Court, noresponsive pleading is yet due, although motions to dismiss on global issuesaffecting all of the issuers have been filed.

 

In October 2002, certain of the Company’s officers and directorswho had been named as defendants in the In re Initial Public OfferingSecurities Litigation were dismissed without prejudice upon order of thepresiding judge. In February 2003, the presiding judge dismissed the Section 10(b)claims against the Company and its named officers and directors with prejudice.

 

From September 2002 through June 2003, the Companyparticipated in settlement negotiations with a committee of Issuers’ litigationcounsel, plaintiffs’ executive committee and representatives of variousinsurance companies (the “Insurers”). The Company’s Insurers were activelyinvolved in the settlement negotiations, and strongly supported a settlementproposal presented 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.

 

After careful consideration, the Company decided to approve thesettlement proposal in July 2003. Although the Company believes thatplaintiffs’ claims are without merit, it decided to accept the settlementproposal (which does not admit wrongdoing) to avoid the cost and distraction ofcontinued litigation. Because the settlement will be funded entirely by itsInsurers, the Company does not believe that the settlement will have any effecton the Company’s financial condition, results or operations or cash flows.

 

The Company believes that the settlement will be presented to the Courtfor approval in the summer of 2004. There can be no guarantee that thesettlement will be judicially approved.

 

**6.****                  ****Segment Information**

 

TheCompany operates in one segment, providing a global remote access solution forcorporate enterprises with mobile and remote workforces and for the Company’sservice provider resellers and value-added resellers.

 

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

 
|                                    |   | **Three  months ended March 31,** |   |
|-----------------------------------------|--------|-----------------------------------|--------|
|                                    |   | **2004**                          |   | **2003** |   |
|                                    |   | **(in  thousands)**               |   |
| Revenue by external customers:          |   |                              |   |   |   |
| United States, Canada and Latin America |   | $                                 | 8,653  |   | $ | 5,025 |   |
| Japan/Korea                             |   | 2,320                             |   | 2,584 |   |
| Asia Pacific                            |   | 866                               |   | 857 |   |
| Europe, Middle East and Africa          |   | 1,121                             |   | 1,025 |   |
|                                    |   | $                                 | 12,960 |   | $ | 9,491 |   |

 

The following is a summaryof long-lived assets by geographical area for the periods presented:

 
|                |   | **March 31,  2004** |   | **December 31,  2003** |   |
|---------------------|--------|--------------------------|--------|-----------------------------|--------|
|                |   | **(in  thousands)**      |   |
| Long-lived  assets: |   |                     |   |                        |   |
| United States       |   | $                        | 56,192 |                        | $      | 56,633 |   |
| Rest of World       |   | 72                       |   | 72                          |   |
|                |   | $                        | 56,264 |                        | $      | 56,705 |   |

 

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Revenue by external customer is based on the customer’s billinglocations. Long-lived assets are those assets used in each geographiclocation.  For the three months endedMarch 31, 2004, two customers each accounted for 10% or more of the Company’stotal consolidated revenues.

 

**7.             Stockholder’s Equity**

 

*Series A Redeemable Convertible PreferredStock.*  Duringthe three months ended March 31, 2004 and 2003, 3.0 million and 316,000 shares,respectively, of Series A Preferred Stock were converted into common stock,respectively.

 

*Series A Preferred Stock Warrants. *No Series APreferred Stock warrants were exercised during the three months ended March 31,2004 and 2003, respectively.

 

*Stock Repurchase Program.*InSeptember 2001, the Board of Directors approved a program to expend up to$2.0 million to repurchase shares of the Company’s common stock in openmarket transactions. The Company purchased 110,000 shares for approximately$99,000 during 2001. Although the program approval remains in effect, the Companyrepurchased no additional shares during 2002, 2003 or during the three monthsended March 31, 2004.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF****FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion should be read inconjunction with the selected consolidated financial information and theconsolidated financial statements and notes appearing elsewhere in this Form 10-Q.The following discussion contains forward-looking statements, such asstatements of expected revenues and expenses, that involve risks anduncertainties. We assume no obligation to update any such forward-lookingstatements. Our actual results could differ materially from those anticipatedin these forward-looking statements. Factors that could cause orcontribute to such differences include, but are not limited to, those detailedfrom time to time in our filings with the Securities and Exchange Commissionand those discussed in this Form 10-Q, particularly in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations andunder “Factors That May Affect Future Results.”*

 

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

 

**Overview**

 

We provide secure managed broadband and remote access solutions toenterprises and service providers. Our solutions enable enterprises tosecurely, reliably, and cost-effectively extend their corporate networksand applications to mobile and remote workers outside the corporate firewall.These workers include mobile professionals such as sales professionals, projectmanagers and engineers; teleworkers including call center agents;telecommuters; and employees in branch offices and retail settings. We providecomprehensive and integrated managed broadband and global remote accessservices that include: intelligent client software; multiple network accesstypes including broadband, Wi-Fi and dial-up; security capabilitiesthat ensure security policy compliance by remote workers; a real-timeremote access management console; end-to-end managed and value-addedservices including managed security services; and design, deployment,monitoring, and technical support. Our products and services enable enterprisesto reduce the cost, complexity and risk of remote office networking, whilemaximizing the productivity of mobile and remote workers.

 

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

 

The majority of our revenue comes from providing settlement andclearing-house services for our customers. We provide services over aheterogeneous virtual network known as the GRIC TierOne Network. As of May 1,2004, the GRIC TierOne Network included more than 34,000 Internetaccess-dialing locations, over 7,600 public wireless fidelity—or WiFi—hotspotsand approximately 1,400 public broadband access points in approximately 150countries. Through the acquisition of Axcelerant, we added a virtual broadbandcable modem and DSL network that spans the United States and

 

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Canada. Thisnetwork is an aggregation of the networks of more than 150 broadband providers,including virtually all of the leading cable companies, ILECs and CLECs in theUnited States. By utilizing this network, we are able to provide comprehensivecoverage in the United States for enterprises requiring broadband branch officeand broadband teleworker solutions. We created the GRIC TierOne Network byforming contractual relationships with over 500 access providers — Internetservice providers, cable companies, DSL companies and telecommunicationcompanies. These providers, which we refer to as the GRIC TierOne 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 GRIC TierOneNetwork because we manage this shared network and provide settlement servicesas a clearinghouse. As a clearinghouse, we have established common technical,service and payment standards to settle charges that our customers incur whentheir end users access the network facilities of GRIC TierOne Network membersto conduct Internet-based communications, such as Internet roaming. Weintend to continue developing our service offering to introduce new Internet-basedremote communications services that may be adopted, deployed and managed on aglobal scale across the GRIC TierOne Network.

 

We have incurred substantial losses since our inception as a result ofexpenses associated with building the GRIC TierOne Network and related networkinfrastructure, developing our software products and marketing our solutions toour customers. We had an accumulated deficit of approximately $133.3 million asof March 31, 2004. We cannot assure you that we will achieve or sustainprofitability. See “Factors That May Affect Future Results—We have a history ofnet losses and may incur future losses.”

 

Our business model has evolved in the course of our development and webelieve that period-to-period comparisons of our operating resultsshould not be relied upon as indicative of future performance. Our futureprospects must be considered in light of the risks, expenses and difficultiesfrequently encountered by companies in the early stages of development,particularly companies in new and rapidly evolving markets. See “Factors ThatMay Affect Future Results—We have limited experience in our business, whichmakes it more difficult for us to execute our business plan and for you toevaluate us.”

 

**Critical Accounting Policies and Estimates**

 

The methods, estimates and judgments we use in applying our mostcritical accounting policies have a significant impact on the results we reportin our consolidated financial statements. We evaluate our estimates andjudgments on an on-going basis. We base our estimates on historicalexperience and on assumptions that we believe to be reasonable under thecircumstances when made. Our experience and assumptions form the basis for ourjudgments about the carrying value of assets and liabilities and reportedamounts of revenues and expenses that are not readily apparent from othersources. Actual results may vary from what we anticipate, and differentassumptions or estimates about the future could change our reported results. Webelieve the following accounting policies are the most critical to us, becausethey are important to the portrayal of our financial statements and theyrequire our most difficult, subjective or complex judgments in the preparationof our consolidated financial statements.

 

*Revenue Recognition and Related Allowances.*  We enter into agreements to sell our managedbroadband and global access solutions, which may include one or more of ourservices and product offerings. Revenues are recognized when a bindingagreement or purchase order from the customer has been received, the serviceshave been delivered, the fee or price was fixed or determinable, the collectionof the receivable was reasonably assured, and no significant post-deliveryobligations remain. Our revenue recognition policy is one of our criticalaccounting policies because revenue is a key component of our results ofoperations and is based on complex rules, which require us to make certainjudgments and estimates. In applying our revenue recognition policy we must determinewhich portions of our revenues are recognized currently and which portions mustbe deferred. In order to recognize revenue, we make judgments and estimateswith regard to the revenues earned for services—including related installationservices and products—and maintenance services, as well as the timing of thedelivery of such services and products. In addition, we provide services over aheterogeneous virtual network, which was created by forming contractualrelationships with over 500 access providers — Internet serviceproviders, cable companies, DSL companies and telecommunications companies.These companies may provide us their services under either a reseller or anagency arrangement. In applying our revenue recognition policy we must makejudgments and estimates with regard to the specific facts and circumstancessurrounding each provider relationship to determine which portion of ourrevenues we provide under a reseller arrangement, where we would record grossrevenues and cost of revenues, and which portion of our revenues we provide asan agent, where we would record revenues and cost of revenues combined on a netbasis. We base our estimates on historical experience and on various otherassumptions believed to be applicable and reasonable under the circumstances.These estimates may change as new events occur, as additional information isobtained and as our operating environment changes, any of which could cause amaterial impact on the revenues that we have reported.

 

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Our services for remote Internet access are generally billed on a per-minutebasis for usage or at a flat rate per month per user based on negotiated ratesfor which we recognize revenue in the month the services are provided. Oursolutions may also include installation services, the sale of customer premiseequipment and managed security services related to our broadband servicesofferings. Revenue from broadband installation services and the sale of relatedequipment is deferred and recognized ratably over a 24-month period. Weconsider these services and products to be an enabler of the related remoteaccess service contracts and we estimate that on average our customer’s remotebroadband access workers use our services for a period of approximately 24months. Revenues from managed security services are recognized in the month theservice is provided. To a lesser extent, we also derive a portion of ourrevenues from licenses of our authentication software, related maintenance andsupport services, and other optional services related to our remote accesssolutions which are recognized ratably over the term of service, which istypically 1 to 12 months. These other revenues amounted to five percent or lessof total revenues over the last three years. Fees generated from maintenancecontracts are recognized over the life of those contracts. The majority of themaintenance contracts cover periods of one to twelve months. Amounts billed inadvance of revenue recognition are recorded to deferred revenue as collected.We have some customers with minimum commitment arrangements. We record suchrevenue in the month that we determine that minimum commitments have not beenmet. We recognize certain broadband connectivity revenues generated underagency arrangements on a net basis. Product returns and allowances have notbeen significant.

 

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

 

From time to time our customers, including significant customers, mayseek protection under bankruptcy laws. While we assess the credit-worthinessof our customers on an on-going basis, when such a bankruptcy eventoccurs, our management determines our risk that an account receivable willprove to be uncollectable, and establishes appropriate reserves for thatcontingency as necessary. In addition, for each continuing customer inbankruptcy management evaluates the creditworthiness of the customer anddetermines whether revenue should be recognized on an accrual basis or whencash payments are received. When we record revenue on an accrual basis,management has based their judgment on the creditworthiness of the debtor-in-possession,their payment experience and whether the collectability of receivables isreasonably assured, in addition to other revenue recognition criteria havingbeen met.

 

*Allowance for Doubtful Accounts.*  We maintain allowances for doubtful accountsfor estimated losses from our customers’ inability to make payments they oweus. In order to estimate the appropriate level of this allowance, we analyzehistorical bad debts, customer concentrations, current customer credit-worthiness,current economic trends and changes in our customer payment patterns. If thefinancial condition of our customers were to deteriorate and to impair their abilityto make payments to us, additional allowances might be required in futureperiods. If our estimates prove too low, our bad debt expense will increase.

 

*Valuation of Long-Lived Assetsincluding Intangible Assets.*  We evaluate the carrying amount of property and equipment andintangible assets for impairment whenever events or circumstances indicate theamount of the assets may not be recoverable. Determination of impairment ofproperty and equipment, goodwill and intangible assets is highly subjective andrequires significant judgment at many points during the analysis. This analysisis based on our estimate of future cash flows that the assets are expected togenerate and their eventual disposition. If we determine that any of theseassets have been impaired, the impairment charge will be charged to earnings inthe period such determination is made.

 

*Valuation of Goodwill.*  We test goodwill for possible impairment onan annual basis and at any other time if events occur or circumstances indicatethat the carrying amount of goodwill may not be recoverable. Circumstances thatcould trigger an impairment test include, but are not limited to, a significantadverse change in the business climate or legal factors, an adverse action orassessment by a regulator, unanticipated competition and loss of key personnel.The determination as to whether a write down of goodwill is necessary involvessignificant judgment based on the short-term and long-termprojections of our future performance. The assumptions supporting the estimatedfuture cash flows, including the discount rate used and estimated terminalvalue, reflect our best estimates.

 

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**Business Combination**

 

On December 1, 2003, we completed our acquisition of Axcelerant, aprivately-held provider of broadband Internet remote access services andmanaged security services. Our acquisition of Axcelerant did not result in anew reportable segment. The results of operations of Axcelerant have beenincluded in our financial statements subsequent to the date of the acquisition.See “Note 3 of Notes to the Condensed Consolidated Financial Statements.”

 

**Results of Operations**

**Three Months Ended March 31, 2004 Compared toThree Months Ended March 31,2003**

 

*Overview of the First Quarter of 2004*

 

During the first quarter of 2004, we continued to develop our businessfrom being based principally on an indirect sales model — as it was in thefirst quarter of 2003 when we sold our services on a wholesale basis throughlarge telecommunications companies and service providers — to a model underwhich we sell a significant portion of our services directly or through VARs toenterprise customers.  During the firstquarter of fiscal 2004, 42% of our quarterly revenues were derived fromservices sold to enterprise customers both directly and indirectly through ourVARs. We continued our focus on acquiring and serving enterprise customers byenhancing the quality and breadth of the GRIC TierOne Network and increasingthe value of our solution offering by delivering new products such as ourmanagement and administrative console for enterprise IT departments and ourend–to–end remote access security solution. As a result of our December 2003acquisition of Axcelerant, Inc., the GRIC TierOne Network now also includes avirtual broadband cable modem and DSL network that spans the United States andCanada. By aggregating the networks of more than 150 broadband providers, weare able to provide enterprise branch offices and teleworkers with comprehensivebroadband coverage in North America.

 

In the first quarter of 2004, our revenues, expenses and gross margineach increased over the first quarter of 2003. Cost of revenues was lower as apercentage of revenues principally as a result of sales to enterprise customersrepresenting a higher percentage of our total revenues during the first quarterof 2004. Our operating expenses were higher in the first quarter of 2004 thanin the first quarter of 2003 principally due to the addition of personnel at ourIrvine, California facility that resulted from our acquisition of Axcelerantand our increased investment in enterprise focused sales and marketingefforts.   We expect our quarterlyoperating expenses to continue increasing in absolute dollar terms in thesecond quarter of 2004 as we continue to invest in developing and supportingour enterprise customer base.

 

We continue to focus on delivering innovative services for ourcustomers to drive revenues and achieve positive earnings. In fiscal 2004 weplan to release a number of new value added services, which we expect willaugment the revenues we derive from our existing customers and, together withexpanding the global footprint of the GRIC TierOne Network, drive revenues fromnew enterprise customers. Several factors will impact our ability to achieveand sustain profitability, including the effectiveness of our sales andmarketing efforts through both direct and VAR sales channels, the timelyrelease of new services and the introduction of new services by existing or newcompetitors.  Currently, we do notexpect to be profitable during 2004. For a discussion of these and other risk factors, see the section titled“Factors That May Affect Future Results.”

 

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*Revenues*

 

Revenues for the three months ended March 31, 2004 and 2003 wereas follows:

 
|     |   | **2004**           |   | **2003** |   |
|----------|--------|--------------------|--------|----------|--------|
|     |   | **(in  millions)** |   |
|     |   |               |   |     |   |
| Revenues |   | $                  | 13.0   |     | $      | 9.5 |   |
|          |        |                    |        |          |        |  |  |

 

Total revenues increased approximately $3.5 million in the three monthsended March 31, 2004, compared to the three months ended March 31,2003, which represented an increase of 37%. The increase was principally due to the addition of broadband revenuesduring the three months ended March 31, 2004.  Approximately 25% of our revenues for the three months endedMarch 31, 2004 were generated from sales of broadband and Wi-Fiservices.  Sony Communication NetworkCorporation and Fiberlink Communications Corporation, both of which are serviceprovider resellers, accounted for 12% and 11%, respectively, of ourconsolidated revenues during the three months ended March 31, 2004.

 

We expect 2004 revenues to exceed 2003 revenues, based on both sales tonew customers and sales of additional services (such as our managed securityservice offering) to our existing customers, partially offset by competitivepricing pressures on our Internet access services.

 

*Costs and Expenses*

 

Costs and expenses for the three months ended March 31, 2004 and2003 were as follows:

 
|                                     |   | **2004**           |   | **2003** |   |
|------------------------------------------|--------|--------------------|--------|----------|--------|
|                                     |   | **(in  millions)** |   |
|                                     |   |               |   |     |   |
| Cost of revenues                         |   | $                  | 5.3    |     | $      | 4.4 |   |
| Percentage of net revenues               |   | 40.8               | %      | 46.0     | %      |
| Network and operations                   |   | $                  | 2.3    |     | $      | 0.9 |   |
| Percentage of net revenues               |   | 17.8               | %      | 10.0     | %      |
| Research and Development                 |   | $                  | 1.2    |     | $      | 0.6 |   |
| Percentage of net revenues               |   | 9.0                | %      | 6.8      | %      |
| Sales and Marketing                      |   | $                  | 5.1    |     | $      | 2.7 |   |
| Percentage of net revenues               |   | 39.1               | %      | 28.4     | %      |
| General and administrative               |   | $                  | 1.6    |     | $      | 1.4 |   |
| Percentage of net revenues               |   | 12.3               | %      | 14.8     | %      |
| Amortization of intangibles              |   | $                  | 0.4    |     | $      | — |   |
| Percentage of net revenues               |   | 3.1                | %      | —   | %      |
| Amortization of stock-based compensation |   | $                  | 0.09   |     | $      | 0.04 |   |
| Percentage of net revenues               |   | 0.7                | %      | 0.4      | %      |

 

*Cost of Revenues.*  Cost of revenues consists of amounts we payto access the Internet in order to provide remote Internet access services forour customers and to offer other mobile broadband services.

 

Cost of revenues increased approximately $928,000 in the three monthsended March 31, 2004 compared to the three months ended March 31,2003, representing an increase of 21%. The increase was primarily due to the corresponding increases in thevolume of remote Internet access, the expansion of our customer base and theinclusion of three months of the cost of broadband revenues following ouracquisition of Axcelerant.  We expectthat for the remainder of 2004 the cost of revenues will increase in absolutedollars as remote Internet access revenues and broadband revenues increase, butbe similar to the quarter ending December 31, 2003 as a percentage of revenues.

 

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

 

Network and operations expenses increased approximately $1.4 million inthe three months ended March 31, 2004 compared to the three months endedMarch 31, 2003, representing an increase of 143%. The increase wasprimarily due to an increase in compensation and benefits related expenses ofapproximately $953,00 and increased facility allocation of approximately$254,000, both of which are primarily related to the inclusion of three monthsof network and operations expenses incurred in our Irvine, California facilityfollowing our acquisition of Axcelerant. Additionally, there was approximately $57,000 of increased professionalfees related to post-acquisition integration activities and improving networksystems.  We expect the network andoperations expenses to remain constant in absolute dollars as we continue toexpand the GRIC TierOne Network and support a growing base of enterprisecustomers, but decline as a percentage of sales in 2004.

 

*Research and Development.*  Research and development expenses consist ofsalaries and benefits, allocated facility and management information systems,depreciation costs, outside consultants, facilities costs, administration andother related costs.

 

Research and development expenses increased approximately $522,000 inthe three months ended March 31, 2004 compared to the three months endedMarch 31,2003, representing an increase of 81%.  The increase was primarily due to an increase in compensation andbenefits expenses of approximately $253,000 primarily related to the inclusionof three months of research and development expenses incurred in our Irvine,California facility following our acquisition of Axcelerant, and approximately$129,000 related to increased compensation costs due to adding staff in theUnited States and India in order to service our growing enterprise customerbase. In addition, engineering consulting fees increased by approximately$78,000.  We expect research anddevelopment expenses to increase moderately in absolute dollars as we continueto invest in developing our remote access solutions for our enterprisecustomers, but stay approximately the same as a percentage of revenues in 2004.

 

*Sales and Marketing.*  Sales and marketing expenses consist of salariesand benefits, allocated facility and management information systems costs,travel and entertainment costs, costs for marketing and promotional programs,outside consultants, commissions earned by sales and marketing personnel, andcosts associated with domestic and international sales offices and otherrelated costs.

 

Sales and marketing expenses increased $2.4 million in the three monthperiod ended March 31, 2004 compared the three month period endedMarch 31, 2003, representing an increase of 88%. The increase wasprimarily due to an increase in compensation and benefits of approximately $1.1million related to our increased sales force and marketing personnel, anincrease of approximately $607,000 in marketing and promotional programs, anincrease of approximately $201,000 in travel and entertainment expenses, and anincrease of approximately $141,000 in outside consulting services as weexpanded our marketing activities.  Inaddition, allocated facilities costs and administrative expenses increased byapproximately $203,000.  We expect theoverall amount of sales and marketing expenses to increase during 2004 inabsolute dollars as we shift our sales strategy from predominantly an indirectsales channel to both indirect and direct sales efforts, but be approximatelythe same as 2003 as a percentage of revenues.

 

*General and Administrative.*  General and administrative expenses consistof general corporate and facility costs as well as salary, benefits and relatedcosts for executive, finance, legal, administrative, human resources, investorrelations and management information systems functions and provisions foruncollectible receivables.

 

General and administrative expenses increased approximately $190,000 inthe three months ended March 31, 2004 compared to the three months endedMarch 31, 2003, representing an increase of 14%. The increase wasprimarily due to higher compensation and benefits expenses of approximately$279,000 principally due to the inclusion of three months of general and administrativeexpenses incurred in our Irvine, California facility following the acquisitionof Axcelerant, approximately $253,000 of increased professional fees primarilyrelated to services provided by our independent auditors and approximately$76,000 of consulting associated with the integration of Axcelerant. Theseincreases were largely offset by approximately $408,000 for costs related topayments made in connection with the resignation of our former Chief ExecutiveOfficer during the first quarter of 2003 and a $69,000 reduction in insurancecosts. We expect the amount of general and administrative expenses to increaseduring 2004 in absolute dollars while we complete the back office automationand integration of our Irvine, California operations and update certain otherback office processes and procedures to implement the requirements of theSarbanes-Oxley Act of 2002 and related regulations, but stay approximately thesame as a percentage of revenues.

 

*Amortization of Intangibles.*  Amortization of intangibles includes threemonths of amortization of the intangible assets acquired in connection with theacquisition of Axcelerant. The value assigned to Axcelerant customerrelationships

 

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was $7.5 million, which is amortized on a straight-line basis over afive-year life at a rate of $125,000 per month. The value assigned to internaluse software was $100,000, which is amortized on a straight-line basis over aone-year life at a rate of $8,000 per month.

 

*Amortization of Stock-Based Compensation.*  Some stock options previously grantedthrough December 14, 1999 were considered compensatory because the deemedfair value for accounting purposes was higher than the stock option exerciseprice as determined by the board of directors on the date of grant.Additionally, in connection with of our acquisition of Axcelerant, we recorded$674,000 of additional deferred stock-based compensation, which will beamortized over the vesting period of the underlying stock options assumedduring the acquisition. As a result, we recorded amortization of deferredcompensation expense of $90,000 and $41,000 during the three months endedMarch 31, 2004 and 2003, respectively. We expect to record amortization ofdeferred compensation expense of approximately $359,000 in 2004, related tooptions assumed by us in connection with our acquisition of Axcelerant.

 

As of March 31, 2004, we had an aggregate of $554,000 of deferredcompensation related to the acquisition of Axcelerant that remained to beamortized. Deferred compensation is amortized on a straight-line basis over thevesting period of the options. We expect amortization of stock-basedcompensation to end in 2007.

 

*Interest Income (Expense) and Other and Taxes*

 

Interest income and other, net, interest expense and taxes for thethree months ended March 31, 2004 and 2003 were as follows:

 
|                           |   | **2004**            |   | **2003** |   |
|--------------------------------|--------|---------------------|--------|----------|--------|
|                           |   | **(In  thousands)** |   |
|                           |   |                |   |     |   |
| Interest income and other, net |   | $                   | 93     |     | $      | (9 | ) |
| Provision for income taxes     |   | $                   | 22     |     | $      | 8 |   |

 

*Interest Income and Other, Net*

 

Interest income and other, net, primarily represents interest income oncash balances and on short-term investments, gain on disposition of assets andsales, use and value-added tax.

 

Interest income and other, net, increased $102,000 in the three monthsended March 31, 2004 compared to the three months ended March 31,2003.  This increase primarily reflectshigher sales, use and value-added tax for approximately $177,000 during 2003offset by a gain on the sale of an asset of $104,000 during 2003, which did notreoccur in 2004 and a increase of approximately $19,000 due to a gain onforeign currency re-measurement offset by approximately $13,000 in interestincome due to lower interest rate yields.

 

*Income Taxes*

 

The provision for income taxes was $22,000 and $8,000 for the threemonths ended March 31, 2004 and 2003, respectively.  The provision for income taxes consists offoreign tax provisions.

 

**Liquidity and Capital Resources**

 
|                                                 |   | **March 31,**  |   |
|------------------------------------------------------|--------|---------------------|--------|
|                                                 |   | **2004**            |   | **2003** |   |
|                                                 |   | **(in  thousands)** |   |
|                                                 |   |                |   |   |   |
| Cash and cash equivalents                            |   | $                   | 4,442  |   | $ | 4,222 |   |
| Net cash used in operating activities                |   | (3,184              | )      | (1,021 | ) |
| Net cash (used in) provided by investing  activities |   | 1,548               |   | (2,357 | ) |
| Net cash provided by financing activities            |   | 779                 |   | 286 |   |
|                                                      |        |                     |        |  |  |  |  |

 

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*Cash and Cash Equivalents.*  Our principal source of liquidity is ourcash, cash equivalents and short-term investments. As of March 31, 2004,in addition to our cash and cash equivalents balance of $4.4 million, we had ashort-term investment balance of approximately $18.0 million.

 

*Operating Activities. *Net cash used inoperating activities in the three months ended March 31, 2004 of $3.2million was primarily a result of our net operating losses of $2.9 million andhigher accounts receivable balances of approximately $722,000 from increasedrevenues and by decreased accounts payable balances of approximately $1.0million offset by increased deferred revenues of approximately $821,000primarily related to deferred installation revenues. We expect the number ofdays it takes for us to collect our accounts receivable to lengthen from theperiods experienced historically, primarily due to the longer payment cyclesgenerally associated with enterprise customers and the increasing percentage ofour revenue base represented by such customers.

 

*Investing Activities.*  Net cash provided by investing activitiesduring the three months ended March 31, 2004 of approximately $1.5 millionwas primarily the result of liquidation of certain short-term instrumentsoffset by capital expenditures of approximately $361,000.

 

*Financing Activities.*  Net cash provided by financing activitiesduring the three months ended March 31, 2004 of approximately $779,000 wasprimarily the result of proceeds of sales of common stock to our employees andoption holders.

 

*Commitments.*  We lease all of our facilities underoperating leases that expire at various dates through 2008. We have enteredinto certain purchase commitments from suppliers who provide network access,software and related services that are utilized by us in order to deliver ourproducts and services solution.

 

During 2004, we expect to increase capital equipment expenditures inabsolute dollars as compared to 2003 while we complete the back office automationand integration of Axcelerant and update certain other back office processesand procedures required for us to efficiently run our business.

 

The future minimum operating lease and purchase commitments were asfollows at March 31, 2004:

 
|       |   | **Operating  Leases** |   | **Purchase  Commitments** |   |
|------------|--------|-----------------------|--------|---------------------------|--------|
|       |   | **(in  thousands)**   |   |
|       |   |                  |   |                      |   |
| 2004       |   | $                     | 1,463  |                      | $      | 413 |   |
| 2005       |   | 1,005                 |   | 294                       |   |
| 2006       |   | 796                   |   | —                    |   |
| 2007       |   | 563                   |   | —                    |   |
| 2008       |   | 90                    |   | —                    |   |
| Thereafter |   | —                |   | —                    |   |
|       |   | $                     | 3,917  |                      | $      | 707 |   |

 

*Indemnifications.*  From time to time we enter into types ofcontracts that contingently require us to indemnify parties against third partyclaims. These contracts primarily relate to: (i) divestiture agreements,under which we may provide customary indemnifications to purchasers of ourassets; (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.

 

The terms of such obligations vary. Generally, a maximum obligation isnot explicitly stated, except for indemnifications involving infringement ofthird party intellectual property rights. Because the obligated amounts ofthese types of agreements often are not explicitly stated, the overall maximumamount of the obligations cannot be reasonably estimated. Historically, we havenot been obligated to make any payments for these obligations, and noliabilities have been recorded for these obligations on our balance sheet asMarch 31, 2004.

 

*Summary of Liquidity.*  We believe that our available cash, cashequivalents and short-term investments of $22.4 million at March 31, 2004and cash expected to be generated by operations during the next twelve months,will fund planned operations for at least the next twelve months. We utilized$2.8 million in cash during the quarter ended March 31, 2004.

 

We plan to invest in expanding our mobile office communicationsservices, on a global basis, by continuing to build strategic partneringrelationships. This will require us to maintain market acceptance, and to growour mobile office communications services offerings in order for us to continueour research and development activities and fund planned

 

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operating expenses. There can be no assurance that our mobile officecommunications services offerings will maintain market acceptance, growth andoperating margins.

 

If we are unable to attain our revenue and margin goals, significantreductions in spending and the delay or cancellation of planned activities ormore substantial restructuring may be necessary to enable us to meet our cashrequirements through the next 12 months. These actions could have a materialadverse effect on our business, results of operations and prospects.Furthermore, we may need to raise additional funds in future periods throughpublic or private financing, or other arrangements, to fund operations andpotential acquisitions, if any. If additional financing is needed, it might notbe available on reasonable terms or at all. Failure to raise capital whenneeded could seriously harm our business and results of operations. Ifadditional funds were raised through the issuance of equity securities, thepercentage of ownership of our stockholders would be reduced. Furthermore,these equity securities might have rights, preferences or privileges senior toour common stock.

 

**Recent Accounting Pronouncements**

 

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “*Consolidation of Variable Interest Entities*.”FIN 46 requires an investor with a majority of the variable interests (primarybeneficiary) in a variable interest entity (VIE) to consolidate the entity andalso requires majority and significant variable interest investors to providecertain disclosures. A VIE is an entity in which the voting equity investors donot have a controlling interest, or the equity investment at risk isinsufficient to finance the entity’s activities without receiving additionalsubordinated financial support from other parties. For arrangements enteredinto with VIEs created prior to January 31, 2003, the provisions of FIN 46are required to be adopted at the beginning of the first interim or annualperiod beginning after March 31, 2004. The provisions of FIN 46 wereeffective immediately for all arrangements entered into with new VIEs createdafter January 31, 2003. We have adopted the provisions of FIN 46 and as ofDecember 31, 2003, there was no entities identified that would requireconsolidation.

 

**Factors That May Affect Future Results**

 

In addition to the information in this Quarterly Report on Form 10-Q,the following should be considered in evaluating GRIC and our business.

 

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**The markets that we serve are highlycompetitive and there is no assurance that we will be able to achieve ormaintain profitability.**

 

We are aware of many companies in related markets that addressparticular aspects of the features and functions that our products provide.Currently, we compete directly with iPass and Fiberlink CommunicationsCorporation in the market for Internet roaming and related settlement services,and each of iPass and Fiberlink has a network that competes with the GRICTierOne Network. In addition, iPass has greater cash resources than we do andeach of iPass and Fiberlink has a larger sales force than our own dedicated toenterprise sales. Large communications service providers such as AT&T,Equant and MCI also have the ability and resources to compete with us in theInternet-based mobile office communications services market. In the mobilebroadband services market, our primary competitors include Megapath, ePresenceand Netifice. Many of our competitors have longer operating histories, greatername recognition or larger customer bases, which they may leverage in order toobtain more favorable volume discounts from suppliers. In addition, thesecompetitors may be able to undertake more extensive marketing efforts, adoptmore aggressive pricing policies and provide more favorable payment terms tocustomers than we can, which could limit our opportunities to obtain newcustomers or cause us to lose our existing customers.

 

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

 

Historically, a significant portion of our revenues was derived fromsmaller companies in the Internet marketplace, but in recent periods we haveattempted to focus our sales and marketing efforts on larger corporate andenterprise-level customers. This strategy places new demands on our business,such as the longer sales cycles and higher levels of service and support thatlarger accounts generally require. Some of our competitors with greaterfinancial resources than ours have focused their sales efforts on selling tolarge enterprises for a longer period of time with more success than we haveenjoyed, which adds to the risk of our strategy. If we fail in this strategy,or if we have underestimated the costs of this strategy, we will likely missour revenue and profitability goals.

 

**If we are unable to increase revenuesassociated with broadband services, our ability to grow our business will beimpaired.**

 

Until our acquisition of Axcelerant in December 2003, we havegenerated our remote Internet access services revenues to date almostexclusively from the sale of services based on dialup access—a narrowbandtechnology. In some countries, including the United States, the use ofnarrowband as a primary means of remote access is expected to decline over timeas broadband access technologies, such as cable modem, DSL and Wi-Fi, become morewidely adopted and used. Our experience in the first quarter of 2004 showed usthat the decline in dialup revenues from service providers may decline at apace more rapid than previously projected. Although we have recently begun to generate revenues from managedbroadband access following our acquisition of Axcelerant, the future growth ofour business may depend in large part upon our ability to expand the broadbandelements of our virtual network and generate broadband revenues at asubstantially higher level and growth rate. We may not succeed in thisexpansion and we may not generate substantial new revenues, which could harmour results and cause our stock price to decline.

 

**Our business strategy has shifted over timeand remains unproven, so the success of our strategy cannot be assured.**

 

Our business strategy has changed over time. For example, we ceased tobe an Internet service provider in 1997 and abandoned our Internet telephonyservices business in 2001. We have pursued our current business—remote access,managed security and related mobile office services—for a relatively briefperiod and in markets that are rapidly changing. We have only been offeringmanaged broadband services to enterprises with branch offices and largeteleworker populations since December 2003, following our acquisition ofAxcelerant. There can be no assurance that we will succeed in our efforts tomake our current business profitable, and there can be no assurance that ourrecent acquisition of Axcelerant will make us more likely to succeed.

 

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

 

Our customers are generally free to use competing products and servicesand dialup remote access prices are declining, so we could face significantcustomer losses, at unpredictable times. We had two customers in the threemonths

 

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ended March 31, 2004 that each accounted for more than ten percentof our revenues: Sony Communication Network Corporation (12%) and FiberlinkCommunications Corporation (11%). This concentration of revenue from twocustomers, each of which principally purchases our dialup remote accessservice, makes our business more risky. Losing either of these customers could result in a significant revenueshortfall for us. In addition, large customers have significant negotiatingpower during contract discussions or in the event of a customer dispute, whichmay make it more likely that the terms of the customer arrangement orsettlement may be more favorable to the customer. We are in direct competitionwith Fiberlink, which makes it more likely that revenues from Fiberlink will declinein the future. These factors make it difficult to anticipate the level of ourfuture revenues from existing customers. In addition, our success depends onour ability to expand and diversify the composition of our customer base. If weare unable to expand our customer base and increase our average revenues percustomer, our business success will be less likely.

 

**If we cannot effectively integrateAxcelerant’s operations with our own operations, we will not realize thepotential benefits of our recent merger.**

 

The integration of Axcelerant into our company has been and continuesto be a time consuming and expensive process and may disrupt our operations ifit is not completed in a timely and efficient manner.  If this integration effort is not successful, our results ofoperations could be harmed, employee morale could decline, key employees couldleave and customers could cancel existing orders or choose not to place newones. In addition, we may not achieve anticipated synergies or other benefitsof the merger. Having completed the merger, we must now operate a singleorganization utilizing common information and communication systems, operatingprocedures, financial controls and human resources practices. We may encounterthe following difficulties, costs and delays involved in fully integratingAxcelerant’s operations into our operations:

 

•                                          failureto successfully manage relationships with customers and other importantrelationships;

 

•                                          failureof customers to accept new services or to continue using the products andservices of the combined company;

 

•                                          potentialincompatibility of technologies and systems; and

 

•                                          potentialdifficulties in successfully integrating the employees of GRIC and Axcelerant;

 

•                                          managingour growth and managing larger, more geographically dispersed operations;

 

•                                          perceivedadverse changes in business focus;

 

•                                          theloss of key employees and diversion of the attention of management from otherongoing business concerns; and

 

•                                          potentialincompatibility of business cultures.

 

**We may not succeed in cost-effectivelyautomating, integrating and updating critical back office systems andprocesses, which could limit our ability to achieve and maintain profitability.**

 

Historically, we have invested in the automation of back office systemsand processes in order to enable us to cost effectively grow our traditionalmobile office communications business. The back office systems and process ofAxcelerant, whose business we acquired in December 2003, are largelymanual. In order to efficiently provision, support and service our customers,we will be required to cost-effectively update, automate and, whereappropriate, integrate these systems and processes. We will need to ensure thatthe combined company’s financial reporting, financial controls anddocumentation processes meet all applicable financial controls certificationstandards, such as Section 404 of the Sarbanes-Oxley Act. We mayunderestimate the investments required to accomplish this automation,integration, updating and certification. We may not succeed in this effort,which could impair our ability to scale our operations, limit our growth andlessen the likelihood that we would achieve profitability.

 

**The market price of our common stock hastraditionally been highly volatile, and if we do not realize the anticipatedbenefits of our acquisition of Axcelerant or meet the expectations of analysts,the market price of our common stock could decline further.**

 

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In the past, the price of our common stock has experienced large swingsup and down. As of May 1, 2004, our common stock is valued less than it was atthe time of the closing of our acquisition of Axcelerant. This volatility mightoccur again in the future. Volatility can arise particularly in response toquarter-to-quarter variations in the actual or anticipated financial results ofus or our customers or competitors, and announcements that our competitors orwe make regarding new product and service introductions. The market price ofour common stock can also fluctuate in response to price and volumefluctuations in the stock market, particularly those that affect the marketprices of technology stocks.

 

In addition, the market price of our common stock is subject to declineif we do not achieve the expected benefits of the Axcelerant acquisition asquickly as anticipated or the costs of or operational difficulties arising fromthe merger are greater than anticipated.

 

**We have incurred significant losses to dateand expect to continue to incur losses for some period of time. If we fail togenerate sufficient revenue to achieve and sustain positive cash flow orprofits, our stock price will decline.**

 

We have incurred significant losses to date and we expect to continueto incur losses for some period of time. We incurred operating losses beforeincome taxes of approximately $1.8 million for 2003, $5.0 million for 2002 and$31.6 million for 2001. As of March 31, 2004, we had an accumulateddeficit of $133.3 million and incurred a loss of $2.9 million for the quarterthen ended.

 

We have experienced negative cash flows in each year since ourinception in 1994, and we expect to continue to do so for some time in thefuture. In addition, we may also incur significant new costs related to possibleacquisitions, the development of new products and services, the integration ofnew technologies or the update of old technologies. Moreover, we might not beable to increase our operating profitability on a quarterly or annual basis. Toincrease profits, we will need to maintain our relationships with existingcustomers, generate additional revenue growth from our existing customers andobtain new customers, while continuing to control our expenses. We expect tocontinue to invest in network and operations, research and development andsales and marketing, and we expect to face pressure to adopt new pricingarrangements, including volume discounts, that may lower our gross margins. Asa result, our ability to achieve and sustain profitability will depend on ourability to sustain and achieve substantially higher revenue while maintainingreasonable cost and expense levels. If we fail to sustain or achieveprofitability, our stock price could decline.

 

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

 

If our cash proves to be insufficient to fund our operations, we mayneed to raise additional funds at some point in the future. In the quarterended March 31, 2004, we utilized $2.8 million in cash, leaving us with acash balance of $22.4 million. If we raise additional funds by selling equityor convertible debt securities, our stockholders may experience additionaldilution and these new securities may have powers, preferences and rights thatare senior to those of the rights of our common stock. We cannot predictwhether additional financing will be available on terms favorable to us, or atall. If adequate funds are not available or are not available on acceptableterms, we may be unable to fund our business operations, promote our brandidentity, take advantage of acquisition opportunities, develop or enhanceservices or respond to competitive pressures. Any inability to do so could havea negative effect on our business, revenues, financial condition and results ofoperations.

 

**The telecommunications industry continues toexperience a dramatic decline, which may cause consolidation among networkservice providers and impair our ability to provide reliable, redundant servicecoverage and negotiate favorable network access terms.**

 

The telecommunications industry continues to experience dramatictechnological change and increased competition that have led to significantdeclines in network access pricing. In addition, the revenues of network serviceproviders have declined as a result of the general economic slowdown. As aresult, network service providers have experienced operating difficulties inthe last several years, resulting in poor operating results and a number ofthese providers declaring bankruptcy. If these conditions continue, some ofthese service providers may consolidate or otherwise cease operations, whichwould reduce the number of network service providers from which we are able toobtain network access. To the extent this were to occur, while we would stillbe able to maintain operations and provide enterprise connectivity serviceswith a small number of network service providers, we would potentially not beable to provide sufficient alternative access points in some geographic areas,which could diminish our ability to provide broad, reliable, redundantcoverage. Further, our ability to

 

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negotiate favorable access rates from network service providers couldbe impaired, which could increase our network access expenses and harm ouroperating results.

 

**If we fail to enhance our existing productsor if new services, products or features we introduce do not succeed in themarketplace, we will not be able to generate new revenues and we will haveincreased costs without the expected returns.**

 

Our target markets are characterized by rapid technological advances,changes in end-user requirements, and frequent new product introductions. Ourfuture success will depend on our ability to anticipate or adapt to suchchanges and to offer, on a timely and cost-effective basis, products that meetchanging customer demands. For example, our growth prospects will bedetermined, among other things, by our ability to grow our new branch officeservices offering, which is an offering into a highly competitive market with alarge number of incumbents. We may lack sufficient resources to anticipatetechnological and market trends, manage long development cycles or develop,introduce and market new products and enhancements. In addition, we cannotpredict whether our products and services will meet with market acceptance orbe profitable.

 

**Any strategic acquisitions or investments weengage in could dilute our stockholders and/or result in the assumption ofadditional liabilities, loss of sales and disruption of our business.**

 

We expect that we will consider future acquisitions of, or investmentsin, complementary businesses, products or technologies. We may encounterdifficulties in identifying and acquiring suitable candidates on reasonableterms.

 

In the event of any future acquisitions, we could:

 

•                                          issuestock that would dilute our current stockholders’ percentage ownership;

 

•                                          incurdebt that will give rise to interest charges and may impose material restrictionson the manner in which we operate our business;

 

•                                          assumeliabilities;

 

•                                          incurexpenses related to impairment of goodwill and other intangible assets; or

 

•                                          incurlarge write-offs.

 

Any strategic acquisitions or investments that we make in the futurewill involve many risks, including the following:

 

•                                          problemscombining the acquired operations, technologies, products or personnel;

 

•                                          unanticipatedcosts;

 

•                                          diversionof management time and attention from our existing business;

 

•                                          adverseeffects on existing business relationships with our suppliers and customers;

 

•                                          risksassociated with entering markets in which we have no or limited priorexperience; and

 

•                                          potentialloss of key employees, particularly those of acquired companies.

 

We may not be able to successfully integrate the businesses, products,technologies or personnel that we might acquire in the future. We cannot assureyou that any strategic investments we may make will meet our financial or otherinvestment objectives. Any failure to do so could seriously harm our business,financial condition and results of operations.

 

**Our ability to compete could be jeopardizedif we are unable to protect our intellectual property.**

 

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Our products 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 its software and other original works. Because thetechnology and intellectual property associated with these products areevolving rapidly, current intellectual property rights may not adequatelyprotect us. In addition, despite efforts to protect our proprietary rights,unauthorized parties may attempt to copy or otherwise obtain and use ourproducts or technology. Monitoring unauthorized use of technology is difficult,and we cannot assure you that the steps they have taken will preventunauthorized use of the technology. Moreover, effective patent, trademark,copyright and trade secret protection may not be available in some countries inwhich we provide, or may anticipate providing, our products. Furthermore, our competitorsmay independently 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.

 

**We may become involved in litigationregarding intellectual property rights that could be costly, could cause us tolose significant rights, and divert our management time and attention.**

 

In the future, we, or our customers, may become a party to litigationto protect our intellectual property or to respond to allegations that weinfringe others’ intellectual property. We may receive communications fromthird parties inquiring about their interest in licensing certain of the thirdparty’s intellectual property or more generally identifying intellectual propertythat could be the basis of a future infringement claim. If a party accuses usof infringing upon its proprietary rights, we would have to defend our companyand possibly our customers against the alleged infringement. These lawsuits,regardless of their success, would likely be time-consuming and expensive toresolve and would divert management’s time and attention. Any potentialintellectual property litigation could also force us to:

 

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

 

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

 

•                                          redesignthe products and services that use that technology.

 

If we are forced to take any of these actions, it may have a materialadverse effect on our business, financial condition and results of operations.

 

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

 

Terrorist acts or acts of war, including military actions in Iraq andother parts of the Middle East and the geo-political uncertainties in othercontinents are having an adverse effect on the U.S. economy and could possiblyinduce or accelerate the advent of a more severe economic recession. The U.S.government’s political, social and economic policies and policy changes as aresult of these circumstances could have consequences that we cannot predict,including causing further weaknesses in the economy. In addition, as amulti-national company with headquarters and significant operations located inthe United States, we may be impacted by actions against the United States. Wewill be predominantly uninsured for losses and interruptions caused byterrorist acts and acts of war. Thus, the long-term impact of these events onour business is uncertain. As a result, our operating results and financialcondition could be materially and adversely affected.

 

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

 

Our success depends on our ability to assure generally error-freeclearinghouse services, uninterrupted operation of our network and softwareinfrastructure, and a satisfactory experience for our customers’ end users. Inthe past, we have experienced problems due to our inability to detect systemmalfunctions and due to errors in collecting or processing account usage 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.

 

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**We depend on our reseller customers to marketInternet-based communications services to their end users, so if our resellercustomers fail to market their services effectively, our revenues may bereduced.**

 

Our business depends in part on the efforts and success of our Internetservice provider and telecommunications service customers in marketingInternet-based communications services to their end users. Although we haverecently focused more heavily on selling to large enterprise customers, thehighest percentage of our revenues is derived from our traditional serviceprovider business. It is important that we maintain a healthy service providerbusiness while we attempt to grow a more expansive enterprise customer base.Recently, we have experienced a faster than projected decline in revenuesderived from our service provider customers. We have little ability to promote our services, or to promote demand forour reseller customers’ services generally. The use of the Internet as a mediumfor communications services remains unproven. If our reseller customers fail tomarket their Internet-based communications services effectively, our revenueswill be reduced. Similarly, if the market for Internet-based 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.

 

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

 

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

 

•                                          thevolume of transaction-based revenues;

 

•                                          thetiming of deployment of services by our customers;

 

•                                          competitivepricing pressure;

 

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

 

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

 

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

 

•                                          regulation,domestically and internationally.

 

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

 

**If SARS re-emerges, business travelers couldrestrict their travel to and from Asia, which could harm our revenues.**

 

Severe Acute Respiratory Syndrome, which is generally known as SARS, isa highly communicable disease that emerged in Asia during the first half of 2003.Concerns about the spread of SARS led to quarantines and travel restrictionsbeing imposed on individuals with suspected symptoms in some countries, andsome companies restricted or banned nonessential travel to and from certainparts of Asia. If business travel to Asia or elsewhere were to decline for asustained period of time due to the re-emergence of SARS-related issues orother health concerns, the level of demand for our services is also likely todecline which could result in reduced revenues.

 

**If we fail to attract and retain qualifiedsales personnel, our business might be harmed.**

 

Our success depends in large part upon our ability to identify, attractand retain qualified sales individuals. Competition for these individuals isoften intense, and we may not be able to hire the type and number of salespersonnel it needs. Moreover, even after we hire salespersons, they requireextensive training in our combined products and services. This trainingtypically covers several weeks of formal in-class and on-the-job instruction.If we are unable to continue to retain our current employees and train newsales personnel as rapidly as necessary, we may not be able to increase marketawareness

 

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and sales of our services, which may prevent us from generating revenueand may negatively impact our ability to maintain customer relationships.

 

**The uncertain economic environment in generalcould adversely affect our revenue, gross margins and expenses.**

 

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

 

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

 

The secure transmission of confidential information over publicnetworks is a significant barrier to widespread adoption of electronic commerceand communications. The Internet is a public network and information is sentover this network from many sources. Advances in computer capabilities, newdiscoveries in the field of code breaking or other developments could result incompromised security on our network or the networks of others. Security andauthentication concerns with respect to the transmission over the Internet of confidentialinformation, such as corporate access passwords, and the ability ofunauthorized 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.

 

**Government regulations and legaluncertainties regarding the Internet could harm GRIC’s business.**

 

GRIC will be subject to local regulations or laws applicable to accessto or commerce on the Internet, in addition to regulations applicable tobusinesses generally. However, the Federal Communications Commission hasinitiated several proceedings that may change the regulatory and legal frameworkfor the provision of broadband and Internet services and current and futureFederal Communications Commission rules and regulations, as well as judicialinterpretations of these rules and regulations, could negatively affect GRIC’sbusiness. In addition, international regulatory standards will govern GRIC’sproducts and services in foreign markets and could impair its ability todevelop products and services for international service providers in thefuture. GRIC may not be able to obtain or maintain all of the regulatoryapprovals that may be required to operate its business. The inability to obtainthese approvals, as well as any delays caused by its compliance and itscustomers’ compliance with regulatory requirements or resulting fromuncertainty associated with future regulatory decisions, could result inpostponements or cancellations of product orders, which would significantlyreduce GRIC’s revenue.

 

**Recently enacted and proposed regulatorychanges may cause us to incur increased costs.**

 

Recently enacted and proposed changes in the laws and regulationsaffecting public companies, including the provisions of the Sarbanes-Oxley Actof 2002, will increase our expenses as we evaluate the implications of newrules and devote resources to respond to the new requirements. In particular,we expect to incur additional administrative expense as we implementSection 404 of the Sarbanes-Oxley Act, which requires management to reporton, and our independent 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 and chief financial officers and directors forsecurities law violations. In addition, The Nasdaq National Stock Market, onwhich our common stock is listed, has also adopted comprehensive rules andregulations relating to corporate governance. These laws, rules and regulationshave increased and will continue to increase the scope, complexity and cost ofour corporate governance, reporting and disclosure practices, which could harmour results of operations and divert management’s attention from businessoperations. We also expect these developments to make it

 

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more difficult and more expensive for us to obtain director and officerliability insurance in the future, and we may be required to accept reducedcoverage or incur substantially higher costs to obtain coverage.

 

Further, our board members, Chief Executive Officer and Chief FinancialOfficer could face an increased risk of personal liability in connection withthe performance of their duties. As a result, we may have difficultlyattracting and retaining qualified board members and executive officers, whichwould adversely affect our business.

 

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

 

Effective internal controls are necessary for us to provide reliablefinancial reports and to detect and prevent fraud. We are currently performingthe system and process evaluation required to ensure compliance with themanagement certification and auditor attestation requirements of Section 404 ofthe Sarbanes-Oxley Act. This evaluation may conclude that enhancements,modifications or changes to our internal controls are necessary. Completingthis evaluation, performing testing and implementing required remedial changeswill require significant expenditures in the short term and on a regular basisin the future. We cannot be certain as to the timing of completion of ourevaluation, testing and remediation actions or the impact of the same on ouroperations.  We have in the pastdiscovered, and may in the future discover, areas of our internal controls thatneed improvement. For example, during our 2003 audit, our independent auditorbrought to our attention a need to improve the closing process used at ourrecently-acquired Irvine, California location by formally documenting ourpolicy relating to recognition of revenues derived from agency arrangementsversus reseller arrangements, correcting recognition of broadband serviceinstallation revenues, training employees performing key finance and accountingfunctions and documenting certain judgmental accounting matters. The auditoridentified these items, collectively, as a "reportable condition,"which means that it was a matter that in the auditor's judgment could adverselyaffect our ability to record, process, summarize and report financial dataconsistent with the assertions of management in the financial statements.  Completing our evaluation of internalcontrols, implementing any changes that are necessary, and maintaining aneffective system of internal controls will be expensive and requireconsiderable management attention. However, if we fail to implement and maintainan effective system of internal controls or prevent fraud, we could be subjectto costly litigation, 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.

** **

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

 

Recent actions and public comments from the Securities and ExchangeCommission have focused on the integrity of financial reporting generally. Inaddition, the FASB and other regulatory accounting agencies have recentlyintroduced several new or proposed accounting standards, or are developing newproposed standards, such as accounting for stock options, some of which wouldrepresent a significant change from current industry practices. While webelieve that our financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America, wecannot predict the impact of the adoption of any such proposals on ourfinancial statements going forward.

 

For example, we currently are not required to record stock-basedcompensation charges if the employee’s stock option exercise price equals orexceeds the deemed fair value of our common stock at the date of grant.However, several companies have recently elected to change their accountingpolicies and begun to record the fair value of stock options as an expense.Although the standards have not been finalized and the timing of a finalstatement has not been established, the FASB has announced their support forrecording expense for the fair value of stock options granted. If we were tochange our accounting policy in accordance with Statement of FinancialAccounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensationand SFAS No. 148, Accounting for Stock- Based Compensation—Transition andDisclosure and retroactively restate all prior periods as if we had adoptedSFAS 123 for all periods presented, then our operating expenses would increaseby approximately $1.4 million and $693,000 for the three months endedMarch 31, 2004 and 2003, respectively.

 

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

 

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

 

•                                          authorizethe board to issue preferred stock without stockholder approval;

 

•                                          prohibitcumulative voting in the election of directors;

 

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

 

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

 

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

 

## **ITEM 3.** QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

*Foreign Currency Risk. *We have limitedexposure to financial market risks, including changes in foreign currencyexchange rates and interest rates. Although we have foreign operations inEurope and Asia, to date our exposure to foreign currency fluctuations has notbeen significant. Therefore, no accompanying table has been provided.

 

*Interest Rate Risk. *Our exposure to interest rate riskrelates primarily to our investment portfolio and debt obligations. Interestrate risk occurs when we cannot hold a purchased investment to its maturity.The weighted-average maturity of our investment portfolio, when taking intoaccount the reset feature of floating rate municipal bonds, is limited to

 

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90 days. We intend to have our securities available for sale. Wedo not expect to recognize an adverse impact on income or cash flows, althoughthere can be no assurance of this. We have established policies and businesspractices regarding our investment portfolio to preserve principal whileobtaining reasonable rates of return without significantly increasing risk. Weplace investments with high credit quality issuers according to our investmentpolicy. We do not use derivative financial instruments in our investmentportfolio. All investments are carried at fair market value at March 31,2004. Due to the short-term nature of our investments and the immaterial amountof our debt obligation, we believe that there is no material exposure tointerest fluctuation. Therefore, no accompanying table has been provided.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

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

 

*Changes in Internal Controls.*  During the period covered by this report,there were no changes in the Company’s internal control over financialreporting that materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.  However, we intend to continue to refine ourinternal controls on an ongoing basis. Our management believes that it has taken the necessary steps to fullyresolve the reportable condition that was previously reported to our AuditCommittee relating to the financial close process used in December 2003 atour Irvine, California facility and that the reportable condition no longerexists.  Under the direction of ourrecently hired Chief Financial Officer, we reviewed and documented keyaccounting procedures, trained our finance personnel and realigned accountingresponsibilities in our Irvine, California facility to support our operationsand external reporting requirements.

 

***               ****Limitations onEffectiveness of Controls and Procedures.*  Our management, including our Chief Executive Officer and ChiefFinancial Officer, does not expect that our disclosure controls and proceduresor our internal controls will prevent all error and all fraud. A controlsystem, no matter how well conceived and operated, can provide only reasonable,not absolute, assurance that the objectives of the control system are met.Further, the design of a control system must reflect the fact that there areresource constraints and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include, but are not limited to, the realities thatjudgments in decision-making can be faulty and that breakdowns can occurbecause of simple error or mistake. Additionally, controls can be circumventedby the individual acts of some persons, by collusion of two or more people, orby management override of the control. The design of any system of controlsalso is based in part upon certain assumptions about the likelihood of futureevents and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions; over time, control maybecome inadequate because of changes in conditions, or the degree of compliancewith the policies or procedures may deteriorate. Because of the inherentlimitations in a cost-effective control system, misstatements due toerror or fraud may occur and not be detected.

 

**PART II. OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

We are subject to various legal proceedings and claims arising in theordinary course of business. Our management does not expect that the results inany of these legal proceedings will have a material adverse effect on ourfinancial condition, results of operations, or cash flows.

 

In July and August 2001, we and certain of our 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 GRIC Communications, Inc. Initial Public Offering Securities Litigation,No. 01 Civ 6771 (SAS), and consolidated with more than three hundredsubstantially identical proceedings as In re Initial Public Offering SecuritiesLitigation, Master File No. 21 MC 92 (SAS). The Consolidated Amended ClassAction Complaint for Violation of the Federal Securities Laws (“ConsolidatedComplaint”) was filed on or about April 19, 2002, and alleges claimsagainst certain of our officers and against CIBC World Markets Corp.,Prudential Securities Incorporated, DB Alex. Brown, as successor to DeutscheBank, and U.S. Bancorp Piper Jaffray Inc., underwriters of ourDecember 14, 1999 initial public offering (“underwriter defendants”),under Sections 11 and 15 of the Securities Act of 1933, as amended, and underSection 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended.

 

Citing several press articles, the Consolidated Complaint alleges thatthe underwriter defendants used improper methods in allocating shares ininitial public offerings, and claims the underwriter defendants entered intoimproper commission agreements regarding aftermarket trading in our 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 underSection 11 and Section 10(b) of the Securities Act of 1933,pre-judgment and post-judgment interest, and reasonable attorneys’ and expertwitnesses’ fees and other costs; no specific amount is claimed in theplaintiffs’ prayer in the Consolidated Complaint. By Order of the Court, noresponsive pleading is yet due, although motions to dismiss on global issuesaffecting all of the issuers have been filed.

 

In October 2002, certain of our officers and directors who hadbeen named as defendants in the In re Initial Public Offering SecuritiesLitigation were dismissed without prejudice upon order of the presiding judge.In February 2003, the presiding judge dismissed the Section 10(b)claims against us and our named officers and directors with prejudice.

 

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From September 2002 through June 2003, we participated insettlement negotiations with a committee of issuers’ litigation counsel,plaintiffs’ executive committee and representatives of various insurancecompanies (the “Insurers”). Our Insurers were actively involved in thesettlement negotiations, and strongly supported a settlement proposal presentedto us for consideration in early June 2003. The settlement proposed by theplaintiffs would be paid for by the Insurers and would dispose of all remainingclaims against us.

 

After careful consideration, we decided to approve the settlementproposal in July 2003. Although we believe that plaintiffs’ claims arewithout merit, we have decided to accept the settlement proposal (which doesnot admit wrongdoing) to avoid the cost and distraction of continuedlitigation. Because the settlement will be funded entirely by our Insurers, wedo not believe that the settlement will have any effect on our financialcondition, results or operations or cash flows.

 

We believe that the settlement will be presented to the Court forapproval in the summer of 2004. There can be no guarantee that the settlementwill be judicially approved.

 

**ITEM2.  CHANGES IN SECURITIES AND USE OFPROCEEDS**

 

See “Note 7 of Notes to the Condensed Consolidated FinancialStatements.”

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Not applicable.

 

**ITEM5.  OTHER INFORMATION**

 

Not applicable.

 

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

 

(a)                                  Exhibits
| **Exhibit** |   |                                                                                                                                                |   | **Incorporated  by Reference** |   | **Filed or  Furnished** |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|-------------------------|
| **Number**  |   | **Exhibit  Description**                                                                                                                            |   | **Form**                       |   | **File No.**            |   | **Exhibit** |   | **Filing  Date** |   | **Herewith** |
|        |   |                                                                                                                                                |   |                           |   |                    |   |   |   |   |   |   |
| 31.01       |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 of the Registrant’s Chief Executive Officer, dated May 10, 2004. |   |                           |   |                    |   |   |   |   |   | X |
|        |   |                                                                                                                                                |   |                           |   |                    |   |   |   |   |   |   |
| 31.02       |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 of the Registrant’s Chief Financial Officer, dated May 10, 2004. |   |                           |   |                    |   |   |   |   |   | X |
|        |   |                                                                                                                                                |   |                           |   |                    |   |   |   |   |   |   |
| 32.01*      |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 of the Registrant’s Chief Executive Officer, dated May 10, 2004. |   |                           |   |                    |   |   |   |   |   | X* |
|        |   |                                                                                                                                                |   |                           |   |                    |   |   |   |   |   |   |
| 32.02*      |   | Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 of the Registrant’s Chief Financial Officer, dated May 10, 2004. |   |                           |   |                    |   |   |   |   |   | X* |

 

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*                                         Thesecertifications accompany GRIC’s Quarterly Report on Form 10-Q for the quarterlyperiod ended March 31, 2004.  Thesecertifications are not deemed filed with the Securities and Exchange Commissionand are not to be incorporated by reference in any filing of GRIC under theSecurities Act of 1933 or the Securities Exchange Act of 1934, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage in any

 

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filings.

 

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

 
| **Date Filed or  Furnished** |   | **Item(s)** |   | **Description**                                                                                                                                                                             |
|------------------------------|--------|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         |   |        |   |                                                                                                                                                                                        |
| 2/13/04                      |   | 7,  12      |   | On February 13, 2004,  we filed a Form 8-K regarding a press release announcing our financial  results for the fourth quarter of 2003.*                                           |
| 2/13/04                      |   | 5,  7       |   | On February 13, 2004,  we filed Amendment No. 1 to the Form 8-K filed December 3,  2003, regarding our acquisition of Axcelerant, Inc.*                                 |
| 2/25/04                      |   | 5,  7       |   | On February 25, 2004, we  filed a Form 8-K regarding a press release announcing that we had hired  Daniel Fairfax as our new Senior Vice President of Finance and Chief  Financial Officer. |

 

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*  The information included under Items 7 and 12 of these reports onForm 8-K was furnished, but is not intended to be deemed filed or incorporated byreference into any filing.

 

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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, thereuntoduly authorized, on May 10, 2004.

 
|   | GRIC  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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