**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 June 30, 2003**                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                    |
| **or**                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                    |
| **o**                                                                                                                                                                                                                                                   |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                                                    |
| **For  the transition period from                     to                   ** |
|                                                                                                                                                                                                                                                    |
| **Commission file number: 000-27871**                                                                                                                                                                                                                   |

 

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

 

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  o    No  ý

 

Thenumber of shares of the registrant’s common stock outstanding as of July 31,2003 was 22,551,356 shares.

 

 

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**GRIC COMMUNICATIONS, INC.**

**INDEX**
| **PART I**                |
|---------------------------|
| **FINANCIAL INFORMATION** |
|                      |
| Item 1.                   | Financial Statements: |
|                      | Condensed Consolidated Balance Sheets as of  June 30, 2003 and  December 31, 2002 |
|                      | Condensed Consolidated Statements of Operations  for the Three and Six Months Ended  June 30, 2003 and 2002 |
|                      | Condensed Consolidated Statements of Cash  Flows for the Six Months Ended  June 30, 2003 and 2002 |
|                      | Notes to Condensed Consolidated Financial  Statements |
| Item 2.                   | Management’s Discussion and Analysis of Financial Condition and  Results of Operations |
| Item 3.                   | Quantitative and Qualitative Disclosures  About Market Risk |
| Item 4.                   | Controls and Procedures |
|                      |   |
| **PART 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)**

 
|                                                                                                                                                                                                                                   |   | **Jun  30,  2003** |   | **Dec  31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|
|                                                                                                                                                                                                                                   |   | **(unaudited)**    |   |               |   |
| **ASSETS**                                                                                                                                                                                                                             |   |               |   |               |   |
| ***Current  assets:***                                                                                                                                                                                                                 |   |               |   |               |   |
| Cash and cash equivalents                                                                                                                                                                                                              |   | $                  | 3,426  |               | $      | 7,314 |   |
| Short-term investments                                                                                                                                                                                                                 |   | 19,259             |   | 15,765             |   |
| Accounts receivable, net of allowances of  $282 and $249 at June 30, 2003 and December 31, 2002, respectively                                                                                                                |   | 4,708              |   | 3,978              |   |
| Prepaid expenses and other current assets                                                                                                                                                                                              |   | 1,468              |   | 1,108              |   |
| Total current assets                                                                                                                                                                                                                   |   | 28,861             |   | 28,165             |   |
| Property and equipment, net                                                                                                                                                                                                            |   | 1,600              |   | 1,778              |   |
| Other assets                                                                                                                                                                                                                           |   | 506                |   | 667                |   |
| Total assets                                                                                                                                                                                                                           |   | $                  | 30,967 |               | $      | 30,610 |   |
|                                                                                                                                                                                                                                   |   |               |   |               |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                                                                         |   |               |   |               |   |
| ***Current  liabilities:***                                                                                                                                                                                                            |   |               |   |               |   |
| Accounts payable                                                                                                                                                                                                                       |   | $                  | 4,533  |               | $      | 4,331 |   |
| Accrued compensation and benefits                                                                                                                                                                                                      |   | 964                |   | 596                |   |
| Deferred revenue                                                                                                                                                                                                                       |   | 448                |   | 276                |   |
| Other current liabilities                                                                                                                                                                                                              |   | 335                |   | 343                |   |
| Total current liabilities                                                                                                                                                                                                              |   | 6,280              |   | 5,546              |   |
| Long-term liabilities                                                                                                                                                                                                                  |   | —             |   | 88                 |   |
| Commitments and contingencies                                                                                                                                                                                                          |   |               |   |               |   |
| Stockholders’ equity:                                                                                                                                                                                                             |   |               |   |               |   |
| Series A redeemable convertible preferred  stock, $0.001 par value: 12,801 shares authorized, 8,434 and 9,036 shares  issued and outstanding at June 30, 2003 and December 31, 2002,  respectively                           |   | 10,968             |   | 11,752             |   |
| Preferred stock, 5,000 shares authorized at  June 30, 2003 and December 31, 2002: no shares issued and outstanding                                                                                                                     |   | —             |   | —             |   |
| Common stock, $0.001 par value; 50,000  shares authorized at June 30, 2003 and December 31, 2002: 21,485  and 20,337 shares issued and outstanding at June 30, 2003 and  December 31, 2002, respectively |   | 21                 |   | 20                 |   |
| Additional paid-in capital                                                                                                                                                                                                             |   | 143,259            |   | 141,829            |   |
| Deferred stock-based compensation                                                                                                                                                                                                      |   | (4                 | )      | (65                | )      |
| Accumulated deficit                                                                                                                                                                                                                    |   | (129,557           | )      | (128,560           | )      |
| Total stockholders’ equity                                                                                                                                                                                                        |   | 24,687             |   | 24,976             |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                        |   | $                  | 30,967 |               | $      | 30,610 |   |

 

See accompanying notes

 

3

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**GRICCOMMUNICATIONS, INC.Condensed ConsolidatedStatements of Operations**

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

 
|                                                             |   | **Three Months Ended  June 30,** |   | **Six Months Ended****June 30,** |   |
|------------------------------------------------------------------|--------|----------------------------------|--------|----------------------------------|--------|
|                                                             |   | **2003**                         |   | **2002**                         |   | **2003** |   | **2002** |   |
| Revenues                                                         |   | $                                | 9,858  |                             | $      | 8,179 |   | $ | 19,349 |   | $ | 15,563 |   |
| Costs and expenses:                                              |   |                             |   |                             |   |   |   |   |   |
| Cost of revenues                                                 |   | 4,442                            |   | 3,689                            |   | 8,807 |   | 7,041 |   |
| Network and operations                                           |   | 824                              |   | 1,122                            |   | 1,771 |   | 2,219 |   |
| Research and development                                         |   | 554                              |   | 781                              |   | 1,199 |   | 1,568 |   |
| Sales and marketing                                              |   | 3,312                            |   | 3,318                            |   | 6,009 |   | 6,456 |   |
| General and administrative                                       |   | 1,225                            |   | 1,174                            |   | 2,625 |   | 2,631 |   |
| Amortization of stock-based compensation (1)                     |   | 20                               |   | 42                               |   | 61 |   | 86 |   |
| Restructuring (benefit) charge                                   |   | (79                              | )      | 1,146                            |   | (79 | ) | 682 |   |
| Total costs and expenses                                         |   | 10,298                           |   | 11,272                           |   | 20,393 |   | 20,683 |   |
| Operating loss                                                   |   | (440                             | )      | (3,093                           | )      | (1,044 | ) | (5,120 | ) |
| Interest income and other, net                                   |   | 75                               |   | 97                               |   | 66 |   | 133 |   |
| Interest expense                                                 |   | —                           |   | (15                              | )      | — |   | (31 | ) |
| Operating loss before income taxes                               |   | (365                             | )      | (3,011                           | )      | (978 | ) | (5,018 | ) |
| Provision for income taxes                                       |   | 11                               |   | 8                                |   | 19 |   | 16 |   |
| Net loss                                                         |   | (376                             | )      | (3,019                           | )      | (997 | ) | (5,034 | ) |
| Deemed beneficial conversion dividend on Series APreferred Stock |   | —                           |   | (11,781                          | )      | — |   | (11,781 | ) |
| Net loss attributable to common stockholders                     |   | $                                | (376   | )                                | $      | (14,800 | ) | $ | (997 | ) | $ | (16,815 | ) |
| Basic and diluted net loss per share                             |   | $                                | (0.02  | )                                | $      | (0.74 | ) | $ | (0.05 | ) | $ | (0.84 | ) |
| Shares used to compute basic and diluted net loss  per share     |   | 21,255                           |   | 20,042                           |   | 20,992 |   | 20,009 |   |

 

----

(1) Amortization of stock-based compensation consists of:

 
| Network and operations                          |   | $  | 1      |   | $      | 2  |   | $  | 3      |   | $ | 3  |   |
|-------------------------------------------------|--------|----|--------|--------|--------|----|--------|----|--------|--------|---|----|--------|
| Research and development                        |   | 2  |   | 2      |   | 3  |   | 6  |   |
| Sales and marketing                             |   | 1  |   | 1      |   | 1  |   | 2  |   |
| General and administrative                      |   | 16 |   | 37     |   | 54 |   | 75 |   |
| Total  amortization of stock-based compensation |   | $  | 20     |   | $      | 42 |   | $  | 61     |   | $ | 86 |   |

 

See accompanying notes

 

4

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

 
|                                                                         |   | **Six Months Ended** |   |
|------------------------------------------------------------------------------|--------|----------------------|--------|
|                                                                         |   | **June 30,  2003**   |   | **June 30,  2002** |   |
| ***Cash flows from  operating activities:***                                 |   |                 |   |   |   |
| Net loss                                                                     |   | $                    | (997   | ) | $ | (5,034 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                 |   |   |   |
| Depreciation and amortization of property and  equipment                     |   | 300                  |   | 1,416 |   |
| Amortization of stock-based compensation                                     |   | 61                   |   | 203 |   |
| Gain on sales of assets                                                      |   | (116                 | )      | (333 | ) |
| Accounts receivable allowances                                               |   | (5                   | )      | 18 |   |
| Noncash portion of restructuring benefit                                     |   | (79                  | )      | (94 | ) |
| Noncash warrant expenses—preferred stock                                |   | —               |   | 1 |   |
| Net changes in assets and liabilities:                                       |   |                 |   |   |   |
| Accounts receivable                                                          |   | (725                 | )      | (1,015 | ) |
| Prepaid expenses and other current assets                                    |   | (360                 | )      | (242 | ) |
| Other assets                                                                 |   | 161                  |   | (23 | ) |
| Accounts payable                                                             |   | 366                  |   | 1,345 |   |
| Accrued compensation and benefits                                            |   | 368                  |   | (1,098 | ) |
| Deferred revenue                                                             |   | 172                  |   | (121 | ) |
| Other current liabilities                                                    |   | (8                   | )      | (4 | ) |
| Other long-term liabilities                                                  |   | (88                  | )      | (3 | ) |
| Net cash used in operating activities                                        |   | (950                 | )      | (4,984 | ) |
| ***Cash flows from  investing activities:***                                 |   |                 |   |   |   |
| Available-for-sale investments:                                              |   |                 |   |   |   |
| Purchases                                                                    |   | (9,150               | )      | (18,902 | ) |
| Maturities                                                                   |   | 5,656                |   | 9,787 |   |
| Proceeds from sales of assets                                                |   | 117                  |   | 337 |   |
| Capital expenditures                                                         |   | (208                 | )      | (122 | ) |
| Net cash used in investing activities                                        |   | (3,585               | )      | (8,900 | ) |
| ***Cash flows from  financing activities:***                                 |   |                 |   |   |   |
| Payments of capital lease obligations                                        |   | —               |   | (348 | ) |
| Proceeds from sales of common stock, net                                     |   | 647                  |   | 84 |   |
| Proceeds from sales of treasury stock                                        |   | —               |   | 99 |   |
| Proceeds from issuance of preferred stock, net of  issuance costs            |   |                 |   | 14,366 |   |
| Net cash provided by financing activities                                    |   | 647                  |   | 14,201 |   |
| Net increase (decrease) in cash and cash equivalents                         |   | (3,888               | )      | 317 |   |
| Cash and cash equivalents at beginning of the  period                        |   | 7,314                |   | 4,021 |   |
| Cash and cash equivalents at end of the period                               |   | $                    | 3,426  |   | $ | 4,338 |   |
|                                                                         |   |                 |   |   |   |
| ***Supplemental  disclosures of cash flow information:***                    |   |                 |   |   |   |
| Income taxes paid                                                            |   | $                    | 20     |   | $ | — |   |
| Interest paid                                                                |   | $                    | — |   | $ | 14 |   |

 

See accompanying notes

 

5

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**GRIC COMMUNICATIONS, INC.**

** **

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

 

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

 

Thefinancial information at June 30, 2003 and for the three and six months endedJune 30, 2003 and 2002 is unaudited, but includes all adjustments (consistingof normal recurring adjustments and restructuring 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 and Article 10of Regulation S-X.  Accordingly,they do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for annual financialstatements. The results for the three and six months ended June 30, 2003 arenot necessarily indicative of the results that may be expected for futureperiods.

 

Thebalance sheet at December 31, 2002 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 consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 31, 2002.

 

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

 

*Revenue Recognition and RelatedAllowances. *TheCompany derives revenues primarily from remote Internet access services tocustomers through its virtual network. These services are generally billed on aper-minute basis for usage or at a flat rate per month per user based onnegotiated rates. The Company has some customers with minimum commitmentarrangements. To a lesser extent, the Company derives revenues from licenses ofits authentication software, related maintenance and support services, whichare recognized ratably over the contractual services period or term ofservices, and other optional services related to its GRIC MobileOfficeoffering, which are recognized at the time of delivery.

 

Revenues are recognized when a binding agreement or purchase order fromthe customer has been received, the services have been delivered, the fee orprice was fixed or determinable, the collection of the receivable wasreasonably assured, and no significant post-delivery obligations remained.

 

The Company records estimated allowances against revenues in the sameperiod the revenues are recorded. These estimates are based upon historicalanalysis of our credit memo data and other known factors for pricing andtransaction volume disputes that arise in the normal course of business. Todate, allowances pertaining to the Company’s current business have not beensignificant.

 

From time to time, the Company’s customers, including significantcustomers, may seek protection under bankruptcy laws. When this occurs, theCompany determines its ongoing exposure to risk that a pre-filing accountreceivable will prove to be uncollectable, and establishes appropriateallowances for that contingency as necessary. In addition, for each continuingcustomer in bankruptcy the Company evaluates the creditworthiness of thecustomer and determines whether revenue should be recognized on an accrualbasis or as cash payments are received. When revenue is recorded on an accrualbasis, the Company bases its judgment on the creditworthiness of thedebtor-in-possession, their payment experience, collectability of receivablesis reasonably assured, all in addition to other revenue recognition criteriahaving been met.

 

*Allowance for Doubtful Accounts.*The Company maintains allowances for doubtfulaccounts for estimated losses from its customers’ inability to make requiredpayments. In order to estimate the appropriate level of this allowance, theCompany analyzes historical bad debts, customer concentrations, currentcustomer credit-worthiness, current economic trends and changes in its customerpayment patterns. If the financial condition of its customers were todeteriorate and to impair their ability to make payments, additional allowancesmight be required in future periods.

 

*Long-Lived Assets*.  Aspart of the Company’s review of its property and equipment during the threemonths ended June 30, 2003, certain matters were identified related to prior financialreporting periods that required the recording of a net reduction in operatingexpenses.  The Company quantified theamounts associated with certain property and equipment for which excessdepreciation charges had been recorded against certain property and equipmentin prior periods.  The Company alsoidentified certain leasehold improvements that were abandoned in previousperiods but remained on its financial statements.   Accordingly, for the three months ended June 30, 2003, theCompany recorded a net reduction to operating expenses of $217,000 resultingfrom reduced

 

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accumulated depreciation and depreciation expense by approximately$302,000, partially offset by an impairment charge to property and equipment ofapproximately $85,000 that was applied against the restructuring benefit.  The Company does not believe these amountsare material to the periods in which they should have been recorded, nor does itexpect that the adjustment will be material to its consolidated operatingresults for the year ending December 31, 2003. However, if these adjustments are ultimately deemed to be material tothe Company’s consolidated operating results for the year ending December 31,2003, the Company will need to restate prior financial reporting periodsincluding the three months ended June 30, 2003.  The impact would increase the net loss for the three months endedJune 30, 2003 by $217,000 ($0.01 per share) and decrease net loss for the yearended December 31, 2002 by $217,000 ($0.01 per share), as well as decreaseaccumulated deficit and increase net property and equipment by $217,000.

 

*Net Loss Per Share. *Net loss per common share and dilutednet loss per share are presented in conformity with the Financial AccountingStandards Board’s Statement of Financial Accounting Standards No. 128, *“Earnings Per Share”* (“SFAS No. 128”)for all years presented.

 

In accordance with SFAS No. 128, basic and diluted net loss pershare has been computed using the weighted-average number of shares of commonstock outstanding during the period. Potentially dilutive securities have beenexcluded from the computation of basic and diluted net loss per share, as theireffect is antidilutive.

 

Weighted-average options outstanding to purchase approximately 2.4million and 1.5 million shares of common stock for the three months ended June30, 2003 and 2002, respectively, and approximately 1.8 million and 1.4 millionshares of common stock for the six months ended June 30, 2003 and 2002,respectively, were not included in the computation of diluted net loss pershare because the effect would be antidilutive. Such securities, had they beendilutive, would have been included in the computation of diluted net loss pershare using the treasury stock method.

 

*Reclassifications. *Amounts for revenues and cost ofrevenues**in the previous quarterhave been reclassified to conform to the current presentation.

 

*Recent Accounting Pronouncements. *In June 2002,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 146 (“SFAS 146*”), “Accounting for Costs Associated with Exit or Disposal Activities.”*SFAS 146 nullifies Emerging Issues Task Force IssueNo. 94-3,*“Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)”*(“EITF94-3”). The principle difference between SFAS 146 and EITF 94-3 relates toits requirement for recognition of a liability for a cost associated with anexit or disposal activity. This statement requires that a liability for a costassociated with an exit or disposal activity be recognized when the liabilityis incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3was recognized at the date of an entity’s commitment to an exit plan. Thisstatement also establishes that fair value is the objective for initialmeasurement of the liability. SFAS 146 is effective for exit or disposalactivities that are initiated after December 31, 2002. There was no impacton the Company’s consolidated financial position or results of operations fromthe adoption of SFAS 146 as the Company did not have any new exit or disposalactivities during the six months ended June30, 2003.

 

In November 2002, the FASB issued FASB Interpretation No. 45(“FIN 45”), *“Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”* FIN 45 requires that a liability berecorded in the guarantor’s balance sheet upon issuance of a guarantee. Inaddition, FIN 45 requires disclosures about the guarantees that an entity hasissued, including a roll forward of the entity’s product warranty liabilities.The disclosure provisions of FIN 45 are effective for financial statements ofinterim or annual periods ending after December 15, 2002. The Company hasadopted the disclosure provisions and accounting requirements of FIN 45. Theadoption of the disclosure provisions and accounting requirements of FIN 45 didnot have a material impact on its consolidated financial position or results ofoperations.

 

In December 2002, the FASB issued Statement of FinancialAccounting Standards No. 148 (“SFAS 148”), *“Accounting for Stock-Based Compensation—Transition and Disclosure—anAmendment of FASB Statement No. 123.”* SFAS 148 amendsSFAS 123 to provide alternative methods of transition for a voluntarychange to the fair value method of accounting for stock-based employeecompensation. In addition, SFAS 148 amends the disclosure requirements ofSFAS 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results. Thetransition and annual disclosure requirements of SFAS 148 are effectivefor fiscal years ending after December 15, 2002. The interim financialstatement disclosure requirements of SFAS 148 are effective for interimperiods beginning after December 15, 2002. The transition provisions donot currently have an impact on the Company’s consolidated financial positionand results of operations as the Company has not elected to adopt the fairvalue method of accounting for stock-based compensation as per SFAS 123.The Company has adopted the annual and interim disclosure requirements ofSFAS 148.

 

InJanuary 2003, the FASB issued Interpretation No. 46 (FIN 46),“Consolidation of Variable Interest Entities.” FIN 46 requires an investor witha majority of the variable interests (primary beneficiary) in a variableinterest entity (VIE) to consolidate the entity and also requires majority andsignificant variable interest investors to provide certain disclosures. A VIEis an entity in which

 

7

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thevoting equity investors do not have a controlling interest, or the equityinvestment at risk is insufficient to finance the entity’s activities withoutreceiving additional subordinated financial support from other parties. Forarrangements entered into with VIEs created prior to January 31, 2003, theprovisions of FIN 46 are required to be adopted at the beginning of the firstinterim or annual period beginning after June 15, 2003. The provisions of FIN46 were effective immediately for all arrangements entered into with new VIEscreated after January 31, 2003.  Basedon the Company’s initial review, there were no entities identified that wouldrequire consolidation.  The Companyexpects to complete the review in the third quarter of 2003.

 

InMarch 2003, the EITF reached a consensus on Issue No. 00-21, “RevenueArrangements with Multiple Elements,” which addresses certain aspects ofaccounting for arrangements that include multiple products or services.  Specifically, this issue addresses: (1) how todetermine whether an arrangement that contains multiple products or servicescontains more than one unit of accounting, and (2) how the arrangementconsideration should be measured and allocated.  Accordingly, the adoption of EITF No. 00-21 may impact the timingof revenue recognition as well as allocation between products andservices.  EITF No. 00-21 is applicablefor transactions entered into in fiscal periods beginning after June 15, 2003.  The Company does not expect thatadoption of the guidance provided by EITF No. 00-21 will have a material impact on its consolidatedfinancial position or results of operations.

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150 (“SFAS 150*”),“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.” *Thisstatement establishes standards for classifying and measuring as liabilitiescertain financial instruments that embody obligations of the issuer and havecharacteristics of both liabilities and equity.  The provisions of SFAS 150 must be applied immediately toinstruments entered into or modified after May 31, 2003 and to all otherinstruments that exist as of the beginning of the first interim financialreporting period beginning after June 15, 2003.  Based on the Company's initial review, it does not appear thatthe adoption of the provisions of SFAS 150 will have a material impact on itsconsolidated financial position or results of operations.  The Company expects to complete the reviewin the third quarter of 2003.

 

**3.****                  ****Stock-Based Compensation**

 

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

 

Pro forma information regarding net income (loss) and earnings (loss)per share is required by SFAS No. 148 and SFAS No. 123 and has beendetermined as if the Company had accounted for awards to employees under thefair value method of SFAS No. 123. The fair value of stock options underthe Company’s 1999 Equity Incentive Plan and stock purchase rights under theCompany’s 1999 Employee Stock 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 endedJune 30, 2003 and 2002 were estimated at the date of grant assuming no expecteddividends and the following weighted average assumptions.

 

**Stock Options**

 
|                            |   | **Three  Months Ended June 30,** |   | **Six  Months Ended June 30,** |   |
|---------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                            |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                            |   |                             |   |                           |   |   |   |   |   |
| Expected life (years)           |   | 2.09                             |   | 1.31                           |   | 2.04 |   | 2.40 |   |
| Expected stock price volatility |   | 2.50                             |   | 0.84                           |   | 1.94 |   | 0.99 |   |
| Risk-free interest rate         |   | 2.62                             | %      | 4.51                           | %      | 2.76 | % | 4.31 | % |

 

**Stock Purchase**

** **
|                            |   | **Three  Months Ended June 30,** |   | **Six  Months Ended June 30,** |   |
|---------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                            |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                            |   |                             |   |                           |   |   |   |   |   |
| Expected life (years)           |   | 0.49                             |   | 0.49                           |   | 0.50 |   | 0.50 |   |
| Expected stock price volatility |   | 0.77                             |   | 0.97                           |   | 0.77 |   | 0.97 |   |
| Risk-free interest rate         |   | 2.46                             | %      | 4.09                           | %      | 2.46 | % | 4.09 | % |

 

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.

 

8

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The Company’s pro forma information is as follows:

 
|                                       |   | **Three  Months Ended June 30,**             |   | **Six  Months Ended June 30,** |   |
|--------------------------------------------|--------|----------------------------------------------|--------|--------------------------------|--------|
|                                       |   | **2003**                                     |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                       |   | **(in thousands, except per share amounts)** |   |
| Net loss as reported                       |   | $                                            | (376   | )                              | $      | (14,800 | ) | $ | (977 | ) | $ | (16,815 | ) |
| Stock-based compensation expense           |   | (1,219                                       | )      | (870                           | )      | (1,953 | ) | (2,099 | ) |
| Amortization of stock compensation         |   | 20                                           |   | 42                             |   | 61 |   | 86 |   |
| Pro forma net loss                         |   | $                                            | (1,575 | )                              | $      | (15,628 | ) | $ | (2,869 | ) | $ | (18,828 | ) |
|                                       |   |                                         |   |                           |   |   |   |   |   |
| Basic and fully diluted net loss per share |   |                                         |   |                           |   |   |   |   |   |
| As reported                                |   | $                                            | (0.02  | )                              | $      | (0.74 | ) | $ | (0.05 | ) | $ | (0.84 | ) |
| Pro forma                                  |   | $                                            | (0.07  | )                              | $      | (0.78 | ) | $ | (0.14 | ) | $ | (0.94 | ) |

 

Calculated under SFAS No. 123, the weighted-average fair values ofthe employee stock options granted during the three months ended June 30, 2003and 2002 were $2.24 and $0.63 per share, respectively.

 

**4.****                  ****Intangible Assets**

 

The Company entered into anagreement with a wireless service provider during 2001 for the exchange ofservices, which resulted in a prepayment for future wireless services and theobligation by the Company to provide future Internet roaming services. Theassessed value of these wireless services is included in prepaid expenses andother current assets and in other assets in the amounts of $200,000 and$400,000, respectively. As of June 30, 2003, these assets had not beenutilized. The underlying agreement is due to expire on September 30, 2003. TheCompany is currently in discussions with the provider to modify the scope ofthe business relationship in order to enable the Company to realize the amountpreviously prepaid.  In assessing therecoverability, the Company must make certain assumptions regarding a number offactors, including its ability to modify the scope of the business relationshipto determine the fair value of the prepaid amount.  If the Company is unable to modify the scope of the businessrelationship or if these assumptions change during the term of the underlyingagreement with the service provider, the Company will be required to record animpairment charge related to these assets in the quarter ended September 30,2003.

 

**5.****                  ****Commitments andContingencies**

 

#### *Lease commitments. *The Company leases all of itsfacilities under operating leases that expire at various dates through 2008. Asof June 30, 2003, the Company had $2.5 million in future operating leasecommitments.

 

*Purchase Commitments. *The Company hasentered into certain non-cancelable purchase commitments from suppliers whoprovide network access, software and related services that are utilized by theCompany in order to deliver its GRIC MobileOffice solution. As of June 30, 2003the Company had $656,000 in future purchase commitments that expire at variousdates through 2004.

 

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

 

In July and August 2001, the Company and certain of its officers werenamed as defendants in five purported securities class action lawsuits filed inthe United States District Court, Southern District of New York, captioned asIn re 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 claims againstcertain of the Company’s 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 the Company’sDecember 14, 1999 initial public offering (“underwriter defendants”), underSections 11 and 15 of the Securities Act of 1933, as amended, and under Section10(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 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 market manipulationclaims against the underwriter defendants based on the

 

9

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activities of their respective analysts, who were allegedly compromisedby conflicts of interest. The plaintiffs in the Consolidated Complaint seekdamages as measured under Section 11 and Section 10(b) of theSecurities Act of 1933, pre-judgment and post-judgment interest, and reasonableattorneys’ and expert witnesses’ fees and other costs; no specific amount isclaimed in the plaintiffs’ prayer in the Consolidated Complaint. By Order ofthe Court, no responsive pleading is yet due, although motions to dismiss onglobal issues affecting all of the issuers have been filed.

 

In October 2002, certain of the Company’s officers and directors whohad been 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) claimsagainst the Company and its named officers and directors with prejudice.

 

For several months, the Company has participated in settlementnegotiations with a committee of Issuers’ litigation counsel, plaintiffs’executive committee and representatives of various insurance 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.  The settlement proposed by the plaintiffswould be paid for by the Insurers and would dispose of all remaining claimsagainst the Company.

 

After careful consideration, the Company has decided to approve thesettlement proposal in July 2003. Although the Company believes that plaintiffs’ claims are without merit,it has decided to accept the settlement proposal (which does not admitwrongdoing) to avoid the cost and distraction of continued litigation.  Because the settlement will be fundedentirely by its Insurers, the Company does not believe that the settlement willhave any effect on the Company’s financial condition, results or operations orcash flows.

 

The settlement will be presented to the Court for approval in thecoming months.  There can be noguarantee that the settlement will be judicially approved.

 

###### ***Indemnifications. ***The Company from time to time enters intotypes of contracts that contingently require the Company to indemnify partiesagainst third party claims. These contracts primarily relate to: (i) realestate leases, under which the Company may be required to indemnify propertyowners for environmental and other liabilities, and other claims arising fromthe Company’s use of the applicable premises; and (ii) agreements with theCompany’s officers, directors and employees, under which the Company may berequired to indemnify such persons for liabilities arising out of theiremployment relationship.

 

The terms of such obligations vary. Generally, a maximum obligation isnot explicitly stated. Because the obligated amounts of these types of agreementsoften are not explicitly stated, the overall maximum amount of the obligationscannot be reasonably estimated. Historically, the Company has not beenobligated to make any payments for these obligations, and no liabilities havebeen recorded for these obligations on its balance sheet at June 30, 2003.

 

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

 

*June 2002 Restructuring. *In June 2002,the Company undertook a strategic restructuring to streamline its operations inorder to help reduce operating expenses. The provision and associated chargesagainst the provision for the June 2002 restructuring through the yearended December 31, 2002, and the three and six months ended June 30, 2003,are as follows:

 
|                                                        |   | **Employee********Severance********Costs** |   | **Termination  of  Lease and  Other  Obligations** |   | **Loss  on  Disposition and  Retirement of  Fixed Assets** |   | **Total** |   |
|-------------------------------------------------------------|--------|--------------------------------------------|--------|----------------------------------------------------|--------|------------------------------------------------------------|--------|-----------|--------|
|                                                        |   | **(in  thousands)**                        |   |
|                                                        |   |                                       |   |                                               |   |                                                       |   |      |   |
| Provision recorded in the quarter ended  June 30, 2002 |   | $                                          | 964    |                                               | $      | 169                                                        |   | $         | 43     |   | $ | 1,176 |   |
| Non-cash charges                                            |   | —                                     |   | —                                             |   | (43                                                        | )      | (43       | )      |
| Cash payments                                               |   | (444                                       | )      | (101                                               | )      | —                                                     |   | (545      | )      |
| Accrual reversals                                           |   | (191                                       | )      | (68                                                | )      | —                                                     |   | (259      | )      |
| Accruals at December 31, 2002                               |   | 329                                        |   | —                                             |   | —                                                     |   | 329       |   |
| Cash payments                                               |   | (44                                        | )      | —                                             |   | —                                                     |   | (44       | )      |
| Accruals at March 31, 2003                                  |   | 285                                        |   | —                                             |   | —                                                     |   | 285       |   |
| Cash payments                                               |   | (121                                       | )      | —                                             |   | —                                                     |   | (121      | )      |
| Accrual reversals                                           |   | (164                                       | )      | —                                             |   | —                                                     |   | (164      | )      |
| Accruals at June 30, 2003                                   |   | $                                          | — |                                               | $      | —                                                     |   | $         | — |   | $ | — |   |

 

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

 

10

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Restructuring-related involuntary employee severance costs resulted ina charge of $964,000, pertaining to the estimated termination payout toemployees worldwide.  A total of 16employees were terminated as part of these cost cutting measures.

During the year ended December 31, 2002, the Company recordednoncash restructure benefits from restructuring-related involuntary employeeseverance costs of $191,000, as a result of final settlements that were lessthan the amount of previously reserved obligations.  During the quarter ended June 30, 2003, the Company recordednoncash-restructuring benefits from restructuring-related involuntary employeeseverance costs of $164,000, as a result of final settlements that were lessthan the amount of previously recorded obligations.  As of June 30, 2003, the Company has no remaining restructuringaccrual.

 

The termination of lease and other obligations resulted in a charge of$169,000.  During the year endedDecember 31, 2002, the Company recorded noncash-restructuring benefitsfrom lease and other obligations of $68,000, as a result of final settlementsthat were less than the amount of previously recorded obligations.  As of June 30, 2003, the Company had nofurther lease and other obligations pertaining to the June restructuring.

 

The loss on disposition and write-off of assets totaled $43,000. Thisloss was primarily the result of retirement or impairment of property andequipment due to the closure of a facility.

 

The total restructuring benefit of $79,000 for the six months endedJune 30, 2003 reflects the reversal of the restructuring-related employeeseverance costs of $164,000 net of an $85,000 asset impairment charge forcertain leasehold improvements that were abandoned in previous periods.

 

*January 2001 Restructuring. *In January 2001,the Company undertook a strategic restructuring and decided to cease providingits Internet telephony settlement services, based on an analysis of theoperating expenses required to support these services and the low gross marginsassociated with them, and on the Company’s expectation that continued Internettelephony operations would require additional cash infusions to the business.The Company completed this strategic restructuring by December 2001.

 

During the six months ended June 30, 2002, the Company recorded arestructuring benefit of $494,000 due to an unexpected gain of approximately$335,000 on Internet telephony assets that were previously written-off duringthe restructuring in January 2001 and the elimination of the remainingrestructuring accrual in the amount of $159,000.  The accrual was reversed as a result of final settlements thatwere less than the amount of previously reserved obligations.  As of June 30, 2003, there were no remainingaccruals from our January 2001 strategic restructuring.

 

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

 

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

 

Thefollowing is a summary of revenue and long-lived assets by geographical areafor the periods presented:

 
|                                    |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|-----------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                    |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
|                                    |   | **(in thousands)**              |   | **(in thousands)**            |   |
| Revenue by external customers:          |   |                            |   |                          |   |   |   |   |   |
| United States, Canada and Latin America |   | $                               | 5,454  |                          | $      | 4,008 |   | $ | 10,479 |   | $ | 7,459 |   |
| Japan/Korea                             |   | 2,637                           |   | 2,397                         |   | 5,221 |   | 4,541 |   |
| Asia Pacific                            |   | 792                             |   | 866                           |   | 1,649 |   | 1,694 |   |
| Europe, Middle East and Africa          |   | 975                             |   | 908                           |   | 2,000 |   | 1,869 |   |
|                                    |   | $                               | 9,858  |                          | $      | 8,179 |   | $ | 19,349 |   | $ | 15,563 |   |

 

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

 
|               |   | **June 30,  2003** |   | **December 31,  2002** |   |
|--------------------|--------|--------------------|--------|------------------------|--------|
|               |   | **(in thousands)** |   |
| Long-lived assets: |   |               |   |                   |   |
| United States      |   | $                  | 1,481  |                   | $      | 1,554 |   |
| Rest of World      |   | 119                |   | 224                    |   |
|               |   | $                  | 1,600  |                   | $      | 1,778 |   |

 

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Revenueby external customer is based on the customer’s billing locations. Long-livedassets are those assets used in each geographic location.  For the three months ended June 30, 2003,three customers each accounted for 10% or more of the Company’s totalconsolidated revenues.

 

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

 

In September 2001, the Board of Directors approved a program toexpend up to $2.0 million to repurchase shares of the Company’s commonstock in open market transactions. The Company purchased 110,000 shares forapproximately $99,000 during 2001. The Company repurchased no additional sharesduring 2002 or during the three and six months ended June 30, 2003.  The Company’s management currently does nothave plans to repurchase any shares in the near future.

 

**9.****                  ****Subsequent Event**

 

On August 12, 2003, the Company entered into a definitive agreement toacquire Axcelerant, Inc. ("Axcelerant"), a privately-held Delawarecorporation that provides managed broadband VPN services.  Under the terms of the agreement, Axcelerantstockholders will receive Company common stock and options representingapproximately 9.8 million shares, or 22% of the combined company on a commonequivalents basis (including Company preferred stock on an as-if convertedbasis), in a stock-for-stock merger. The transaction is subject to approval by the stockholders of theCompany and Axcelerant and customary closing conditions.  In addition, the Securities and ExchangeCommission may elect to review the Registration Statement on Form S-4 that willbe filed in connection with the proposed transaction.

 

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

 

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

 

**Overview**

 

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

 

We provide services over a heterogeneous virtual network known as theGRIC TierOne Network. As of June 30, 2003, the GRIC TierOne Network includedmore than 25,000 Internet access-dialing locations, 2,000 public wirelessfidelity — or WiFi — hotspots and over 400 public broadband access points inapproximately 150 countries.  We createdthis network by forming contractual relationships with over 300 Internetservice providers and telecommunication companies.  These providers, to whom we refer as the GRIC TierOne Networkmembers, are able to share their communications networks.  Our customers benefit from the resultingnetwork delivering a secure mobile Internet access solution cost-effectively.Our member providers benefit from the GRIC TierOne Network because we managethis shared network and provide settlement services as a clearinghouse. As aclearinghouse, we have established common technical, service and paymentstandards to settle charges that our customers incur when their end usersaccess the network facilities of GRIC TierOne Network members in order toinitiate Internet-based communications, such as Internet roaming. We intend tocontinue evolving our service offering to introduce new Internet-based mobileoffice 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 and with developing our software products. Although we were cashflow positive for our combined activities during the three months ended June30, 2003, we had an accumulated deficit of approximately $129.6 million asof June 30, 2003 and incurred a loss for the three-month period ending June 30,2003. See “Factors That May Affect Future Results—We have a history of netlosses and may incur future losses.”

 

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

 

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**Critical Accounting Policies and Estimates**

 

The methods, estimates and judgments we use in applying our most criticalaccounting policies have a significant impact on the results we report in ourconsolidated financial statements. We evaluate our estimates and judgments onan on-going basis. We base our estimates on historical experience and onassumptions that we believe to be reasonable under the circumstances when made.Our experience and assumptions form the basis for our judgments about thecarrying value of assets and liabilities and reported amounts of revenues andexpenses that are not readily apparent from other sources. Actual results mayvary from what we anticipate, and different assumptions or estimates about thefuture could change our reported results. We believe the following accountingpolicies are the most critical to us, because they are important to theportrayal of our financial statements and they require our most difficult,subjective or complex judgments in the preparation of our consolidatedfinancial statements.

 

*Revenue Recognition and Related Allowances.*  We derive revenues primarily from remoteInternet access services we provide to customers through our virtual network.These services are generally billed on a per-minute basis for usage or at aflat rate per month per user based on negotiated rates.  We have some customers with minimum commitmentarrangements.  To a lesser extent, wealso derive a portion of our revenues from licenses of our authenticationsoftware, related maintenance and support services, which are recognizedratably over the contractual services period or term of service, and otheroptional services related to our GRIC MobileOffice offering, which arerecognized at the time of delivery. These other revenues amounted to five percent or less of total revenuesover the last three years.  Revenues arerecognized when a binding agreement or purchase order from the customer hasbeen received, the services have been delivered, the fee or price was fixed ordeterminable, the collection of the receivable was reasonably assured, and nosignificant post-delivery obligations remained.

 

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

 

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

 

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

 

*Long-Lived Assets*.  Aspart of our review of our property and equipment during the three months endedJune 30, 2003, certain matters were identified related to prior financialreporting periods that required the recording of a net reduction in operatingexpenses.  We quantified the amountsassociated with certain property and equipment for which excess depreciationcharges had been recorded against certain property and equipment in priorperiods.  We also identified certainleasehold improvements that were abandoned in previous periods but remained onour financial statements.   Accordingly,for the three months ended June 30, 2003, we recorded a net reduction tooperating expenses of $217,000 resulting from reduced accumulated depreciationand depreciation expense of approximately $302,000, partially offset by animpairment charge to property and equipment of approximately $85,000 that wasapplied against the restructuring benefit. We do not believe these amounts are material to the periods in whichthey should have been recorded, nor do we expect that the adjustment will bematerial to our consolidated operating results for the year ending December 31,2003.  However, if these adjustments areultimately deemed to be material to the consolidated operating results for theyear ending December 31, 2003, we will need to restate prior financialreporting periods including the three months ended June 30, 2003.  The impact would increase the net loss forthe three months ended June 30, 2003 by $217,000 ($0.01 per share) and decreasenet loss for the year ended December 31, 2002 by $217,000 ($0.01 per share), aswell as decrease accumulated deficit and increase net property and equipment by$217,000.

 

*Intangible Assets*.  We entered into an agreement with a wirelessservice provider during 2001 for the exchange of services, which resulted in aprepayment for future wireless services and the obligation to provide futureInternet roaming services.  The assessedvalue of these wireless services is included in prepaid expenses and othercurrent assets and in other assets in the amounts of $200,000 and $400,000,respectively.  As of June 30, 2003,these assets had not been utilized.  Theunderlying agreement is due to expire on September 30, 2003.  We are currently in discussions with theprovider to modify the scope of the business relationship in order to enablethe Company to realize the amount previously prepaid.  In assessing the recoverability, we must make certain assumptionsregarding a number of factors, including our ability to modify the scope of thebusiness relationship to determine the fair value of the prepaid amount.  If we are unable to modify the scope of thebusiness relationship or if these assumptions change during the term of theunderlying agreement with the service provider, we will be required to record animpairment charge related to these assets in the quarter ended September 30,2003.

 

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**Results of Operations**

 

**Three and Six Month Periods Ended June 30,2003 Compared to Three and Six Month Periods Ended June 30, 2002**

 

*Revenues. *Revenues consist of amounts received from ourcustomers for utilizing our remote Internet access services or other servicesfrom our GRIC MobileOffice offering that we provided. Total revenues increasedto $9.9 million in the three months ended June 30, 2003 from$8.2 million in the three months ended June 30, 2002, representing anincrease of 21%. Total revenues increased to $19.3 million in the sixmonths ended June 30, 2003 from $15.6 million in the six months ended June30, 2002, representing an increase of 24%. The increase of approximately $1.7million and $3.7 million during the three and six month periods ended June 30,2003, respectively, was primarily due to increased use of our remote Internetaccess services by our existing customers in the combined regions of the UnitedStates, Canada and Latin America and to a lesser degree the expansion of ourglobal customer base. We expect 2003 revenues to exceed 2002 revenues based onincreased usage of our remote Internet access services as well as increasedsales of our managed security service offering and our value-added services.

 

*Cost of Revenues.*  Cost of revenues consists of amounts we payto access the Internet in order to provide remote Internet access services toour customers and amounts we pay to third parties to offer other mobilebroadband services.  Cost of revenuesincreased to $4.4 million in the three months ended June 30, 2003 from$3.7 million in the three months ended June 30, 2002, which represented anincrease of 20%.  Cost of revenuesincreased to $8.8 million in the six months ended June 30, 2003 from$7.0 million in the six months ended June 30, 2002, which represented anincrease of 25%.  The increase ofapproximately $753,000 and $1.8 million during the three and six month periodsended June 30, 2003, respectively, reflects corresponding increases in thevolume of remote Internet access and the expansion of our customer base as wellas the cost of adding additional products to our Mobile Office solution offering.  As remote Internet access revenues increasewe expect that the cost of revenues in 2003 will increase in absolute dollarswhen compared to 2002, but decline as a percentage of total revenues.

 

*Network and Operations.*  Network and operations expenses includesalaries and benefits, allocated facility and management information systemsexpenses, depreciation on network equipment, administrative expenses, costs ofco-location of network equipment and leased telecommunication lines and otherrelated costs.  Network and operationsexpenses decreased to $824,000 in the three months ended June 30, 2003 from$1.1 million in the three months ending June 30, 2002, representing a decreaseof 27%. The decrease of approximately $298,000 reflects reductions of approximately$142,000 in depreciation expense primarily associated with older assets thatare still in use, but have reached the end of their estimated lives foraccounting purposes, an additional reduction of depreciation expense ofapproximately $74,000 due to property and equipment adjustments that related toprior periods and reductions of approximately $55,000 in compensation-relatedexpenses that were primarily due to lower staffing levels and the eliminationof compensation programs.  Network andoperations expenses decreased to $1.8 million in the six months ended June 30,2003 from $2.2 million in the six months ending June 30, 2002, representing adecrease of 20%.  The decrease ofapproximately $448,000 reflects reductions of approximately $277,000 indepreciation expense primarily associated with older assets that are still inuse, but have reached the end of their estimated lives for accounting purposesand reductions of approximately $125,000 in compensation-related expenses thatwere primarily due to lower staffing levels and the elimination of compensationprograms.  We expect the amount ofnetwork and operations expenses in 2003 to be less than total expenses in 2002as we maintain current staffing levels and utilize the existing networkinfrastructure.

 

*Research and Development.*  Research and development expenses consist ofquality assurance, salaries and benefits, allocated facility and managementinformation systems, depreciation costs, facilities costs, outside consultants,administration and other related costs. Research and development expensesdecreased to $554,000 in the three months ended June 30, 2003 from $781,000 inthe three months ended June 30, 2002, representing a decrease of 29%.  The decrease of approximately $227,000reflects a reduction of depreciation expense of approximately $87,000 due toproperty and equipment adjustments that related to prior periods and reductionsof approximately $73,000 in compensation-related expenses, primarily dueto shifting staff from our U.S. headquarters to our development center in Indiawhere engineering talent is available at more favorable rates and approximately$44,000 in depreciation expense primarily associated with older assets that arestill in use, but have reached the end of their estimated lives for accountingpurposes.  Research and developmentexpenses decreased to $1.2 million in the six months ended June 30, 2003 from$1.6 million in the six months ended June 30, 2002, representing a decrease of24%.  The decrease of approximately $369,000reflects reductions of approximately $129,000 in compensation-relatedexpenses primarily due to shifting staff from our U.S. headquarters to ourdevelopment center in India, lower professional fees of approximately $100,000due to the decreased use of outside services and approximately $87,000 due tothe property and equipment adjustment previously discussed.  We expect research and development expensesto be lower in 2003 as compared to 2002 due to our utilization of existingassets and resources in our development center in India.

 

*Sales and Marketing.*  Sales and marketing expenses consist ofsalaries and benefits, allocated facility and management information systemscosts, travel and entertainment costs, costs for marketing and promotionalprograms, outside consultant fees, administrative expenses, costs associatedwith domestic and international sales offices and other related costs. Salesand marketing expenses remained consistent at $3.3 million in the three monthsended June 30, 2003 compared to the three months ended June 30, 2002.  Although total expenses remained constant,there was a reduction of approximately $201,000 in advertising and promotion

 

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costs due to continuing efforts to reduce operating costs and areduction of depreciation expense of approximately $79,000 due to property andequipment adjustments that related to prior periods partially offset by anincrease in compensation expense of approximately $264,000 primarily due to highercompensation-related expenses pertaining to our increased sales force.  Sales and marketing expenses decreased to$6.0 million in the six months ended June 30, 2003 from $6.5 million in the sixmonths ended June 30, 2002, representing a decrease of 7%.  The decrease of approximately $447,000principally reflects reductions of approximately $216,000 in advertising andpromotion expenses and $133,000 in compensation-related expenses due tocontinued efforts to streamline our operations in 2003 and approximately$87,000 in depreciation expense primarily associated with older assets that arestill in use, but have reached the end of their estimated lives for accountingpurposes.  We expect the overall amountof sales and marketing expenses to significantly increase during the remainderof 2003 and to be greater than total expense in 2002 as we evolve our businessstrategy to employ not only an indirect sales channel, but also a direct saleschannel and to increase our marketing presence by investing in marketingprograms.

 

*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 remainedconsistent at $1.2 million in the three months ended June 30, 2003 compared tothe three months ended June 30, 2002. Although the total expense remainedconstant, there was a reduction of approximately $198,000 in depreciationexpense primarily associated with older assets that are still in use, but havereached the end of their estimated lives for accounting purposes and approximately$108,000 in lower facility costs due to continued efforts to streamline ouroperations in 2003 mostly offset by increased professional services fees ofapproximately $147,000 due to the increased use of outside services andincreased compensation-related expenses of approximately $145,000 due to aone-time bonus accrual reversal in the second quarter of 2002.  General and administrative expenses remainedconsistent at $2.6 million in the six months ended June 30, 2003 compared tothe six months ended June 30, 2002. Although the total expense remained constant, there was a decrease ofapproximately $347,000 in depreciation expense primarily associated with olderassets that are still in use, but have reached the end of their estimated livesfor accounting purposes and approximately $194,000 in lower facility costs dueto continued efforts to streamline our operations in 2003, offset by anincrease of approximately $408,000 for one-time costs related to payments madein connection with the resignation of our former CEO during the first quarterof 2003, the reversal of bad debt reserves of approximately $75,000 during thesix months ended June 30, 2002.  Weexpect the amount of general and administrative expenses to remain consistentfor the remainder of 2003 and to be only slightly higher than total expenses in2002.

 

*Amortization of Stock-Based Compensation.*  Some stock options granted throughDecember 14, 1999 were considered compensatory because the deemed fairvalue for accounting purposes was higher than the stock option exercise priceas determined by the board of directors on the date of grant. As a result, werecorded amortization of deferred compensation expense of $20,000 and $42,000in the three months ended June 30, 2003 and 2002, respectively, and we recordedamortization of deferred compensation expense of $61,000 and $86,000 in the sixmonths ended June 30, 2003 and 2002, respectively.  As of June 30, 2003, we had an aggregate of $4,000 of deferredcompensation remaining to be amortized. Deferred compensation is amortized on astraight-line basis over the vesting period of the options. We expectamortization to end in 2003.

 

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

 

In our June 2002 strategic restructuring, we streamlined ouroperations in order to help us reduce operating expenses. In the three monthsended June 30, 2002 we recorded a total charge to operations of $1.2million.  The total restructuringbenefit of $79,000 for the six months ended June 30, 2003 reflects the reversalof the restructuring-related employee severance costs of $164,000 as a resultof final settlements that were less than the amount of previously recorded obligationsnet of an $85,000 asset impairment charge for certain leasehold improvementsthat were abandoned in previous periods. As of June 30, 2003, there was no remaining balance in our restructuringaccrual.

 

In our January 2001 strategic restructuring, we decided to ceaseproviding Internet telephony settlement services, based on an analysis of theoperating expenses required to support these services and the low gross marginsassociated with them, and on our expectation that continued Internet telephony operationswould require additional cash infusions to the business. During the six monthsended June 30, 2002, we recorded a restructuring benefit of $494,000 due to again of approximately $335,000 on Internet telephony assets that werepreviously written-off during the restructuring in January 2001 and theelimination of the remaining restructuring accruals in the amount of$159,000.  The accrual was reversed as aresult of final settlements that were less than the amount of previouslyreserved obligations. As of June 30, 2003, there were no remaining accrualsfrom our January 2001 strategic restructuring.

 

*Interest Income and Other, Net. *Interest income andother, net, consists of interest income on cash balances and on short-terminvestments, gain on disposition of assets and sales, use and value-added tax.Interest income and other, net, represented a net income of $75,000 for thethree months ended June 30, 2003 as compared to $97,000 of income for the threemonths ended June 30, 2002.  Thedecrease of approximately $22,000 primarily reflects a decrease in interestincome of $36,000 due to lower interest rate yields partially offset by a gainon the sale of assets of $12,000. Interest income and other, net, represented a net income of $66,000

 

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for the six months ended June 30, 2003 as compared to $133,000 ofincome for the six months ended June 30, 2002. The decrease of approximately $67,000 primarily reflects higher sales,use and value-added tax on equipment for approximately $169,000 partiallyoffset by a gain on the sale of assets of $117,000.

 

*Interest Expense. *Interest expense consists of interestexpense associated with capital leases and amortization of the fair value ofwarrants issued in connection with our financing activities. There was no interest expense or amortization of the fairvalue of warrants in the three and six months ended June 30, 2003, as we paidour remaining debt balance from our capital lease obligations and fullyamortized our warrants in 2002. Total interest expense was $15,000 and $31,000for the three and six months ended June 30, 2002, respectively.

 

*Income Taxes. *Theprovision for income taxes was $11,000 and $19,000 for the three and six monthsended for June 30, 2003, respectively, as compared to $8,000 and $16,000 thethree and six months ended for June 30, 2002, respectively. The provision forincome taxes consists of foreign tax provisions.

 

***Liquidity and Capital Resources***

 
|                                                 |   | **June 30,  2003** |   | **June 30,  2002** |   |
|------------------------------------------------------|--------|--------------------|--------|--------------------|--------|
|                                                 |   | **(in thousands)** |   |
| Cash and cash equivalents                            |   | $                  | 3,426  |               | $      | 4,338 |   |
| Net cash used in operating activities                |   | (950               | )      | (4,984             | )      |
| Net cash provided by (used in) investing  activities |   | (3,585             | )      | (8,900             | )      |
| Net cash provided by (used in) financing  activities |   | 647                |   | 14,201             |   |
|                                                      |        |                    |        |                    |        |  |  |

 

*Cash and cash equivalents. *Ourprincipal source of liquidity is our cash, cash equivalents and short-terminvestments. As of June 30, 2003, in addition to our cash and cash equivalentsbalance of $3.4 million we had a short-term investment balance of approximately$19.3 million.

 

*Operating activities. *Net cash used inoperating activities was $950,000 in the six months ended June 30, 2003, and$5.0 million in the six months ended June 30, 2002. Net cash used inoperating activities in the three months ended June 30, 2003 reflects our netoperating losses of $997,000 which has been significantly reduced when comparedto 2002, higher accounts receivable balances of approximately $725,000 due toincreased revenues and higher prepaid and other current asset balances of$360,000 due primarily to the payment of our 2003 directors’ and officers’insurance policy. Net cash used in operating activities in the six months endedJune 30, 2002 reflects net operating losses of $5.0 million, lower accruedcompensation and benefit payable balances of $1.1 million principally due tothe elimination of our 2002 bonus plan and higher accounts receivable balancesof approximately $1.0 million due to increased revenues.

 

*Investing activities. *Netcash used in investing activities was $3.6 million in the six months endedJune 30, 2003 and $8.9 million in the six months ended June 30, 2002. Net cashused in investing activities in the six-month periods ended June 30, 2003 and2002 primarily reflects purchases of short-term investments.

 

*Financing activities. *Netcash provided by financing activities was $647,000 in the six months ended June30, 2003 and $14.2 million in the six months ended June 30, 2002. The net cashprovided by financing activities in the six months ended June 30, 2003 wasprincipally due to proceeds received from the sale of common stock through ourincentive stock option and employee stock purchase plans. The net cash providedby financing activities in the six months ended June 30, 2002 was primarily theresult of proceeds from the issuance of our Series A Preferred Stock.

 

*Commitments. *We lease all of our facilities underoperating leases that expire at various dates through 2008. As of June 30,2003, we had $2.5 million in future operating lease commitments. We haveentered into certain non-cancelable purchase commitments from suppliers whoprovide network access, software and related services that are utilized by usin order to deliver our GRIC MobileOffice solution.  We have $656,000 in future purchase commitments that expire atvarious dates through 2004.

 

*Summary of Liquidity. *At June30, 2003, we had an accumulated deficit of $129.6 million and we incurreda net loss of approximately $997,000 for the six months ended June 30, 2003,although we were cash positive for the three months ended June 30, 2003.

 

Webelieve that our available cash, cash equivalents and short-term investments of$22.7 million at June 30, 2003, and cash expected to be generated byoperations during the next twelve months, will fund planned operations for atleast the next twelve months.  Ourcurrent business model does not require a substantial investment in capitalequipment.  Although a large portion ofour

 

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propertyand equipment have reached the end of their useful lives for accountingpurposes, we expect spending levels for capital assets in the near-term toremain consistent with levels in recent quarters.

 

We plan to invest in expanding our Internet roaming and related serviceson a global basis by continuing to build strategic partnering relationships.This will require us to maintain market acceptance and to grow our Internetroaming and related services offerings in order for us to continue our researchand development activities and fund planned operating expense growth such asincreasing our sales force and marketing presence. There can be no assurancethat our Internet roaming product offerings will maintain market acceptance,growth and operating margins.

 

On August 12, 2003, we entered into a definitive agreement to acquireAxcelerant, Inc. ("Axcelerant"), a privately-held Delawarecorporation that provides managed broadband VPN services.  Under the terms of the agreement, Axcelerantstockholders will receive common stock and options from us representingapproximately 9.8 million shares, or 22% of the combined company on a commonequivalents basis (including our preferred stock on an as-if converted basis),in a stock-for-stock merger.  Thetransaction is subject to approval by the stockholders of the Company andAxcelerant and customary closing conditions; in addition, the Securities andExchange Commission may elect to review the Registration Statement on Form S-4that will be filed in connection with the proposed transaction.  Accordingly, we cannot assure that theproposed merger will be completed in Q4 2003, or at all.

 

Ifwe are unable to attain our revenue and margin goals, significant reductions inspending and the delay or cancellation of planned activities or moresubstantial restructuring may be necessary to enable us to meet our cashrequirements through at least the next 12 months. These actions could have amaterial adverse 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. Although we achieved cash flow positive resultsfor our combined activities during this quarter, we may not remain cash flowpositive. If additional financing is needed, it might not be available onreasonable terms or at all. Failure to raise capital when needed couldseriously harm our business and results of operations. If additional funds wereraised through the issuance of equity securities, the percentage of ownershipof our stockholders would be reduced. Furthermore, these equity securitiesmight have rights, preferences or privileges senior to our common stock.

 

**RecentAccounting Pronouncements**

 

In June 2002, the Financial Accounting Standards Board (‘‘FASB’’)issued Statement of Financial Accounting Standards No. 146 (‘‘SFAS 146’’), *‘‘Accounting for Costs Associated with Exit orDisposal Activities.’’* SFAS 146 nullifies Emerging Issues Task ForceIssue No. 94-3, *‘‘Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)’’* (‘‘EITF94-3’’). The principle difference between SFAS 146 and EITF 94-3 relates to itsrequirement for recognition of a liability for a cost associated with an exitor disposal activity. This statement requires that a liability for a costassociated with an exit or disposal activity be recognized when the liabilityis incurred. Under EITF 94-3, a liability for an exit cost, as defined in EITF94-3, was recognized at the date of an entity’s commitment to an exit plan.This statement also establishes that fair value is the objective for initialmeasurement of the liability. SFAS 146 is effective for exit or disposalactivities that are initiated after December 31, 2002. There was no impact onour consolidated financial position or results of operations from the adoptionof SFAS 146, as we did not have any new exit or disposal activities during thethree months ended June 30, 2003.

 

In November 2002, the FASB issued FASB Interpretation No. 45 (‘‘FIN45’’), *‘‘Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.’’* FIN 45 requires that a liability berecorded in the guarantor’s balance sheet upon issuance of a guarantee. Inaddition, FIN 45 requires disclosures about the guarantees that an entity hasissued, including a roll forward of the entity’s product warranty liabilities.The disclosure provisions of FIN 45 are effective for financial statements ofinterim or annual periods ending after December 15, 2002. We have adopted thedisclosure provisions of FIN 45. We do not expect that the adoption of theaccounting requirements of FIN 45 will have a material impact on ourconsolidated financial position or results of operations.

 

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

 

InJanuary 2003, the FASB issued Interpretation No. 46 (FIN 46),“Consolidation of Variable Interest Entities.” FIN 46 requires an investor witha majority of the variable interests (primary beneficiary) in a variableinterest entity (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 controlling interest,or the equity investment at risk is insufficient to finance the entity’sactivities without receiving additional subordinated financial support fromother parties. For arrangements entered into with VIEs created prior to January31, 2003, the provisions of FIN 46 are required to be adopted at the beginningof the first interim or annual period beginning after June 15, 2003. Theprovisions of FIN 46 were effective immediately for all arrangements enteredinto with new VIEs created after January 31, 2003.  Based on our initial review, there were no entitiesidentified that would require consolidation.

 

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We expect to complete the review in the third quarter of 2003.

 

InMarch 2003, the EITF reached a consensus on Issue No. 00-21, “RevenueArrangements with Multiple Elements,” which addresses certain aspects ofaccounting for arrangements that include multiple products or services.  Specifically, this issue addresses: (1) howto determine whether an arrangement that contains multiple products or servicescontains more than one unit of accounting, and (2) how the arrangementconsideration should be measured and allocated.  Accordingly, the adoption of EITF No. 00-21 may impact the timingof revenue recognition as well as allocation between products andservices.  EITF No. 00-21 is applicablefor transactions entered into in fiscal periods beginning after June 15,2003.  We do not expect thatadoption of the guidance provided by EITF No. 00-21 will have a material impact on our consolidatedfinancial position or results of operations.

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150 (“SFAS 150*”),“Accounting for Certain Financial Instruments with Characteristics of both Liabilitiesand Equity.” *This statementestablishes standards for classifying and measuring as liabilities certainfinancial instruments that embody obligations of the issuer and havecharacteristics of both liabilities and equity.  The provisions of SFAS 150 must be applied immediately toinstruments entered into or modified after May 31, 2003 and to all otherinstruments that exist as of the beginning of the first interim financialreporting period beginning after June 15, 2003.  Based on our initial review, it does not appear that the adoptionof the provisions of SFAS 150 will have a material impact on our consolidatedfinancial position or results of operations. We expect to complete our review in the third quarter of 2003.

 

**Factors ThatMay Affect Future Results**

 

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

 

**We face many risks in connection with ourproposed merger with Axcelerant.  Someof those risks apply whether or not the merger is completed.**

 

Our proposed merger with Axcelerant might not be completed on a timelybasis or at all.  If that were tohappen, these risks include the following:

 
| • |   | The price of our common stock may decline to the extent that it reflects  a market assumption that the merger will be completed.                                                                                                                                                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                    |
| • |   | Customers may delay or defer purchasing our products because of  uncertainty about the future direction of the company's product offerings.                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                    |
| • |   | Any delay in the completion of the merger could diminish the  anticipated benefits of the merger or result in additional transaction costs,  loss of revenue or other effects associated with uncertainty about the  transaction, including a decline in the price of our common stock. |
|   |   |                                                                                                                                                                                                                                                                                    |
| • |   | We will be required to pay significant costs incurred in connection  with the merger, including legal, accounting and financial advisory fees and  certain filing fees, whether or not the merger is completed.                                                                         |

 

Even if the proposed merger is completed, the combined company may notrealize expected benefits because of integration and other challenges.  These risks include the following:

 
| • |   | The failure of the combined company to meet the complex challenges  involved in integrating the products, services, technology, personnel and  other operations of GRIC and Axcelerant successfully, or to realize  anticipated cost savings, could seriously harm the results of operations of  the combined company. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                   |
| • |   | Managing the implementation of the integration plan will divert  management attention from ongoing business concerns, which could harm our  future operating results.                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| • |   | Employees may be uncertain about their future roles with the combined  company until integration plans are finalized, which could adversely affect  their productivity and our ability to attract or retain key employees.                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| • |   | The completion of the merger depends on regulatory approval that,  even if granted, may result in unfavorable restrictions or conditions.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| • |   | The combined company must retain and motivate key employees, which  will be particularly difficult due to the potential distractions of the  merger, until our strategies with regard to the integration of Axcelerant are  executed.                                                                                  |

 

Merger-related earnings charges may adversely affect the market value ofour common stock following the merger. We will allocate the total estimated purchase price among Axcelerant'svarious tangible and intangible assets, and record the excess of the purchaseprice over those fair values as goodwill. Some allocated portions of the purchase price may be expensed in thequarter in which the merger is completed; that amount has not yet beendetermined, but may be material.  Wewill incur additional amortization expense over the useful lives of variousacquired assets.  In addition, to theextent the value of goodwill or intangible assets that result from our proposedmerger becomes impaired, we may be required to record material charges relatingto the impairment of those assets.  Wemay also incur liabilities and restructuring charges associated withintegration planning, including costs associated with employee severance, whichare currently unknown but may be material.

 

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

 

We have incurred net losses every year since our inception. We reportednet losses of approximately $376,000 and $997,000 for the three and six monthsended June 30, 2003, respectively, $5.0 million for 2002, $31.6 millionfor 2001, and $32.4 million for 2000. Although we experienced positive cash flow for our combined activitiesin the fourth quarter of 2002 and in the second quarter of 2003, we experiencednegative cash flow in the first quarter of 2003 and have experienced negativecash flows in each year since our inception in 1994.  As of June 30, 2003 we had an accumulated deficit of$129.6 million.  We cannot assureyou that we will become profitable or remain cash flow positive. Moreover, wemight not be able to increase our operating profitability on a quarterly orannual basis. To increase profits, we will need to generate additional revenuegrowth from our existing customers and to obtain new customers, whilecontinuing to control our expenses. We expect to continue to invest in networkand operations, research and development and sales and marketing, and we expectto face pressure to adopt new pricing arrangements, including volume discounts,that may lower our gross margins. If revenues do not meet levels we anticipate,or if our costs and expenses exceed our expectations, our quarterly losseswould continue, and the price of our common stock is likely to decline as aresult.

 

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

 

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

 

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

 

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

 

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to competitive pressures. Any inability to do so could have a negativeeffect on our business, revenues, financial condition and results ofoperations.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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**We depend on our 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. We have littleability to promote our services, or to promote demand for our resellercustomers’ services generally.  The useof the Internet as a medium for communications services remains unproven.  If our reseller customers fail to markettheir Internet-based communications services effectively, our revenues will bereduced. Similarly, if the market for Internet-based communications servicesfails to grow, or expands more slowly than anticipated, our revenues will belower than expected. The Internet-based services we provide are relatively newand have not achieved widespread market acceptance. Network service providersand communication solutions providers may be reluctant to promote or rely uponour services until they gain greater commercial acceptance, which may neveroccur.

 

**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:

 

•              the volume oftransaction-based revenues;

 

•              the timing ofdeployment of services by our customers;

 

•              competitive pricingpressure;

 

•              changes in globaltravel patterns due to past and potential future terrorist activities in theU.S. and the military responses to them in the Middle East, Southern Asia andelsewhere;

 

•              the mix of servicesused by our customers’ end users;

 

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

 

•              regulation,domestically and internationally.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

•                                          foreigncustomers often take longer to pay for services;

 

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

 

•                                          foreigncurrency exchange rates fluctuate and can impact our results;

 

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

 

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

 

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

 

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

 

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

 

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

 

**If SARS re-emerges, business travelers could restrict their travel to andfrom Asia, which could harm our revenues.**

 

Severe Acute Respiratory Syndrome, which is generally known as SARS, isa highly communicable disease that emerged in Asia earlier this year.  Concerns about the spread of SARS led toquarantines and travel restrictions being imposed on individuals with suspectedsymptoms in some countries, and some companies restricted or bannednonessential travel to and from certain parts of Asia.  If business travel to Asia or elsewhere wereto decline for a sustained period of time due to the re-emergence ofSARS-related issues or other health concerns, the level of demand for ourservices is also likely to decline which could result in reduced revenues.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

•                                          redesignthe products that use that technology.

 

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

 

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

 

As of July 31, 2003, our executive officers and directors, and theirrelated entities, owned a majority of our outstanding common stock and commonstock equivalents, including the effect of a voting agreement that coverselections of directors, to which some of our stockholders are parties. As aresult, these stockholders will be able to exercise control over all mattersrequiring approval of our stockholders, including the election of directors andapproval of significant corporate transactions.  This concentration of ownership might also have the effect ofdelaying or preventing a change in control of the Company that might be viewedas beneficial by other stockholders.

 

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

 

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

 

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

 

**Provisions in our charter documents might detera company from acquiring us, which could inhibit your ability to receive anacquisition 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:

 

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•                                          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.

 

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

 

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

 

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

 

*United States.*  We believe that, under United States law,the Internet-related services that we provide constitute information servicesor other non-telecommunications services, and do not constitute regulatedtelecommunications services. Therefore our services are not currently subjectto regulation by the Federal Communications Commission, and, by operation offederal preemption law, are also exempt from regulation by state agenciescharged with regulating telecommunications carriers. We do not know the extentto which our Internet-related services may be subject to regulation by theFederal Communications Commission or state telecommunications authorities inthe future.

 

The Federal Communications Commission has initiated several proceedingsthat may change the regulatory and legal framework for the provision ofbroadband and Internet services.  Recently,the Federal Communications Commission determined that cable modem servicesconstitute unregulated information services. This decision is currently under appeal in the Court of Appeals for theNinth Circuit.  In addition, theindustry and policy makers continue to debate the obligation of cable operatorsto provide ISPs non-discriminatory access to cable broadband platforms.  The Federal Communications Commission alsohas recently issued new rules in its Triennial Review proceeding relievingincumbent local exchange carriers of certain regulatory obligations in theprovision of broadband services, including requirements that they providecertain types of network access services on an unbundled and discounted basisto competitors. The Federal Communications Commission is also consideringwhether incumbent local exchange carriers should be treated as non-dominant inthe provision of broadband services as well as whether facilities-basedbroadband Internet access providers should be required to contribute to theuniversal service fund, which is used to subsidize the universal availabilityof telecommunications services. If adopted, these regulatory measures maylessen some of the regulatory burdens on existing providers of broadbandservices, particularly incumbent local exchange carriers, but may increasebarriers to entry for new providers and may result in increased costs tocustomers of such services. We cannot be certain of the impact that any ofthese measures would have on our business.

 

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

 

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

 

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

 

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

 

In particular, the European Union has enacted several directivesconcerning the Internet and Internet-related activities. The European Unionhas, for example, adopted a directive that requires Member States to imposerestrictions on the collection and processing of personal data and to preventtransmission outside of Europe of personal data, which can include customer andbilling information as well as human resource data, except to countries thatprovide adequate protection of such data. In response to the European Uniondirective, the U.S. negotiated with the European Union the establishment ofcertain “Safe Harbor” principles, effective as of November 2000, whichprovide U.S. companies choosing to adhere to them a presumption of adequateprotection of privacy. Companies complying with the Safe Harbor principles mustprovide notice to users of personal data collection, provide choices to usersregarding certain uses, including the transfer of information to third parties,guarantee the security and integrity of personal data collected, provide userswith the ability to access, correct and delete personal information that isbeing stored, and provide for user enforcement and redress in the event ofviolation of the principles. These principles are more restrictive than otherapplicable U.S. laws and may impose additional cost on companies that decide tocomply. Currently, the Safe Harbor principles are voluntary and are intended tobe implemented through self-regulation and industry self-certification. In thefuture, however, the requirements embodied in the principles may becomemandatory. To date, we have not certified that we will operate under the SafeHarbor principles.

 

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

 

As our services are made available in foreign countries, and as wefacilitate sales by our customers and affiliates to end users located inforeign countries, these countries may claim that we or our customers arerequired to qualify to do business in the particular foreign country, that weare otherwise subject to regulation, including requirements to obtainauthorization, or that we or our customers are prohibited in all cases fromconducting business as currently conducted in that foreign country. Our failureto qualify as a foreign corporation in a jurisdiction in which we are requiredto do so or to comply with foreign laws and regulations could subject us totaxes and penalties or preclude us from, or limit our ability in, enforcingcontracts in these jurisdictions, which could materially adversely affect ourbusiness, prospects, operating results and financial condition.

 

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

 

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

 

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

 

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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.

 

**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 guarantees, restructuring chargesand stock options, some of which would represent a significant change fromcurrent industry practices. While we believe that our financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America, we cannot predict the impact of the adoption ofany such proposals on our financial statements going forward.

 

## **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 to90 days. We intend to hold our securities until maturity and, therefore,do 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 June 30, 2003.Due to the short-term nature of our investments and the immaterial amount ofour debt obligation, we believe that there is no material exposure to interestfluctuation. Therefore, no accompanying table has been provided.

 

## **ITEM 4. CONTROLS AND PROCEDURES**

 

***Evaluation ofDisclosure Controls and Procedures***.  Regulations under the Securities Exchange Act of1934 require public companies to maintain “disclosure controls and procedures,”which are defined to mean a company’s controls and other procedures that aredesigned to ensure that information required to be disclosed in the reportsthat it files or submits under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theCommission’s rules and forms. Our Chief Executive Officer and our ChiefFinancial Officer, based on their evaluation of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport, concluded that our disclosure controls and procedures were effectivefor this purpose.

 

*Changes in Internal Controls.*  During the period covered by this report,there have been no changes in the Company’s internal control over financial reportingthat have materially affected or are reasonably likely to materially affect theCompany’s internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

## **ITEM 1.**                           LEGAL PROCEEDINGS

 

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

 

In July and August 2001, we and certain of our officers were named asdefendants in five purported securities class action lawsuits filed in theUnited States District Court, Southern District of New York, captioned as In reGRIC Communications, Inc. Initial Public Offering Securities Litigation, No. 01Civ 6771 (SAS), and consolidated with more than three hundred substantiallyidentical proceedings as In re Initial Public Offering Securities Litigation,Master File No. 21 MC 92 (SAS).  TheConsolidated Amended Class Action Complaint for Violation of the FederalSecurities Laws (“Consolidated Complaint”) was filed on or about April 19,2002, and alleges claims against certain of our officers and against CIBC WorldMarkets Corp., Prudential Securities Incorporated, DB Alex. Brown, as successorto Deutsche Bank, and U.S. Bancorp Piper Jaffray Inc., underwriters of ourDecember

 

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14, 1999 initial public offering (“underwriter defendants”), underSections 11 and 15 of the Securities Act of 1933, as amended, and under Section10(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 claim 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 had beennamed as defendants in the In re Initial Public Offering Securities Litigationwere dismissed without prejudice upon order of the presiding judge. In February2003, the presiding judge dismissed the Section 10(b) claims against us and ournamed officers and directors with prejudice.

 

For several months, we participated in settlement negotiations with acommittee of Issuers’ litigation counsel, plaintiffs’ executive committee andrepresentatives of various insurance companies (the “Insurers”) regarding theremaining Section 11 claim against us. Our Insurers were actively involved in the settlement negotiations, andstrongly supported a settlement proposal presented to us for consideration inearly June 2003.  The settlementproposed by the plaintiffs would be paid for by the Insurers and would disposeof all remaining claims against us.

 

After careful consideration, we decided to approve the settlementproposal during July 2003.  Although webelieve that plaintiffs’ claims are without merit we have decided to accept thesettlement proposal (which does not admit wrongdoing) to avoid the cost anddistraction of continued litigation. Because the settlement will be funded entirely by our Insurers, we donot believe that the settlement will have any effect on our financialcondition, results or operations or cash flows.

 

The settlement will be presented to the Court for approval in thecoming months.  There can be noguarantee that the settlement will be judicially approved.

 

## **ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

Not applicable.

 

## **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

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## **ITEM 4.**                           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Company held its annual meeting of stockholders on May 21,2003.  Following are descriptions of thematters voted on and the results of such meeting:

 
|                                                                                                                                                 |   | **Votes  For** |   | **Votes  Against** |   | **Votes  Abstained** |   | **Votes  Withheld** |   | **Broker  Non-Votes** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------------------|--------|----------------------|--------|---------------------|--------|-----------------------|--------|
| 1. Election of Directors                                                                                                                             |   |           |   |               |   |                 |   |                |   |                  |   |
|                                                                                                                                                 |   |           |   |               |   |                 |   |                |   |                  |   |
| Series A Directors                                                                                                                                   |   |           |   |               |   |                 |   |                |   |                  |   |
| Mark Hsu                                                                                                                                             |   | 16,839,550     |   |               |   |                 |   | 176,714             |   |                  |   |
| Kheng Nam Lee                                                                                                                                        |   | 16,839,448     |   |               |   |                 |   | 176,816             |   |                  |   |
| Robert Shen                                                                                                                                          |   | 16,840,050     |   |               |   |                 |   | 176,214             |   |                  |   |
|                                                                                                                                                 |   |           |   |               |   |                 |   |                |   |                  |   |
| Additional Directors                                                                                                                                 |   |           |   |               |   |                 |   |                |   |                  |   |
| Dr. Hong Chen                                                                                                                                        |   | 16,721,702     |   |               |   |                 |   | 294,562             |   |                  |   |
| Bharat Davé                                                                                                                                     |   | 16,994,536     |   |               |   |                 |   | 21,728              |   |                  |   |
| Roderick C. McGeary                                                                                                                                  |   | 16,989,861     |   |               |   |                 |   | 26,303              |   |                  |   |
| Hock Chuan Tam                                                                                                                                       |   | 16,915,200     |   |               |   |                 |   | 101,064             |   |                  |   |
| Gerald Wright                                                                                                                                        |   | 16,655,011     |   |               |   |                 |   | 361,253             |   |                  |   |
| Joseph M. Zaelit                                                                                                                                     |   | 16,648,842     |   |               |   |                 |   | 367,422             |   |                  |   |
|                                                                                                                                                 |   |           |   |               |   |                 |   |                |   |                  |   |
| 2. Proposal to ratify the appointment of  Ernst & Young LLP as independent auditors of the Company for the fiscal  year ending December 31, 2003 |   | 16,928,285     |   | 74,469             |   | 13,510               |   |                |   | 0                     |   |

 

## **ITEM 5.**                           OTHER INFORMATION

 

Notapplicable.

 

## **ITEM 6.**                           EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                Exhibits

 
| **Exhibit  Number** |                    |                                                                                                                                               |     | **Incorporated by Reference** |         | **Filed or Furnished**

**Herewith** |
|---------------------|-------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------|----------|-------------------------------|--------------|--------------------------------------|
|                | **Exhibit Description** |                                                                                                                                               | **Form** |                          | **File No.** |                                 | **Exhibit** |   | **Filing Date** |   |
| 10.37               |                    | Offer letter dated August 7, 2003 to Rob Fuggetta.                                                                                                 |     |                          |         |                                 |   |   |   |   |   | X |
| 31.01               |                    | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 of the Registrant’s Chief Executive Officer, dated August 14, 2003.  |     |                          |         |                                 |   |   |   |   |   | X |
| 31.02               |                    | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 of the Registrant’s Chief Financial Officer, dated August 14, 2003.  |     |                          |         |                                 |   |   |   |   |   | X |
| 32.01*              |                    | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 of the Registrant’s Chief Executive Officer, dated August 14, 2003. |     |                          |         |                                 |   |   |   |   |   | X* |
| 32.02*              |                    | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 of the Registrant’s Chief Financial Officer, dated August 14, 2003. |     |                          |         |                                 |   |   |   |   |   | X* |

 

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*                                         Thesecertifications accompany GRIC’s Quarterly Report on Form 10-Q for the quarterlyperiod ended June 30, 2003.  Thesecertifications are not deemed filed with the Securities and Exchange Commissionand are not to be incorporated by reference in any filing of GRIC under theSecurities Act of 1933 or the Securities Exchange Act of 1934, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage in any filings.

 

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

 
| **Date of Report** |   | **Item(s)** |   | **Description**                                                                                                                                                |
|--------------------|--------|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4/24/03            |   | 12          |   | In  April 2003, we filed a Form 8-K furnishing information related to a press  release announcing our financial results for the quarter ended March 31,  2003. |

 

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## **SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on August 14, 2003.

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

 

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