**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

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

**Forthe quarterly period ended January 31, 2005**

**or**

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

**Forthe transition period from                 to**

**Commissionfile number: 000-27871**

**GoRemote Internet Communications, Inc.**

(Exact Name of Registrantas 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)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x    No  o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  x    No  o

Thenumber of shares of the registrant’s common stock outstanding as of February 28,2005 was 41,606,684 shares.

 

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**GoRemote Internet Communications, Inc. INDEX**
| **PART I**           |
|---------------------------|
| **FINANCIAL INFORMATION** |
| Item 1.                   |   | Financial  Statements: |   |
|                      |   | Condensed Consolidated  Balance Sheets as of January 31, 2005 and October 31, 2004 | 3 |
|                      |   | Condensed Consolidated  Statements of Operations for the Three Months Ended January 31, 2005 and  2004 | 4 |
|                      |   | Condensed Consolidated  Statements of Cash Flows for the Three Months Ended January 31, 2005 and  2004 | 5 |
|                      |   | Notes to Condensed Consolidated Financial  Statements | 6 |
| Item  2.                  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item  3.                  |   | Quantitative  and Qualitative Disclosures About Market Risk | 35 |
| Item  4.                  |   | Controls  and Procedures | 35 |
| **PART II **    |
| **OTHER INFORMATION**     |
| Item 1.                   |   | Legal Proceedings | 37 |
| Item 2.                   |   | Changes in Securities  and Use of Proceeds | 38 |
| Item 3.                   |   | Defaults Upon Senior  Securities | 38 |
| Item 4.                   |   | Submission of Matters to  a Vote of Security Holders | 38 |
| Item 5.                   |   | Other Information | 38 |
| Item 6.                   |   | Exhibits | 38 |
| SIGNATURE                 | 39 |

 

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**PART I.   FINANCIALINFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS

**GoRemote Internet Communications, Inc.Condensed Consolidated Balance Sheets(in thousands, except per share amounts)**
| ** **                                                                                                                                                                                                                                       | ** ** | **January 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                       | ** ** | **(unaudited)**            | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                                                                                                       |       |                       |       |                       |       |
| ***Current assets:***                                                                                                                                                                                                                            |       |                       |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                                                                                       |       | $                          | 3,765      |                       | $          | 2,407 |   |
| Short-term investments                                                                                                                                                                                                                           |       | 15,569                     |       | 15,614                     |       |
| Accounts receivable, net  of allowances of $190 and $211 at January 31, 2005 and  October 31, 2004, respectively                                                                                                                  |       | 5,850                      |       | 7,243                      |       |
| Inventory                                                                                                                                                                                                                                        |       | 139                        |       | 119                        |       |
| Deferred installation  costs                                                                                                                                                                                                                     |       | 1,764                      |       | 1,425                      |       |
| Prepaid expenses and  other current assets                                                                                                                                                                                                       |       | 631                        |       | 725                        |       |
| Total current assets                                                                                                                                                                                                                             |       | 27,718                     |       | 27,533                     |       |
| Property and equipment,  net                                                                                                                                                                                                                     |       | 1,563                      |       | 1,694                      |       |
| Goodwill                                                                                                                                                                                                                                         |       | 21,612                     |       | 21,612                     |       |
| Intangible assets, net                                                                                                                                                                                                                           |       | 3,631                      |       | 3,876                      |       |
| Deferred installation  costs, less current portion                                                                                                                                                                                               |       | 819                        |       | 740                        |       |
| Other assets                                                                                                                                                                                                                                     |       | 449                        |       | 442                        |       |
| Total assets                                                                                                                                                                                                                                     |       | $                          | 55,792     |                       | $          | 55,897 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                    |       |                       |       |                       |       |
| ***Current liabilities:***                                                                                                                                                                                                                       |       |                       |       |                       |       |
| Accounts payable                                                                                                                                                                                                                                 |       | $                          | 6,050      |                       | $          | 6,571 |   |
| Restructuring accrual                                                                                                                                                                                                                            |       | 183                        |       | 434                        |       |
| Accrued compensation and  benefits                                                                                                                                                                                                               |       | 1,045                      |       | 1,061                      |       |
| Current portion of  deferred revenue                                                                                                                                                                                                             |       | 3,624                      |       | 2,741                      |       |
| Other current  liabilities                                                                                                                                                                                                                       |       | 1,492                      |       | 1,407                      |       |
| Total current  liabilities                                                                                                                                                                                                                       |       | 12,394                     |       | 12,214                     |       |
| Deferred revenue, less  current portion                                                                                                                                                                                                          |       | 1,289                      |       | 1,305                      |       |
| Restructuring accrual,  less current portion                                                                                                                                                                                                     |       | 370                        |       | 416                        |       |
| Total liabilities                                                                                                                                                                                                                                |       | 14,053                     |       | 13,935                     |       |
| Stockholders’ equity:                                                                                                                                                                                                                       |       |                       |       |                       |       |
| Series A redeemable  convertible preferred stock, $0.001 par value: 12,801 shares authorized at  January 31, 2005 and October 31, 2004: no shares issued and  outstanding                                                    |       | —                     |       | —                     |       |
| Preferred stock, 5,000  shares authorized at January 31, 2005 and October 31, 2004: no  shares issued and outstanding                                                                                                                  |       | —                     |       | —                     |       |
| Common stock, $0.001 par  value; 100,000 shares authorized at January 31, 2005 and October 31, 2004:  41,585 and 41,159 shares issued and outstanding at January 31, 2005  and October 31, 2004, respectively |       | 42                         |       | 41                         |       |
| Additional paid-in  capital                                                                                                                                                                                                                      |       | 213,769                    |       | 213,244                    |       |
| Deferred stock-based  compensation                                                                                                                                                                                                               |       | (131                       | )          | (201                       | )          |
| Accumulated deficit                                                                                                                                                                                                                              |       | (171,941                   | )          | (171,122                   | )          |
| Total stockholders’  equity                                                                                                                                                                                                                 |       | 41,739                     |       | 41,962                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                  |       | $                          | 55,792     |                       | $          | 55,897 |   |

 

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

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**GoRemote InternetCommunications, Inc.Condensed Consolidated Statements of Operations(in thousands, except per share amounts)(unaudited)**
| ** **                                                   | ** ** | **Three Months Ended  January 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                           | ** ** | **2004** | ** ** |
| Revenues                                                     |       | $                                                  | 11,976     |   | $ | 11,918 |   |
| Costs and expenses:                                          |       |                                               |       |   |   |
| Cost of revenues                                             |       | 5,012                                              |       | 4,709 |   |
| Network and operations                                       |       | 2,159                                              |       | 1,711 |   |
| Research and development                                     |       | 583                                                |       | 868 |   |
| Sales and marketing                                          |       | 3,109                                              |       | 4,758 |   |
| General and administrative                                   |       | 1,595                                              |       | 1,361 |   |
| Amortization of intangible assets                            |       | 244                                                |       | 266 |   |
| Amortization of stock-based compensation(1)                  |       | 57                                                 |       | 60 |   |
| Restructuring charge                                         |       | 60                                                 |       | — |   |
| Total costs and expenses                                     |       | 12,819                                             |       | 13,733 |   |
| Operating loss                                               |       | (843                                               | )          | (1,815 | ) |
| Interest income  and other, net                              |       | 55                                                 |       | (6 | ) |
| Loss before  income taxes                                    |       | (788                                               | )          | (1,821 | ) |
| Provision for  income taxes                                  |       | 31                                                 |       | 22 |   |
| Net loss                                                     |       | $                                                  | (819       | ) | $ | (1,843 | ) |
| Basic and diluted  net loss per share                        |       | $                                                  | (0.02      | ) | $ | (0.05 | ) |
| Shares used to compute  basic and diluted net loss per share |       | 41,320                                             |       | 34,474 |   |

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(1)          Amortizationof stock-based compensation consists of:
| Network and  operations                         |   | $  | 21     |   | $      | 17 |   |
|-------------------------------------------------|--------|----|--------|--------|--------|----|--------|
| Research and  development                       |   | 4  |   | 13     |   |
| Sales and  marketing                            |   | 26 |   | 25     |   |
| General and  administrative                     |   | 6  |   | 5      |   |
| Total  amortization of stock-based compensation |   | $  | 57     |   | $      | 60 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements

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**GoRemote Internet Communications, Inc.Condensed Consolidated Statements of Cash Flows (in thousands)(unaudited)**
| ** **                                                                            | ** ** | **Three Months Ended  January 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                           | ** ** | **2004** | ** ** |
| ***Cash  flows from operating activities:***                                          |       |                                               |       |   |   |
| Net loss                                                                              |       | $                                                  | (819       | ) | $ | (1,843 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:          |       |                                               |       |   |   |
| Depreciation and amortization of property and  equipment                              |       | 293                                                |       | 363 |   |
| Amortization of stock-based compensation                                              |       | 57                                                 |       | 60 |   |
| Amortization of intangibles                                                           |       | 244                                                |       | 267 |   |
| Accounts receivable allowances                                                        |       | 17                                                 |       | — |   |
| Non-cash portion of restructuring charge (benefit)                                    |       | (21                                                | )          | — |   |
| Net changes in  assets and liabilities:                                               |       |                                               |       |   |   |
| Accounts receivable                                                                   |       | 1,376                                              |       | (291 | ) |
| Inventories                                                                           |       | (20                                                | )          | (91 | ) |
| Prepaid expenses and other current assets                                             |       | (245                                               | )          | 421 |   |
| Other assets                                                                          |       | (86                                                | )          | (312 | ) |
| Accounts payable                                                                      |       | (797                                               | )          | 231 |   |
| Accrued compensation and benefits                                                     |       | (16                                                | )          | (659 | ) |
| Deferred revenue                                                                      |       | 867                                                |       | 524 |   |
| Other current liabilities                                                             |       | 86                                                 |       | (220 | ) |
| Net cash provided by (used in) operating activities                                   |       | 936                                                |       | (1,550 | ) |
| ***Cash  flows from investing activities:***                                          |       |                                               |       |   |   |
| Available-for-sale  investments:                                                      |       |                                               |       |   |   |
| Purchases                                                                             |       | (1,250                                             | )          | (1,250 | ) |
| Maturities                                                                            |       | 1,295                                              |       | 1,250 |   |
| Cash provided by  business combination, net                                           |       | —                                             |       | 1,412 |   |
| Capital  expenditures                                                                 |       | (162                                               | )          | (240 | ) |
| Net cash provided by (used in) investing activities                                   |       | (117                                               | )          | 1,172 |   |
| ***Cash  flows from financing activities:***                                          |       |                                               |       |   |   |
| Proceeds from  sales of common stock, net                                             |       | 539                                                |       | 775 |   |
| Net cash provided by financing activities                                             |       | 539                                                |       | 775 |   |
| Net increase in cash and cash equivalents                                             |       | 1,358                                              |       | 397 |   |
| Cash and cash equivalents  at beginning of the period                                 |       | 2,407                                              |       | 3,560 |   |
| Cash and cash  equivalents at end of the period                                       |       | $                                                  | 3,765      |   | $ | 3,957 |   |
| ***Supplemental  disclosures of cash flow information:***                             |       |                                               |       |   |   |
| Income taxes paid                                                                     |       | $                                                  | 14         |   | $ | 3 |   |
| ***Supplemental  disclosures of noncash financing activities:***                      |       |                                               |       |   |   |
| Conversion of  Series A redeemable convertible preferred stock into common stock |       | $                                                  | —     |   | $ | 4,032 |   |

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

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

**1.   Basis ofPresentation**

The financial information at January 31, 2005 andfor the three months ended January 31, 2005 and 2004 is unaudited, butincludes all adjustments that GoRemote Internet Communications, Inc. (the “Company”)considers necessary for a fair presentation of the financial information setforth herein, in accordance with accounting principles generally accepted inthe United States for interim financial information and with the instructionsto Form 10-Q and Article 10 of Regulation S-X. Accordingly, thefinancial information set forth herein does not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States for annual financial statements. The results for the three monthsended January 31, 2005 are not necessarily indicative of the results thatmay be expected for future periods.

The balance sheet at October 31, 2004 has beenderived from the audited financial statements at that date, but does notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.

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

**2.   Summary ofSignificant Accounting Policies**

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

*Use of Estimates.  *Thepreparation of the condensed consolidated financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. The Company’s broadbandservice providers are unable to deliver actual accounting information to theCompany on a timely basis at month-end. Due to this delay, which is outside theCompany’s control, the Company estimates its revenue and cost of sales relatedto broadband connectivity on a monthly basis, and adjusts them to actual in thesubsequent month after receiving information from its service providers.Historically, these adjustments have been immaterial. In addition, the Companymade estimates as to its accounts receivable allowance and reserves, therecoverability of a prepaid asset, potential liability as to certain taxobligations and restructuring expenses. Actual results could differ from thoseestimates.

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

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

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*Short-term Investments.  *TheCompany’s policy is to invest in various short-term instruments with investmentgrade credit ratings. All of the Company’s investments are classified asavailable-for-sale, and the Company views its available-for-sale portfolio asavailable for use in its current operations. Investments with maturitiesgreater than one year are considered short-term and they are classified asavailable-for-sale in accordance with Statement of Financial AccountingStandards No. 115, “Accounting for Certain Investments in Debt and EquitySecurities” (“SFAS No. 115”).

The cost of securities sold is based on the specificidentification method. Any realized gains or losses and declines in value,judged to be other-than-temporary, are included in interest income and other.The Company includes unrealized gains or losses in comprehensive income instockholders’ equity, if material.

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

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

*Property and Equipment.  *Propertyand equipment are stated at cost, net of accumulated depreciation and amortization.Depreciation and amortization are provided on a straight-line basis over theestimated useful lives of the respective assets. The useful lives used by theCompany are 36 months for furniture and fixtures, 24 to 42 months forcomputer equipment and software and the shorter of the useful life or theremaining lease term for leasehold improvements, respectively.

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

*Impairment of Goodwill.  *Circumstancesthat could trigger an impairment test include, but are not limited to, asignificant adverse change in the business climate or legal factors, an adverseaction or assessment by a regulator, unanticipated competition or loss of keypersonnel. In addition, the Company assesses goodwill for recoverability if itsmarket capitalization is less than the recorded value of its net assets. If thecarrying amount of the goodwill exceeds the implied fair value of thatgoodwill, an impairment loss is recorded in net earnings (loss).

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

*Impairment of Long-Lived Assets andIntangible Assets.  *The Company evaluates the carryingamount of its long-lived assets, including purchased intangible assets, whenevents or changes in business circumstances have occurred, which indicate thecarrying amount of such assets may not be fully realizable. Determination ofimpairment is based on an estimate of undiscounted future cash flows resultingfrom the use of the assets and their eventual disposition. If the Companydetermines that any of these assets have 

7

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been impaired, theimpairment charge is recorded based on a comparison of the net book value ofthe assets and the fair value. The fair value of the assets is determined byeither discounted future cash flows resulting from the use of the assets overtheir average remaining useful lives or specific appraisal.

*Revenue Recognition and RelatedAllowances.  *The Company derives revenues primarily fromproviding remote Internet access services to customers through its virtualnetwork and by providing monthly security and support services and monthlyconnectivity services to broadband Internet remote access customers. TheCompany’s arrangements with its customers typically have multiple deliverables.These deliverables may include software, installation services, customerpremises equipment, connectivity services, and maintenance and supportservices.

The Company recognizes revenues when persuasiveevidence of an arrangement exists, service has been provided to the customer,the price to the customer is fixed or determinable, and collectibility isprobable. Mobile remote Internet access services are generally billed on aper-minute basis for usage or at a flat rate per month per user based on negotiatedrates. Usage fees are recognized in the period the services are rendered to endusers, and monthly fees are recognized ratably based on the number of days thathave elapsed. The Company has minimum commitment arrangements with somecustomers. These customers are not contractually entitled to use or otherwisereceive benefit for unused service in subsequent periods. Minimum commitmentfees are recognized as revenue in the month it has been determined that theminimum commitments have not been achieved, assuming all other criteria forrevenue recognition have been met.

The Company’s solutions sometimes also includeinstallation services, the sale of customer premise equipment and managedsecurity services related to its broadband services offerings. Depending on theservice provided and the nature of the arrangement, the Company may charge aone-time, annual or monthly fee for these additional services or deliverables.Revenue from installation services and the sale of equipment is deferred andrecognized ratably over the period of expected usage by its customers since theCompany considers these services and products to be an enabler of the relatedremote access service contracts. The Company’s estimate of expected usage is24 months for all periods presented. On a quarterly basis, the Companyreviews this estimate of expected usage based on actual data. Revenues frommanaged security services are recognized in the month the service is provided.To a lesser extent, the Company also derives a portion of its revenues fromlicenses of its authentication software, related maintenance and supportservices, and other optional services related to its remote access solutionswhich are recognized ratably over the term of service. These other revenuesamounted to five percent or less of total revenues over the last three years.Fees generated from maintenance contracts are recognized over the life of thosecontracts. The majority of the maintenance contracts cover periods of one to 12months. Amounts billed in advance of revenue recognition are recorded todeferred revenue as collected. The Company recognizes certain broadbandconnectivity revenues generated under agency arrangements on a net basis.Product returns and allowances have not been significant.

The Company provides services over a heterogeneousvirtual network, which was created by forming contractual relationships withapproximately 500 Internet service providers, cable companies, DSL companiesand telecommunications companies. These companies may provide their servicesunder either a reseller or an agency arrangement. In applying its revenuerecognition policy, the Company must make judgments and estimates with regardto the specific facts and circumstances surrounding each provider relationshipto determine which portion of its revenues the Company provides under areseller arrangement, where the Company would record gross revenues and cost ofrevenues, and which portion of its revenues the Company provides as an agent,where the Company would record revenues and cost of revenues combined on a netbasis. The Company bases its estimates on historical experience and on variousother assumptions believed to be applicable and reasonable under thecircumstances. These estimates may change as new events occur, as additionalinformation is obtained and as its operating 

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environment changes, anyof which could cause a material impact on the revenues that the Company hasreported.

The Company records estimated allowances againstrevenues for returns and cancellations in the same period the revenues arerecorded. These estimates are based upon historical analysis of the Company’sservice level agreements, credit memo data and other known factors for pricingand transaction volume disputes that arise in the normal course of business. Todate, allowances pertaining to the Company’s current business have not beensignificant. If the historical data the Company uses to calculate theseestimates does not accurately reflect amounts associated with future disputes,its actual revenues could be higher or lower than what the Company hasrecognized.

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

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

*Research and Development.  *TheCompany’s research and development costs, which principally have related todevelopment of internal use software that is also marketed to the Company’scustomers, are expensed as incurred until technological feasibility has beenestablished. To date, the software developed by the Company has generally beenavailable for general release concurrent with the establishment oftechnological feasibility and, accordingly, no software development costs havebeen capitalized.

*Stock-based Compensation.  *Aspermitted under the provisions of Statement of Financial Accounting Standards No. 123,  “Accounting for Stock-BasedCompensation” (“SFAS No. 123”), the Company accounts for employee stock-basedcompensation in accordance with Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB No. 25”), using anintrinsic value approach to measure compensation expense, if any. Under APB No. 25,the Company generally recognizes no compensation expense with respect to suchawards. Appropriate disclosures using a fair-value based method, as provided bySFAS No. 123, are also reflected herein. Options issued to non-employeesare accounted for in accordance with SFAS 123 using a fair-value approach.

Pro forma information regarding net income andearnings per share is required by SFAS No. 123 and has been determined asif the Company had accounted for awards to employees under the fair-valuemethod of SFAS No. 123. The fair value of stock options under the Company’sstock option plan and stock purchase plan rights under the Company’s stockpurchase plan was estimated as of the grant date using the Black-Scholesoption-pricing model.

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The fair value of stockoptions granted during the three months ended January 31, 2005 and 2004were estimated at the date of grant assuming no expected dividends and thefollowing weighted average assumptions.

*Stock Options*
| ** **                       | ** ** | **Three Months Ended January 31,**                                                                           | ** ** |
|----------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **          2005          ** | ** ** | **          2004          ** | ** ** |
| Expected life (years)            |       |                                                                                                                             | 2.88       |   |   |   | 2.80 |   |   |
| Expected stock price  volatility |       |                                                                                                                             | 286        | % |   |   | 138 | % |   |
| Risk-free interest rate          |       |                                                                                                                             | 2.79       | % |   |   | 1.28 | % |   |

 

*Stock Purchase*
| ** **                       | ** ** | **Three Months Ended January 31,**                                                                           | ** ** |
|----------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **          2005          ** | ** ** | **          2004          ** | ** ** |
| Expected life (years)            |       |                                                                                                                             | 0.50       |   |   |   | 0.50 |   |   |
| Expected stock price  volatility |       |                                                                                                                             | 246        | % |   |   | 375 | % |   |
| Risk-free interest rate          |       |                                                                                                                             | 2.79       | % |   |   | 1.01 | % |   |

 

For purposes of pro forma disclosures, the estimatedfair value of stock-based awards is amortized against pro forma net income overthe stock-based awards’ vesting period for options and over the offering periodfor stock purchases under the Company’s 1999 Employee Stock Purchase Plan.

TheCompany’s pro forma information is as follows:
| ** **                                                      | ** ** | **Three Months Ended January 31,**                                                                           | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **          2005          ** | ** ** | **          2004          ** | ** ** |
| ** **                                                      | ** ** | **(in thousands, except  per share amounts)**                                                                                    | ** ** |
| Net loss attributable to  common stockholders as reported       |       |                                                                                                                             | $          | (819 | ) |   |   | $ | (1,843 | ) |   |
| Add: Amortization of  stock compensation measured under APB 25  |       |                                                                                                                             | 57         |   |   |   | 60 |   |   |
| Less: Stock-based  compensation expense measured under SFAS 123 |       |                                                                                                                             | (907       | ) |   |   | (994 | ) |   |
| Pro forma net loss                                              |       |                                                                                                                             | $          | (1,669 | ) |   |   | $ | (2,777 | ) |   |
| Basic and diluted net  loss per share                           |       |                                                                                                                             | $          | (0.02 | ) |   |   | $ | (0.05 | ) |   |
| Pro forma basic and diluted net loss per share                  |       |                                                                                                                             | $          | (0.04 | ) |   |   | $ | (0.08 | ) |   |

 

Calculated under SFAS No. 123, theweighted-average fair values of the employee stock options granted during thethree months ended January 31, 2005 and 2004 were $1.58 and $3.87 pershare, respectively. The weighted-average estimated fair value of sharespurchased under the Purchase Plan during the three months ended January 31,2005 and 2004 was $0.95 and $5.25 per share, respectively.

*Income Taxes.  *TheCompany accounts for income taxes under the provisions of Statement ofFinancial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFASNo. 109”), which provides for the establishment of deferred tax assets andliabilities based on the difference between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes.

*Net Loss Per Share.  *Netloss per common share and diluted net loss per share are presented inconformity with the Financial Accounting Standards Board’s Statement ofFinancial Accounting Standards No. 128, “Earnings Per Share” (“SFAS No. 128”)for all years presented.

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In accordance with SFAS No. 128,basic and diluted net loss per share has been computed using the weighted-averagenumber of shares of common stock outstanding during the period. Weighted-averageoptions outstanding to purchase approximately 8.8 million and 7.0 millionshares of common stock for the three months ended January 31, 2005 and2004, respectively, were not included in the computation of diluted net lossper share because the effect would be antidilutive. The increase in weighted-averageoptions outstanding in the three months ended January 31, 2005 wasprimarily due to the grant of new options to the Company’s employees. Suchsecurities, had they been dilutive, would have been included in the computationof diluted net loss per share using the treasury stock method.

**3.   Change inFiscal Year End**

In October 2004, theCompany changed its fiscal year end from December 31 to October 31.  The consolidated financial information for thefirst fiscal quarter of 2005 represents the financial results for thethree-month period ended January 31, 2005.  The 2004 financial results presented in this Form 10-Qare for the three-month period ended January 31, 2004.

**4.   BusinessCombination**

On December 1, 2003, the Company completed itsacquisition of Axcelerant, a privately held provider of broadband Internetremote access services and managed security services. The Company’s acquisitionof Axcelerant did not result in a new reportable segment. The results ofoperations of Axcelerant have been included in the Company’s financialstatements subsequent to the date of the acquisition.

A total ofapproximately 1.5 million shares of the total consideration that was to bedelivered to Axcelerant’s stockholders as a result of the acquisition was setaside as an escrow fund, serving as collateral for the indemnificationobligations of Axcelerant stockholders. The Company made no claims against theescrow fund through December 1, 2004, the expiration date for the escrowperiod. The escrowed shares were released to the former Axcelerant shareholdersduring December 2004.

*DeferredStock Compensation.  *The intrinsic value of unvestedstock options assumed in the Axcelerant acquisition in an amount ofapproximately $674,000 has been allocated to deferred stock compensation and isbeing amortized to expense on a straight-line basis over the vesting period.The Company assumed options from Axcelerant to purchase a total ofapproximately 597,000 shares of the Company’s common stock, of whichapproximately 462,000 were fully vested. Options assumed in connection with theacquisition had exercise prices between $0.02 and $5.05 per share, with aweighted average exercise price of $1.32 per share and a weighted averageremaining vesting period of approximately 2.5 years.

**5.   Propertyand Equipment and Intangible Assets**

*Property andEquipment*

Property and equipmentcomprised the following (in thousands):
| ** **                                      | ** ** | ** January 31, ** | ** ** | ** October 31, ** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2005**                         | ** ** | **2004**                         | ** ** |
| Computer hardware                               |       |                             | $          | 6,414                            |       |   |   | $ | 6,319 |   |   |
| Software                                        |       |                             | 4,543      |                             |       |   | 4,495 |   |   |
| Office furniture  and equipment                 |       |                             | 1,525      |                             |       |   | 1,506 |   |   |
| Leasehold  improvements                         |       |                             | 422        |                             |       |   | 422 |   |   |
|                                            |       |                             | 12,904     |                             |       |   | 12,742 |   |   |
| Less accumulated  depreciation and amortization |       |                             | (11,341    | )                                |       |   | (11,048 | ) |   |
| Total                                           |       |                             | $          | 1,563                            |       |   |   | $ | 1,694 |   |   |

 

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*PurchasedIntangible Assets*

Purchased intangible assets are carried at cost lessaccumulated amortization. Amortization of purchased intangible assets iscomputed using the straight-line method over their expected useful lives offive years for customer relationships and Website URLs and one year forinternal use software.

Purchasedintangible assets consisted of the following (in thousands):
| ** **                     | ** ** | **January 31,** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2005**             | ** ** |
| Customer  relationships        |       |                 | $          | 5,150 |   |   |
| Internal use  software         |       |                 | 100        |   |   |
| Website URL                    |       |                 | 50         |   |   |
|                           |       |                 | 5,300      |   |   |
| Less accumulated  amortization |       |                 | (1,669     | ) |   |
| Total                          |       |                 | $          | 3,631 |   |   |

 

Theaggregate estimated amortization expense through October 31, 2009, basedon fiscal years ending October 31, is as follows (in thousands):
| ** ** | ** ** | **Amortization** | ** ** |
|------------|------------|------------------|------------|
| 2005       |       |             | 709        |   |   |
| 2006       |       |             | 946        |   |   |
| 2007       |       |             | 946        |   |   |
| 2008       |       |             | 946        |   |   |
| 2009       |       |             | 84         |   |   |
|       |       |             | $          | 3,631 |   |   |
|            |            |                  |            |  |  |  |

 

*Other IntangibleAssets*

The Company entered intoan agreement with a wireless service provider during 2001 for the exchange ofservices, which resulted in a prepayment for future wireless services and theobligation by the Company to provide future Internet roaming services. As of January 31,2005, there was $53,000 of the asset remaining to be utilized, which theCompany believes will be utilized over the period of the agreement**.**

**6.   Commitmentsand Contingencies**

*Lease Commitments.  *TheCompany leases all of its facilities under operating leases that expire atvarious dates through 2008. As of January 31, 2005, the Company had $2.5million in future operating lease commitments.

*Purchase Commitments.  *TheCompany has entered into certain non-cancelable purchase commitments fromsuppliers who provide network access, software and related services that areutilized by the Company in order to deliver its GoRemote MobileOffice solution.As of January 31, 2005 the Company had $2.1 million in future purchasecommitments that expire at various dates through 2007.

*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 andcertain of its officers were named as defendants in five purported securitiesclass action lawsuits filed in the United States District Court, SouthernDistrict of 

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New York, captioned as Inre GoRemote Internet Communications, Inc. Initial Public OfferingSecurities Litigation, No. 01 Civ 6771 (SAS), and consolidated with morethan three hundred substantially identical proceedings as In re Initial PublicOffering Securities Litigation, Master File No. 21 MC 92 (SAS). TheConsolidated Amended Class Action Complaint for Violation of the FederalSecurities Laws (“Consolidated Complaint”) was filed on or about April 19,2002, and alleges claims against certain of the Company’s officers and againstCIBC World Markets Corp., Prudential Securities Incorporated, DB Alex. Brown,as successor to Deutsche Bank, and U.S. Bancorp Piper Jaffray Inc.,underwriters of the Company’s December 14, 1999 initial public offering (“underwriterdefendants”), under Sections 11 and 15 of the Securities Act of 1933, asamended, and under Section 10(b) and 20(a) of the SecuritiesExchange Act of 1934, as amended.

Citing several press articles, the ConsolidatedComplaint alleges that the underwriter defendants used improper methods inallocating shares in initial public offerings, and claim the underwriterdefendants entered into improper commission agreements regarding aftermarkettrading in the Company’s common stock purportedly issued pursuant to theregistration statement for the initial public offering. The ConsolidatedComplaint also alleges market manipulation claims against the underwriterdefendants based on the activities of their respective analysts, who wereallegedly compromised by conflicts of interest. The plaintiffs in theConsolidated Complaint seek damages as measured under Section 11 and Section 10(b) ofthe Securities Act of 1933, pre-judgment and post-judgment interest, andreasonable attorneys’ and expert witnesses’ fees and other costs; no specificamount is claimed in the plaintiffs’ prayer in the Consolidated Complaint. ByOrder of the Court, no responsive pleading is yet due, although motions todismiss on global issues affecting all of the issuers have been filed.

In October 2002, certain of the Company’sofficers and directors who had been named as defendants in the In re InitialPublic Offering Securities Litigation were dismissed without prejudice uponorder of the presiding judge. In February 2003, the presiding judgedismissed the Section 10(b) claims against the Company and its namedofficers and directors with prejudice.

From September 2002 through June 2003, theCompany participated in settlement negotiations with a committee of issuers’litigation counsel, plaintiffs’ executive committee and representatives ofvarious insurance companies (the “Insurers”). The Company’s Insurers wereactively involved in the settlement negotiations, and strongly supported asettlement proposal presented to the Company for consideration in early June 2003.The settlement proposed by the plaintiffs would be paid for by the Insurers andwould dispose of all remaining claims against the Company.

After careful consideration, the Company decided toapprove the settlement proposal in July 2003. Although the Companybelieves that plaintiffs’ claims are without merit, it has decided to acceptthe settlement proposal (which does not admit wrongdoing) to avoid the cost anddistraction of continued litigation. Because the settlement will be fundedentirely by its Insurers, the Company does not believe that the settlement willhave any effect on the Company’s financial condition, results of operations orcash flows.

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

**7.   RestructuringEvents**

In August 2004, the Company undertook a strategicrestructuring to reduce its operating expense structure by streamliningoperations. The activity related to the restructuring is accounted for underthe 

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provisions of Statement ofFinancial Accounting Standards No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities” (“SFAS 146”).

In thequarter ended January 31, 2005, an additional $69,000 provision wasaccrued for employees who were terminated in the restructuring and had periodsof service that extended beyond August 2004. The provision and associatedcharges against the provision for the August 2004 restructuring through January 31,2005 are as follows:
| ** **                                                       | ** ** | **Employee  Severance Costs** | ** ** | **Lease  Facilities  and Other  Obligations** | ** ** | **Retirement of  Fixed Assets** | ** ** | **Valuation of  Modified  Stock Options** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------|------------|-----------|------------|
| ** **                                                       | ** ** | **(in thousands)**            | ** ** |
| Provision  recorded in the quarter ended September 30, 2004 |       |                               | $          | 1,492                                              |       |                                      |       | $                                                   | 650        |      |       |   | $ | 273 |   |   |   | $ | 53 |   |   | $ | 2,468 |   |
| Non-cash charges                                                 |       |                               | —     |                                               |       |                                      | 15         |                                                |       |      | (273       | ) |   |   | (53 | ) |   | (311 | ) |
| Cash payments                                                    |       |                               | (1,268     | )                                                  |       |                                      | (39        | )                                                   |       |      | —     |   |   |   | — |   |   | (1,307 | ) |
| Accruals at  October 31, 2004                               |       |                               | 224        |                                               |       |                                      | 626        |                                                |       |      | —     |   |   |   | — |   |   | 850 |   |
| Provision  recorded in the quarter ended January 31, 2005   |       |                               | 69         |                                               |       |                                      | (9         | )                                                   |       |      | —     |   |   |   | — |   |   | 60 |   |
| Non-cash charges  (recoveries)                                   |       |                               | —     |                                               |       |                                      | (16        | )                                                   |       |      | —     |   |   |   | — |   |   | (16 | ) |
| Cash payments                                                    |       |                               | (293       | )                                                  |       |                                      | (48        | )                                                   |       |      | —     |   |   |   | — |   |   | (341 | ) |
| Accruals at  January 31, 2005                               |       |                               | $          | —                                             |       |                                      |       | $                                                   | 553        |      |       |   | $ | — |   |   |   | $ | — |   |   | $ | 553 |   |

 

**8.   SegmentInformation**

The Company operates in one segment, providing aglobal remote access solution for corporate enterprises with mobile and remoteworkforces and for the Company’s service provider resellers and value-addedresellers.

Thefollowing is a summary of revenue by geographical area for the periodspresented:
| ** **                              | ** ** | **Three months ended January 31,**                                                               | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **         2005         ** | ** ** | **         2004         ** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                                                                              | ** ** |
| Revenue by  external customers:         |       |                                                                                                                 |       |   |   |   |   |   |   |
| United States, Canada and Latin America |       |                                                                                                                 | $          | 9,183 |   |   |   | $ | 7,432 |   |   |
| Japan/Korea                             |       |                                                                                                                 | 1,131      |   |   |   | 2,703 |   |   |
| Asia Pacific                            |       |                                                                                                                 | 732        |   |   |   | 781 |   |   |
| Europe, Middle East and Africa          |       |                                                                                                                 | 930        |   |   |   | 1,002 |   |   |
|                                    |       |                                                                                                                 | $          | 11,976 |   |   |   | $ | 11,918 |   |   |

 

The following is asummary of long-lived assets by geographical area for the periods presented:
| ** **         | ** ** | **January 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|--------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **         | ** ** | **(in thousands)**    | ** ** |
| Long-lived assets: | ** ** |                       | ** ** | ** **                 |       |   | ** ** | ** ** |   |
| United States      |       |                       | $          | 26,739                     | ** ** |   |   | $ | 27,169 | ** ** |   |
| Rest of World      |       |                       | 120        | ** **                 |       |   | 67 | ** ** |   |
|               |       |                       | $          | 26,859                     | ** ** |   |   | $ | 27,236 | ** ** |   |

 

Revenue by externalcustomer is based on the customer’s billing locations. Long-lived assets arethose assets used in each geographic location. For the three months ended January 31,2005, one customer accounted for 10 percent or more of the Company’s totalconsolidated revenues.

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**9.   Stockholders’Equity**

*Series A Convertible PreferredStock.  *During the three months ended January 31,2004, 3.1 million shares of Series A Preferred Stock were converted intocommon stock. No shares of Series A Preferred Stock were outstanding as ofJanuary 31, 2004 and 2005.

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

*Stock Repurchase Program.  *InSeptember 2001, the Board of Directors approved a program to expend up to$2.0 million to repurchase shares of the Company’s common stock in openmarket transactions. The Company purchased 110,000 shares for approximately$99,000 during 2001. Although the program approval remains in effect, theCompany repurchased no additional shares during 2002, 2003 and 2004 or duringthe three months ended January 31, 2005.

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**ITEM2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The followingdiscussion should be read in conjunction with the selected consolidatedfinancial information and the consolidated financial statements and notes appearingelsewhere in this Form 10-Q. The following discussion containsforward-looking statements, such as statements of expected revenues andexpenses that involve risks and uncertainties. We assume no obligation toupdate any such forward-looking statements. Our actual results coulddiffer materially from those anticipated in these forward-lookingstatements. Factors that could cause or contribute to such differences include,but are not limited to, those detailed from time to time in our filings withthe Securities and Exchange Commission and those discussed in this Form 10-Q,particularly in this Management’s Discussion and Analysis of FinancialCondition and Results of Operations and under “Factors That May AffectFuture Results.”*

*In October 2004, we changed our fiscal year-endfrom December 31 to October 31. As a result, references in this Form 10-Qto the first quarter of 2005 are references to the three-month period ended January 31,2005 and references to the first quarter of 2004 are references to thethree-month period ended January 31, 2004. Unless expressly stated or thecontext otherwise requires, the terms “we”, “our”, “us”, “the Company” and “GoRemote”refer to GoRemote Internet Communications, Inc. and its subsidiaries as awhole.*

**Overview**

We provide secure managed broadband and remote accesssolutions to enterprises and service providers. Our solutions enableenterprises to securely, reliably, and cost-effectively extend their corporatenetworks and applications to mobile and remote workers outside the corporatefirewall. These workers include mobile professionals such as salesprofessionals, project managers and engineers; teleworkers, including callcenter agents; telecommuters; and employees in branch offices and retailsettings. We provide comprehensive and integrated managed broadband and globalremote access services that include: intelligent client software; multiplenetwork access types, including broadband, Wi-Fi, dial-up and general packetradio service (or GPRS); security capabilities that ensure security policycompliance by remote workers; a real-time remote access management console;end-to-end managed and value-added services including managed securityservices; and design, deployment, monitoring, and technical support. Our productsand services enable enterprises to reduce the cost, complexity and risk ofremote office networking, while maximizing the productivity of mobile andremote workers.

In December 2003, we acquired Axcelerant, Inc.,a privately held provider of broadband Internet remote access services andmanaged security services. In May 2004, we changed our corporate name fromGRIC Communications, Inc. to GoRemote Internet Communications, Inc.to reflect our current vision and service offerings. On August 12, 2004,we announced a restructuring of our global operations to reduce operatingexpense and streamline our operations.

The majority of our revenue comes from providingsettlement and clearing-house services for our customers. We provide servicesover a heterogeneous virtual network known as the GoRemote Global Network. Asof February 28, 2005, the GoRemote Global Network included approximately27,000 Internet access—dial-up locations, over 16,500 public wirelessfidelity—or WiFi—hotspots and approximately 1,500 public broadband accesspoints in over 150 countries. Through the acquisition of Axcelerant, we added avirtual broadband cable modem and DSL network that spans the United States andCanada. This network is an aggregation of the networks of more than 150 broadbandproviders, including virtually all of the leading cable companies, incumbentlocal exchange carriers (or ILECs) and competitive local exchange carriers (orCLECs) in the United States. By utilizing this network, we are able to providecomprehensive coverage in the United States for enterprises requiring broadbandbranch office and broadband teleworker solutions. We created the GoRemoteGlobal Network by forming contractual relationships with approximately 500access providers—Internet service providers, cable companies, DSL companies andtelecommunication companies. These providers, which we refer to as the GoRemoteGlobal Network 

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members, are able to sharetheir communications networks. Our customers, who are enterprises, value addedresellers (VARs) and service provider resellers, benefit from the resultingnetwork delivering secure mobile Internet access cost-effectively. Our memberproviders benefit from the GoRemote Global Network because we manage thisshared network and provide settlement services. We have established commontechnical, service and payment standards to settle charges that our customersincur when their end users access the network facilities of GoRemote GlobalNetwork members to conduct Internet-based communications. We intend to continuedeveloping our solutions offering to introduce new Internet-based remotecommunications solutions that may be adopted, deployed and managed on a globalscale across the GoRemote Global Network.

We have incurred substantial losses since ourinception as a result of expenses associated with building the GoRemote GlobalNetwork and related network infrastructure, developing our software productsand marketing our solutions to our customers. We had an accumulated deficit ofapproximately $171.9 million as of January 31, 2005. We cannot assure youthat we will achieve or sustain profitability. See “Factors That May AffectFuture Results—We have a history of net losses and may incur future losses.”

Our business model has evolved in the course of ourdevelopment and we believe that period-to-period comparisons of our operatingresults should not be relied upon as indicative of future performance. Ourfuture prospects must be considered in light of the risks, expenses anddifficulties frequently encountered by companies in the early stages ofdevelopment, particularly companies in new and rapidly evolving markets. See “FactorsThat May Affect Future Results—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 changed our fiscalyear-end from December 31 to October 31. The consolidated financialinformation for the first fiscal quarter of 2005 represents the financialresults for the three-month period ended January 31, 2005. The 2004financial results presented in this Form 10-Q are for the three-monthperiod ended January 31, 2004.

**CriticalAccounting Policies and Estimates**

The methods, estimates and judgments we use inapplying our most critical accounting policies have a significant impact on theresults we report in our consolidated financial statements. We evaluate ourestimates and judgments on an on-going basis. We base our estimates onhistorical experience and on assumptions that we believe to be reasonable underthe circumstances when made. Our experience and assumptions form the basis forour judgments about the carrying value of assets and liabilities and reportedamounts of revenues and expenses that are not readily apparent from othersources. Actual results may vary from what we anticipate, and differentassumptions or estimates about the future could change our reported results.

*Revenue Recognition and RelatedAllowances.  *We derive revenues primarily from providingremote Internet access services to customers through our virtual network and byproviding monthly security and support services and monthly connectivityservices to broadband Internet remote access customers. Our arrangements withour customers typically have multiple deliverables. These deliverables mayinclude software, installation services, customer premises equipment,connectivity services, and maintenance and support services.

We recognize revenues when persuasive evidence of anarrangement exists, service has been provided to the customer, the price to thecustomer is fixed or determinable, and collectibility is probable. Mobileremote Internet access services are generally billed on a per-minute basis forusage or at a flat rate per month per user based on negotiated rates. Usagefees are recognized in the period the services are rendered to end users, andmonthly fees are recognized ratably based on the number of days that haveelapsed. We have minimum commitment arrangements with some customers. Thesecustomers are not contractually entitled to use or otherwise receive benefitfor unused service in subsequent periods. 

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Minimum commitment feesare recognized as revenue in the month it has been determined that the minimumcommitments have not been achieved, assuming all other criteria for revenuerecognition have been met.

Our solutions may also include installation services,the sale of customer premise equipment and managed security services related toour broadband services offerings. Depending on the service provided and thenature of the arrangement, we may charge a one-time, annual or monthly fee forthese additional services or deliverables. Revenue from installation servicesand the sale of equipment is deferred and recognized ratably over the period ofexpected usage by our customers since we consider these services and productsto  be an enabler of the related remoteaccess service contracts. Our estimate of expected usage is 24 months forall periods presented. On a quarterly basis, we review this estimate ofexpected usage based on actual data. Revenues from managed security servicesare recognized in the month the service is provided. To a lesser extent, wealso derive a portion of our revenues from licenses of our authenticationsoftware, related maintenance and support services, and other optional servicesrelated to our remote access solutions which are recognized ratably over theterm of service. These other revenues amounted to five percent or less of totalrevenues over the last three years. Fees generated from maintenance contractsare recognized over the life of those contracts. The majority of themaintenance contracts cover periods of one to 12 months. Amounts billed inadvance of revenue recognition are recorded to deferred revenue as collected.We recognize certain broadband connectivity revenues generated under agencyarrangements on a net basis. Product returns and allowances have not been significant.

We provide services over a heterogeneous virtualnetwork, which was created by forming contractual relationships withapproximately 500 Internet service providers, cable companies, DSL companiesand telecommunications companies. These companies may provide us their servicesunder either a reseller or an agency arrangement. In applying our revenuerecognition policy we must make judgments and estimates with regard to thespecific facts and circumstances surrounding each provider relationship to determinewhich portion of our revenues we provide under a reseller arrangement, where wewould record gross revenues and cost of revenues, and which portion of ourrevenues we provide as an agent, where we would record revenues and cost ofrevenues combined on a net basis. We base our estimates on historicalexperience and on various other assumptions believed to be applicable andreasonable under the circumstances. These estimates may change as new eventsoccur, as additional information is obtained and as our operating environmentchanges, any of which could cause a material impact on the revenues that wehave reported. We record estimated allowances against revenues for returns andcancellations in the same period the revenues are recorded. These estimates arebased upon historical analysis of our service level agreements, credit memodata and other known factors for pricing and transaction volume disputes thatarise in the normal course of business. To date, allowances pertaining to ourcurrent business have not been significant. If the historical data we use tocalculate these estimates does not accurately reflect amounts associated withfuture disputes, our actual revenues could be higher or lower than what we haverecognized.

*Cost of Revenues.  *Costof revenues represents the amounts paid to Internet service providers, cablecompanies, DSL companies and telecommunications companies for the use of theirnetworks, and amounts paid to other third party providers of products orservices that we include in our solutions. We have entered into minimumpurchase commitments with some network service providers for access that weexpect to utilize during the term of the contracts. Costs of minimum purchasecontracts are recognized as network access expenses at the greater of theminimum commitment or actual usage. If we estimate that the revenues derivedfrom the purchase commitment will be less than the purchase commitment, werecognize a loss on that purchase commitment to the extent of that difference. Nosuch loss has been recognized to date.

*Allowance for Doubtful Accounts.  *Wemaintain allowances for doubtful accounts for estimated losses from ourcustomers’ inability to make payments they owe us. In order to estimate theappropriate level of 

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this allowance, we analyzehistorical bad debts, customer concentrations, current customer credit-worthiness,current economic trends and changes in our customer payment patterns. If thefinancial condition of our customers were to deteriorate and to impair theirability to make payments to us, additional allowances might be required infuture periods. If we determine that collectibility is not probable, revenue isrecognized as cash is collected. If our estimates prove too low, our bad debtexpense will increase.

*Valuation of Long-Lived Assetsincluding Intangible Assets.  *We evaluate the carryingamount of our long-lived assets, including purchased intangible assets,whenever events or circumstances indicate the amount of the assets may not berecoverable. Determination of impairment of property and equipment, goodwilland intangible assets is highly subjective and requires significant judgment atmany points during the analysis. This analysis is based on our estimate offuture cash flows that the assets are expected to generate and their eventualdisposition. If we determine that any of these assets have been impaired, theimpairment charge will be charged to earnings in the period such determinationis made.

*Valuation of Goodwill.  *Wetest goodwill for possible impairment on an annual basis in the third fiscalquarter and at any other time if events occur or circumstances indicate thatthe carrying amount of goodwill may not be recoverable. Circumstances thatcould trigger an impairment test include, but are not limited to, a significantadverse change in the business climate or legal factors, an adverse action orassessment by a regulator, unanticipated competition and loss of key personnel.In addition, we assess goodwill for recoverability if our market capitalizationis less than the value of our net assets. The determination as to whether awrite-down of goodwill is necessary involves significant judgment based on theshort-term and long-term projections of our future performance. The assumptionssupporting the estimated future cash flows, including the discount rate usedand estimated terminal value reflect our best estimates.

*Restructuring,Workforce Reductions and Excess Facilities Accrual.  *Inorder to bring our operating expense structure in line with our current levelof revenues, we implemented a restructuring, workforce reduction and facilitiesconsolidation plan to improve our operating performance. Restructuring andfacilities consolidation costs consist of expenses associated with workforcereductions, consolidation of excess facilities and impairment of leaseholdimprovements and other equipment associated with abandoned facilities. At January 31,2005, $553,000 was accrued for future facilities consolidation costs. In connectionwith our restructuring plans, we accrue for severance payments and otherrelated termination benefits provided to employees in connection withinvoluntary staff reductions. We accrue for these benefits in the period whenbenefits are communicated to the terminated employees. Typically, terminatedemployees are not required to provide continued service to receive terminationbenefits. If continued service is required, then the severance liability isaccrued over the required service period. In general, we use a formula based ona combination of the number of years of service and the employee’s positionwithin the Company to calculate the termination benefits to be provided toaffected employees. At January 31, 2005, all affected employees wereterminated and there was no remaining accrual for future severance andtermination benefits payments.

**BusinessCombination**

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

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**Results of OperationsThree Months Ended January 31, 2005 Compared to Three Months Ended January 31,2004**

*Overview of theFirst Quarter of Fiscal 2005*

During the first quarter of 2005, we continued toevolve our business model from one based principally on an indirect sales modelto a model under which we sell a significant portion of our services directlyor through VARs to enterprise customers. During the first quarter of 2005 and2004, 58 percent and 35 percent, respectively, of our quarterly revenues werederived from services sold to enterprise customers both directly and indirectlythrough our VARs. We continued our focus on acquiring and serving enterprisecustomers.

In the first quarter of 2005, our revenues andexpenses increased slightly over the first quarter of 2004. Revenues werehigher quarter over quarter primarily due to the inclusion of three months ofmanaged broadband revenues that resulted from our December 2003acquisition of Axcelerant whereas two months of broadband revenues are includedin the first quarter of 2004. Cost of revenues was higher as a percentage ofrevenues principally as a result of the amortization of license fees andmaintenance cost related to our client software. We expect the trend in ourcost of revenues to be similar to that of prior quarters and possibly decreaseas sales to enterprise customers grow and represent a higher percentage oftotal revenues. Our operating expenses were lower in the first quarter of 2005than in the first quarter of 2004 principally due to the cost savings generatedfrom our strategic restructuring in August 2004 offset by the inclusion ofthree months of costs incurred at our Irvine, California facility that resultedfrom our acquisition of Axcelerant whereas two months of Irvine locationexpense are included in the first quarter of 2004.  We expect our quarterly operating expenses toremain approximately the same as a percentage of revenues during fiscal year2005.

We continue to focus on delivering innovative servicesfor our customers to drive revenues and achieve positive earnings. In fiscal2005 we plan to release additional new value added services, which we expectwill augment the revenues we earn from our existing customers and, togetherwith expanding the global footprint of the GoRemote Global Network, generaterevenues from new enterprise customers. Several factors will impact our abilityto achieve and sustain profitability, including the effectiveness of our salesand marketing efforts through both direct and VAR sales channels, the timelyrelease of new services and the introduction of new services by existing or newcompetitors. For a discussion of these and other risk factors, see thesection titled “Factors That May Affect Future Results.”

The results of operationsfor the three months ended January 31, 2005 includes three months ofrevenue and expenses related to the acquisition of Axcelerant, which wascompleted in December 2003. The results of operations for the three monthsended January 31, 2004 include two months of revenue and expenses relatedto Axcelerant.

*Revenues*

Revenues for the threemonths ended January 31, 2005 and 2004 were as follows:
| ** ** | ** ** | **For the three months ended  January 31,**                         | ** ** |
|------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **       2005       ** | ** ** | **       2004       ** | ** ** |
| ** ** | ** ** | **(in millions)**                                                                       | ** ** |
| Revenues   |       |                                                                                         | $          | 12.0 |   |   |   | $ | 11.9 |   |   |
|            |            |                                                                                              |            |  |  |  |  |  |  |  |  |

 

Total revenues increased approximately $58,000 in thethree months ended January 31, 2005, compared to the three months ended January 31,2004. The net increase was principally due to the increased broadband revenuesin the amount of $2.5 million during the three months ended January 31,2005 compared to the inclusion of two months of broadband revenues in the threemonths ended 

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January 31, 2004,offset by reductions in legacy Internet access service and dial-up revenues inthe amount of $2.4 million. Fiberlink Communications Corporation accounted for12 percent of our consolidated revenues during the three months ended January 31,2005. Fiberlink is both a customer and in certain markets a competitor ofGoRemote, principally with respect to our dial-up remote access offering. Ourexperience during 2004 and during the first month of 2005 showed us that thedecline in dial-up revenues from service providers will likely continue tooccur and at a pace that may not be predictable.

We expect our revenues toincrease, based on sales to new customers and sales of additional services,such as our newer broadband teleworker and branch office solutions and managedsecurity service offering, to our existing customers. We expect these revenuesto be partially offset by a decline in our dial-based Internet access services.

*Costs and Expenses*

Costs and expenses for thethree months ended January 31, 2005 and 2004 were as follows:
| ** **                                | ** ** | **For the three months ended  January 31,**                         | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **       2005       ** | ** ** | **       2004       ** | ** ** |
| ** **                                | ** ** | **(in millions)**                                                                       | ** ** |
| Cost of revenues                          |       |                                                                                         | $          | 5.0 |   |   |   | $ | 4.7 |   |   |
| Percentage of net revenues                |       |                                                                                         | 41.9       | % |   |   | 39.5 | % |   |
| Network and  operations                   |       |                                                                                         | $          | 2.2 |   |   |   | $ | 1.7 |   |   |
| Percentage of net revenues                |       |                                                                                         | 18.0       | % |   |   | 14.4 | % |   |
| Research and  Development                 |       |                                                                                         | $          | 0.6 |   |   |   | $ | 0.9 |   |   |
| Percentage of net revenues                |       |                                                                                         | 4.9        | % |   |   | 7.3 | % |   |
| Sales and  Marketing                      |       |                                                                                         | $          | 3.1 |   |   |   | $ | 4.8 |   |   |
| Percentage of net revenues                |       |                                                                                         | 26.0       | % |   |   | 39.9 | % |   |
| General and  administrative               |       |                                                                                         | $          | 1.6 |   |   |   | $ | 1.4 |   |   |
| Percentage of net revenues                |       |                                                                                         | 13.3       | % |   |   | 11.4 | % |   |
| Amortization of  intangibles              |       |                                                                                         | $          | 0.2 |   |   |   | $ | 0.3 |   |   |
| Percentage of net revenues                |       |                                                                                         | 2.0        | % |   |   | 2.2 | % |   |
| Amortization of  stock-based compensation |       |                                                                                         | $          | 0.06 |   |   |   | $ | 0.06 |   |   |
| Percentage of net  revenues               |       |                                                                                         | 0.5        | % |   |   | 0.5 | % |   |

 

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

Cost of revenues increased approximately $303,000 inthe three months ended January 31, 2005 compared to the three months endedJanuary 31, 2004, representing an increase of six percent. The increasewas primarily due to the inclusion of three months of the cost of broadbandrevenues in the quarter ended January 31, 2005 compared to two months ofcost in the quarter ended January 31, 2004, following our acquisition ofAxcelerant of $1.1 million and approximately $184,000 of license andmaintenance fees related to our MobileOffice client software, offset bydecreased volumes of remote Internet access of approximately $980,000. Weexpect that during fiscal year 2005 the cost of revenues will increase inabsolute dollars as remote Internet access revenues and broadband revenuesincrease, but be similar to the three months ended January 31, 2005 as apercentage of revenues.

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*Network and Operations.  *Networkand operations expenses consist of salaries and benefits, depreciation onnetwork equipment, allocated facility and management information systemsexpenses, administrative expenses, costs of co-location of network equipment andleased telecommunication lines and other related costs.

Network and operations expenses increasedapproximately $448,000 in the three months ended January 31, 2005 comparedto the three months ended January 31, 2004, representing an increase of 26percent. The increase was due primarily to an increase in compensation andbenefits-related expenses of approximately $415,000 and increased facilityallocation of approximately $165,000, both of which are primarily related tothe inclusion of three months of network and operations expenses incurred inour Irvine, California, facility, as opposed to two months of Irvine locationexpenses included in first quarter 2004 due to our acquisition of Axcelerant inDecember 2003. Additionally, there was a decrease of compensation andbenefits of approximately $235,000 offset by an increase of approximately$83,000 of professional expenses in our Milpitas facility as a result ofoutsourcing of certain customer support activities. We expect network andoperations expenses to remain constant as a percentage of revenues duringfiscal year 2005 as we deploy and support new customers.

*Research and Development.  *Researchand development expenses consist of salaries and benefits, allocated facilityand management information systems, depreciation costs, outside consultants,facilities costs, administration and other related costs.

Research and development expenses decreasedapproximately $285,000 in the three months ended January 31, 2005 comparedto the three months ended January 31, 2004, representing a decrease of 33percent. The decrease was due primarily to a reduction of approximately$210,000 of compensation and benefits related to reduced California basedpersonnel resulting from the August 2004 strategic restructuring and therelocation of our development activities to our network operations developmentcenter in India. Additionally, there was a reduction in the facility allocationexpense of approximately $102,000. We expect research and development expensesto remain constant as a percentage of revenues during fiscal year 2005.

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

Sales and marketing expenses decreased $1.6 million inthe three-month period ended January 31, 2005 compared with thethree-month period ended January 31, 2004, representing a decrease of 35percent. The decrease is due primarily to a decrease in compensation andbenefits of approximately $744,000 as a result of our strategic workforcereduction in late 2004. In addition, advertising and promotional programsdecreased by $581,000 as we realigned our marketing program focus and ourfacility allocation expense decreased by $152,000 as a result of lower facilitycosts and reduced personnel.  We expectsales and marketing expenses to be constant as a percentage of revenues as wecontinue to develop our sales force and redefine our advertising and marketingstrategy during 2005.

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

General and administrative expenses increasedapproximately $234,000 in the three months ended January 31, 2005 comparedto the three months ended January 31, 2004, representing an increase of 17percent. The increase was due primarily to $141,000 of increased professionalfees primarily related to fees charged by our previous independent auditors andservices for Sarbanes-Oxley compliance activities, as 

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well as a net increase infacility allocation expenses of $124,000, and an increase in travel andentertainment of approximately $71,000. Offsetting these increases was areduction in insurance cost of approximately $92,000 primarily caused by areduction in our directors’ and officers’ insurance policy premiums. We expectgeneral and administrative expenses to increase in fiscal year 2005 in absolutedollars while we update back office processes and procedures company-wide tomeet the requirements of the Sarbanes-Oxley Act of 2002 and relatedregulations, but to decrease as a percentage of revenues.

*Amortization of PurchasedIntangibles.  *Amortization of purchased intangiblesincludes three months of amortization of the intangible assets acquired inconnection with the acquisition of Axcelerant. The initial value assigned toAxcelerant customer relationships was $7.5 million, which was amortized on astraight-line basis over a five-year life at a rate of $125,000 per month. At September 30,2004 an impairment charge of $2.4 million was recognized and the carrying valueof the customer relationships was adjusted to $3.9 million, which will beamortized over the remaining 50 months of the original five-year life on astraight-line basis at a rate of $78,000 per month. The value assigned tointernal use software was $100,000, which is amortized on a straight-line basisover a one-year life at a rate of $8,000 per month. The internal use softwarewas fully amortized in November 2004.

*Amortization of Stock-BasedCompensation.  *In connection with our acquisition ofAxcelerant, we recorded $674,000 of additional deferred stock-basedcompensation, which is being amortized over the vesting period of theunderlying stock options assumed during the acquisition. As a result, werecorded amortization of deferred compensation expense of $57,000 and $60,000during the three months ended January 31, 2005 and 2004, respectively. Weexpect to record amortization of deferred compensation expense of approximately$80,000 in the remainder of fiscal year 2005, related to options assumed by usin connection with our acquisition of Axcelerant.

As of January 31,2005, we had an aggregate of $131,000 of deferred compensation related to theacquisition of Axcelerant remaining to be amortized. Deferred compensation isamortized on a straight-line basis over the vesting period of the options. Weexpect amortization of stock-based compensation related to these optionsassumed by us to end in 2007.

*Interest Income(Expense) and Other and Taxes*

Interest income and other,net, interest expense and taxes for the three months ended January 31,2005 and 2004 were as follows:
| ** **                      | ** ** | **For the three months ended**                                                       | ** ** |
|---------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **January 31,**                                                                                     | ** ** |
| ** **                      | ** ** | **        2005        ** | ** ** | **        2004        ** | ** ** |
| ** **                      | ** ** | **(in thousands)**                                                                                  | ** ** |
| Interest income  and other, net |       |                                                                                                     | $          | 55 |   |   |   | $ | (6 | ) |   |
| Provision for income  taxes     |       |                                                                                                     | $          | 31 |   |   |   | $ | 22 |   |   |

 

*Interest Income andOther, Net*

Interest income and other, net, primarily representsinterest income on cash balances and on short-term investments, gain ondisposition of assets, sales, use and value-added tax, and interest expense.

Interest income and other, net, increased $61,000 inthe three months ended January 31, 2005 compared to the three months endedJanuary 31, 2004. This increase was primarily due to $29,000 of additionalinterest income based on higher interest rate yields combined withapproximately $53,000 of lower sales, use and value-added taxes, offset by a$16,000 gain on sales of assets in 2004 and $9,000 of interest expense incurredin 2005.

Interest expense consistsof the amortization of the discount of future facility lease payments relatedto the ceased use of facilities in connection with the August 2004strategic restructuring. The discount was 

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approximately$50,000, which is being amortized over the remaining life of the lease. Duringthe three months ended January 31, 2005, $9,000 of interest expense wasrecorded.

*Income Taxes*

The provision for incometaxes was $31,000 and $22,000 for the three months ended January 31, 2005and 2004, respectively. The provision for income taxes consists of foreign taxprovisions and state taxes.

**Liquidity and Capital Resources**
| ** **                                           | ** ** | **For the three months ended**                               | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **January 31,**                                                             | ** ** |
| ** **                                           | ** ** | **      2005      ** | ** ** | **      2004       ** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                                                          | ** ** |
| Cash and cash  equivalents                           |       |                                                                             | $          | 3,765 |   |   |   | $ | 3,957 |   |   |
| Net cash provided  by (used in) operating activities |       |                                                                             | 936        |   |   |   | (1,550 | ) |   |
| Net cash provided  by (used in) investing activities |       |                                                                             | (117       | ) |   |   | 1,172 |   |   |
| Net cash provided by  financing activities           |       |                                                                             | 539        |   |   |   | 775 |   |   |

 

*Cash and Cash Equivalents.  *Ourprincipal source of liquidity is our cash, cash equivalents and short-terminvestments. As of January 31, 2005, in addition to our cash and cashequivalents balance of $3.8 million, we had a short-term investment balance ofapproximately $15.6 million.

*Operating Activities.  *Netcash provided by operating activities in the three months ended January 31,2005 of $936,000 was primarily a result of a reduction in accounts receivablebalances of approximately $1.4 million and an increase in deferred revenue ofapproximately $867,000 primarily related to deferred installation revenues,offset by our net operating losses of $819,000 and decreased accounts payablebalances of approximately $797,000 principally from reductions in restructuringaccruals. While our days sales outstanding fell significantly during the threemonths ended January 31, 2005, we generally expect the number of days ittakes for us to collect our accounts receivable to lengthen from the periodsexperienced historically, primarily due to the longer payment cycles generallyassociated with enterprise customers and the increasing percentage of ourrevenue base represented by such customers.

*Investing Activities.  *Netcash used in investing activities during the three months ended January 31,2005 of approximately $117,000 was primarily the result of capital expendituresof approximately $162,000, offset by the liquidation of certain short-terminstruments.

*Financing Activities.  *Netcash provided by financing activities during the three months ended January 31,2005 of approximately $539,000 was primarily the result of sales of commonstock to our employees and option holders.

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

During 2005, we expect to continue automating and updating our critical back office processesand procedures that are required for us to efficiently run our business,however, we believe that our capital equipment expenditures in absolute dollarswill be relatively flat as compared to 2004. We expect to continue to providecustomer premises equipment to customers for a fee, as part of our solutionofferings.

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Thefuture minimum operating lease and purchase commitments were as follows at January 31,2005, based on fiscal years ending October 31 (in thousands):
| ** ** | ** ** | **Operating   Leases** | ** ** | **Purchase  Commitments** | ** ** |
|------------|------------|-----------------------------|------------|---------------------------|------------|
| 2005       |       |                        | $          | 921                       |       |   |   | $ | 970 |   |   |
| 2006       |       |                        | 786        |                      |       |   | 943 |   |   |
| 2007       |       |                        | 565        |                      |       |   | 149 |   |   |
| 2008       |       |                        | 181        |                      |       |   | — |   |   |
| Thereafter |       |                        | —     |                      |       |   | — |   |   |
|       |       |                        | $2,453     |                      |       |   | $ | 2,062 |   |   |

 

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

The terms of such obligations vary. Generally, amaximum obligation is not explicitly stated, except for indemnifications involvinginfringement of third party intellectual property rights. Because the obligatedamounts of these types of agreements often are not explicitly stated, theoverall maximum amount of the obligations cannot be reasonably estimated.Historically, we have not been obligated to make any payments for theseobligations, and no liabilities have been recorded for these obligations on ourbalance sheet at January 31, 2005.

*Summary of Liquidity.  *Webelieve that our available cash, cash equivalents and short-term investments of$19.3 million at January 31, 2005 and cash expected to be generated byoperations during the next 12 months will fund planned operations for at leastthe next 12 months. We generated $1.3 million in cash during the quarter ended January 31,2005.

We plan to invest in expanding our managed remoteaccess services, on a global basis, by continuing to build strategic partneringrelationships. This will require us to maintain market acceptance, by growingour mobile office communications services offerings, continuing our researchand development activities and funding planned operating expenses. There can beno assurance that our managed remote access services will maintain marketacceptance, growth and operating margins.

If we are unable to attainour revenue and margin goals, significant reductions in spending and the delayor cancellation of planned activities or more substantial restructuring may benecessary to enable us to meet our cash requirements through the next 12months. These actions could have a material adverse effect on our business,results of operations and prospects. Furthermore, we may need to raiseadditional funds in future periods through public or private financing, orother arrangements, to fund operations and potential acquisitions, if any. Ifadditional financing is needed, it might not be available on reasonable termsor at all. Failure to raise capital when needed could seriously harm ourbusiness and results of operations. If additional funds were raised through theissuance of equity securities, the percentage of ownership of our stockholderswould be reduced. Furthermore, these equity securities might have rights,preferences or privileges senior to our common stock.

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**Recent AccountingPronouncements**

In December 2004, theFASB issued a revision of FASB Statement No. 123 (“SFAS 123 Revised”),*Accounting for Stock-BasedCompensation*. SFAS 123 Revised establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods or services. It also addresses transactions in which an entity incursliabilities in exchange for goods or services that are based on the fair valueof the entity’s equity instruments or that may be settled by the issuance ofthose equity instruments. SFAS 123 Revised is effective as of thebeginning of the first interim or annual reporting period that begins after June 15,2005. We have not completed our evaluation of the impact of adoption ofSFAS 123 Revised on our consolidated financial position or results ofoperations. We expect to complete our evaluation during the second quarter offiscal year 2005.

**Factors That May AffectFuture Results**

In addition to theinformation elsewherein this Quarterly Report on Form 10-Q, the following should beconsidered in evaluating GoRemote and our business.

**If we fail in our strategy of focusing our salesefforts on larger companies, our revenue and profitability goals will likelynot be achieved.**

Historically, asignificant portion of our revenues was derived from smaller companies andservice providers in the Internet marketplace, but in recent periods we haveattempted to focus our sales and marketing efforts on larger corporate andenterprise-level customers. This strategy places new demands on ourbusiness, such as the longer sales cycles and higher levels of service andsupport that larger accounts generally require. Some of our competitors withgreater financial resources than ours have focused their sales efforts onselling to large enterprises for a longer period of time with more success thanwe have experienced, which adds to the risk of our strategy. In November 2004,we appointed a new Senior Vice President of Worldwide Sales, and a new VicePresident of North American New Business Sales, but they may not succeed inexecuting this strategy. If we fail to execute this strategy, or if we haveunderestimated the costs of this strategy, we will likely miss our revenue andprofitability goals.

**The markets that we serve are highly competitiveand there is no assurance that we will be able to achieve or maintainprofitability.**

We are aware of manycompanies in related markets that address particular aspects of the featuresand functions that our products provide. Currently, we compete directly withiPass and Fiberlink Communications Corporation in the market for Internetroaming and related settlement services, and each of iPass and Fiberlink has anetwork that competes with the GoRemote Global Network. In addition, iPass hasgreater cash resources than we do and each of iPass and Fiberlink has a largersales force than our own dedicated to enterprise sales. Large communicationsservice providers such as AT&T, Equant and MCI also have the ability andresources to compete with us in the Internet-based mobile officecommunications services market. In the mobile broadband services market, ourprimary competitors include Megapath, Netifice and New Edge. Many of ourcompetitors have longer operating histories, greater name recognition or largercustomer bases, which they may leverage in order to obtain more favorablevolume discounts from suppliers. In addition, these competitors may be able toundertake more extensive marketing efforts, adopt more aggressive pricingpolicies and provide more favorable payment terms to customers than we can,which could limit our opportunities to obtain new customers or cause us to loseour existing customers.

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**If we areunable to increase revenues associated with broadband services, our ability togrow our business will be impaired.**

Until our acquisition ofAxcelerant in December 2003, we generated our remote Internet accessservices revenues almost exclusively from the sale of services based on dial-upaccess—a narrowband technology. In some countries, including the United States,the use of narrowband as a primary means of remote access is expected todecline over time as broadband access technologies, such as cable modem, DSLand Wi-Fi, become more widely adopted and used. Our experience during2004 and during the first monthof 2005 showed us that the decline in dial-up revenues fromservice providers will likely continue to occur and possibly at a more rapid pacethat may not be predictable.Although we have recently begun to generate revenues from managed broadbandaccess following our acquisition of Axcelerant, the future growth of ourbusiness may depend in large part upon our ability to expand the broadbandelements of our virtual network and generate broadband revenues at asubstantially higher level and growth rate. We may not succeed in thisexpansion and we may not generate substantial new revenues, which could harmour results and cause our stock price to decline.

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

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

**We recently appointed a new chief executive officerand replaced a number of executives and other key personnel, which may lead toadditional personnel and organizational changes that could impact our abilityto achieve our strategic goals.**

On August 2, 2004, weannounced the appointment of Tom Thimot to serve as our President and ChiefExecutive Officer. During the third quarter of 2004, we replaced our seniormarketing and operations executives and a number of other senior managers as partof a realignment of our global operations. On November 1, 2004, weappointed two new senior sales leaders, including our Senior Vice President ofWorldwide Sales. It is possible that the new management team will introduceadditional changes or cause workforce instability as it evaluates how best toachieve our strategic goal of returning to profitability and buildingsustainable revenue growth.

**We may not be successful in our efforts to transitionto a reduced cost structure, and the actions that we take in order toaccomplish this transition could have long-term adverse effects on ourbusiness.**

We have taken, and continue to take, various actionsto transition our company to a reduced cost structure. In response to decliningrevenues in our legacy dial access and service provider business, we havescaled back our operations, reduced our expenses, and initiated facilityclosures and consolidations.

There are several risksinherent in our efforts to transition to a reduced cost structure. Theseinclude the risk that we will not be able to hold expenditures at a levelnecessary to achieve profitability, and that we may have to undertake furthercost-reduction initiatives that would entail additional charges. If we are notable to hold down expenses or if we are not able to reduce our non-people-relatedcosts in accordance with our plans, we may have to further reduce ourworkforce. There is also the risk that the cost-cutting actions we have takenand still plan to take will impair our ability to effectively develop andmarket products, to remain competitive in the industries in which we competeand to operate effectively. Each of the above measures could have long-termeffects on our business by reducing our pool of technical talent, 

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decreasingor slowing improvements in our products, making it more difficult for us torespond to customers, limiting our ability to deploy our solutions to ourcustomers quickly if and when the demand for our solutions increases andlimiting our ability to hire and retain key personnel. These circumstancescould cause our income to be lower than it otherwise might be, which wouldadversely affect our stock price.

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

Our customers aregenerally free to use competing products and services and prices for dial-upremote access and Wi-Fi access are declining, so we could face significantcustomer losses, at unpredictable times. Fiberlink Communications Corporationaccounted for 12 percent of our revenues in the three-month period ended January 31,2005. A majority of the revenue derived from this customer during this periodresulted from access to our network in one country, which increases the riskthat it may obtain direct access in this country in the future. Thisconcentration of revenue from one customer, which principally purchases ourdial-up remote access service, makes our business more risky. Losing thiscustomer could result in a significant revenue shortfall for us. In addition,large customers have significant negotiating power during contract discussionsor in the event of a customer dispute, which may make it more likely that theterms of the customer arrangement or settlement may be more favorable to thecustomer. We are in direct competition with Fiberlink, which makes it morelikely that revenues from Fiberlink will decline in the future. These factorsmake it difficult to anticipate the level of our future revenues from existingcustomers. In addition, our success depends on our ability to expand anddiversify the composition of our customer base. If we are unable to expand ourcustomer base and increase our average revenues per customer, our businesssuccess will be less likely.

**We may not succeed in cost-effectively automating,integrating and updating critical back office systems and processes, whichcould limit our ability to achieve and maintain profitability.**

Historically, we have investedin the automation of back office systems and processes in order to enable us tocost effectively grow our traditional mobile office communications business.The back office systems and processes of Axcelerant, whose business we acquiredin December 2003, are largely manual. In order to efficiently provision,support and service our customers, we will be required to cost-effectivelyupdate, automate and, where appropriate, integrate these systems and processes.We will need to ensure that the combined company’s financial reporting,financial controls and documentation processes meet all applicable financialcontrols certification standards, such as Section 404 of the Sarbanes-OxleyAct. We may underestimate the investments required to accomplish this automation,integration, updating and certification. We may not succeed in this effort,which could impair our ability to scale our operations, limit our growth andlessen the likelihood that we would achieve profitability.

**The market price of our common stock has traditionallybeen highly volatile, and if we do not meet the expectations of analysts, themarket price of our common stock could decline further.**

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

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**We have incurred significant losses to date and we maycontinue to incur losses in the future. If we fail to generate sufficientrevenue to achieve and sustain positive cash flow or profits, our stock pricewill decline.**

We have incurred significant losses to date and weexpect to continue to incur losses for some period of time. We incurredoperating losses before income taxes of approximately $788,000 for the threemonths ending January 31, 2005, and $40.6 million for the 10 monthsending October 31, 2004. As of January 31, 2005, we had anaccumulated deficit of $171.9 million.

We have experiencednegative cash flows in each year since our inception in 1994, and we maycontinue to do so in the future. In addition, we may also incur significant newcosts related to possible acquisitions, the development of new products andservices, the integration of new technologies or the update of oldtechnologies. Moreover, we might not be able to achieve operating profitabilityon a quarterly or annual basis. To achieve profits, we will need to maintainour relationships with existing customers, generate additional revenue growthfrom our existing customers and obtain new customers, while continuing tocontrol our expenses. We expect to continue to invest in network and operations,research and development, and sales and marketing, and we expect to facepressure to adopt new pricing arrangements, including volume discounts, thatmay lower our gross margins. As a result, our ability to achieve and sustainprofitability will depend on our ability to sustain and achieve substantiallyhigher revenue while maintaining reasonable cost and expense levels. If we failto achieve profitability, our stock price could decline.

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

If our cash proves to beinsufficient to fund our operations, we may need to raise additional funds atsome point in the future. In the three-month period ended January 31, 2005we generated $1.3 million of cash, leaving us with a cash, cash equivalent andshort term investment balance of $19.3 million. If we raise additionalfunds by selling equity or convertible debt securities, our stockholders mayexperience additional dilution and these new securities may have powers,preferences and rights that are senior to those of the rights of our commonstock. We cannot predict whether additional financing will be available onterms favorable to us, or at all. If adequate funds are not available or arenot available on acceptable terms, we may be unable to fund our businessoperations, promote our brand identity, take advantage of acquisitionopportunities, develop or enhance services or respond to competitive pressures.Any inability to do so could have a negative effect on our business, revenues,financial condition and results of operations.

**If our common stock price falls below and remainsunder $1.00, or if we otherwise fail to comply with Nasdaq rules, our commonstock could be delisted from The NASDAQ National Market, which could severelylimit the trading market for our common stock.**

If we fail to meet thecriteria for continued listing on The NASDAQ National Market, our common stockmay be delisted, which could make it more difficult for you to sell yourshares. For example, if the market price for our common stock falls and remainsbelow $1.00 per share for thirty trading days, we would be subject todelisting. On February 28, 2005, the closing price of our common stock was$1.70 per share.

**The telecommunications industry continues toexperience instability, which may cause consolidation among network serviceproviders and impair our ability to provide reliable, redundant servicecoverage and negotiate favorable network access terms.**

The telecommunicationsindustry continues to experience dramatic technological change and increasedcompetition that have led to significant declines in network access pricing. Inaddition, the revenues of network service providers have declined as a resultof the general economic slowdown. Network service providers have experiencedrelated operating difficulties in the last several years, leading 

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to pooroperating results and declarations of bankruptcy by a number of theseproviders. These conditions have already led to attempts at consolidation, andmore service providers may consolidate or otherwise cease operations in thefuture, which would reduce the number of network service providers from whichwe are able to obtain network access. To the extent this were to occur, whilewe would still be able to maintain operations and provide enterpriseconnectivity services with a small number of network service providers, wewould potentially not be able to provide sufficient alternative access pointsin some geographic areas, which could diminish our ability to provide broad,reliable, redundant coverage. Further, our ability to negotiate favorableaccess rates from network service providers could be impaired, which couldincrease our network access expenses and impact our operating results.

**If we fail to enhance our existing products or if newservices, products or features we introduce do not succeed in the marketplace,we will not be able to generate new revenues and we will have increased costswithout the expected returns.**

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

**Our ability tocompete could be jeopardized if we are unable to protect our intellectualproperty.**

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

**We may become involved in litigation regardingintellectual property rights that could be costly, could cause us to losesignificant rights, and divert our management time and attention.**

In thefuture, we, or our customers, may become a party to litigation to protect ourintellectual property or to respond to allegations that we infringe others’intellectual property. We may receive communications from third partiesinquiring about their interest in licensing certain of the third party’sintellectual property or more generally identifying intellectual property thatcould be the basis of a future infringement claim. If a party accuses us ofinfringing upon its proprietary rights, we would have to defend our company andpossibly our customers against the alleged infringement. These lawsuits,regardless of 

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their success, would likely be time-consuming andexpensive to resolve and would divert management’s time and attention. Anypotential intellectual property litigation could also force us to:

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

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

·       redesignthe products and services that use that technology.

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

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

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

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

Our success depends on ourability to assure generally error-free clearinghouse services, uninterruptedoperation of our network and software infrastructure, and a satisfactoryexperience for our customers’ end users. In the past, we have experiencedproblems due to our inability to detect system malfunctions and due to errorsin collecting or processing account usage and settlement data. Due to the highlevel of performance required for critical communications traffic, any failureto deliver a satisfactory experience to end users, whether or not caused by ourown failures, and any failure to provide accurate settlement data in connectionwith acting as a clearinghouse, could reduce demand for our products andservices.

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

Our business depends inpart on the efforts and success of our Internet service provider andtelecommunications service customers in marketing Internet-basedcommunications services to their end users. Although we have recently focusedmore heavily on selling to large enterprise customers, the highest percentageof our revenues is derived from our traditional service provider business. Itis important that we maintain a healthy service provider business while weattempt to grow a more expansive enterprise customer base. Recently, we haveexperienced a faster than projected decline in revenues derived from ourservice provider customers. We have little ability to promote our services, orto promote demand for our reseller customers’ services generally. The use ofthe Internet as a medium for communications services remains unproven. If ourreseller customers fail to market their Internet-based communicationsservices effectively, our revenues will be reduced. Similarly, if the marketfor Internet-based communications services fails to grow, or expands moreslowly than anticipated, our revenues will be lower than expected. The Internet-basedservices we provide are relatively new and have not achieved widespread marketacceptance. Network service providers and communication solutions providers maybe reluctant to promote or rely upon our services until they gain greatercommercial acceptance, which may never occur.

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

Our quarterlyrevenues and operating results have varied in the past and are likely tofluctuate unpredictably in the future for many reasons beyond our control. Anyof these factors could cause our stock price to decline. The primary factorsthat affect revenues and operating results, in addition to the factorsdiscussed elsewhere in this section, include the following:

·       thevolume of transaction-based revenues;

·       thetiming of deployment of services by our customers;

·       competitivepricing pressure;

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

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

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

·       regulation,domestically and internationally.

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

**If we fail to attract and retain qualified salespersonnel, our business might be harmed.**

Our success depends inlarge part upon our ability to identify, attract and retain qualified salesindividuals. Competition for these individuals is often intense, and we may notbe able to hire the type and number of sales personnel we need. Our new SeniorVice President of Worldwide Sales has only been in this position since November 1,2004, and has not had sufficient opportunity to fully evaluate whether hissales team has the resources and skills required to achieve our revenue growthobjectives. His appointment could lead to the departure of other key salespersonnel and the need to recruit additional qualified personnel in the comingmonths. Once qualified salespersons are hired, they require extensive trainingin our multiple services solution offering. This training typically coversseveral weeks of formal in-class and on-the-job instruction. As of February 28,2005, we had 35 sales personnel. If we are unable to retain our current salesemployees and train new sales personnel as rapidly as necessary, we may not beable to increase market awareness and sales of our services, which may preventus from generating revenue and may negatively impact our ability to maintaincustomer relationships.

**The uncertain economic environment in general couldadversely affect our revenue, gross margins and expenses.**

Our revenues depend inpart on the overall demand for information technology products and services,particularly in the product and service segments in which we compete. Softeningdemand for our products and services caused by the ongoing economic downturnhas resulted in decreased revenue growth rates, and may in the future result indecreased revenue, earnings or growth rates and problems with our ability torealize customer receivables. Global economic and market conditions continue tobe challenging. As a result, companies are delaying or reducing expenditures,including those for information technology. In addition, if our customers experiencefinancial difficulties, we could suffer losses associated with the outstandingportion of accounts receivable. The global economic downturn contributed toreported declines in our revenue growth during fiscal year 2004. Further delaysor reductions in information technology spending could have a material adverseeffect on demand for our products and services and consequently our results ofoperations, prospects and stock price.

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

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

**Government regulations and legal uncertainties regardingthe Internet could harm our business.**

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

**Recently enacted and proposed regulatory changes maycause us to incur increased costs.**

Recently enacted and proposed changes in the laws andregulations affecting public companies, including the provisions of theSarbanes-Oxley Act of 2002, will increase our expenses as we evaluate theimplications of new rules and devote resources to respond to the newrequirements. In particular, we expect to incur additional administrativeexpense as we implement Section 404 of the Sarbanes-Oxley Act, whichrequires management to report on, and our independent auditors to attest to,our internal controls. The Sarbanes-Oxley Act mandates, among otherthings, that companies adopt new corporate governance measures and imposescomprehensive reporting and disclosure requirements, sets stricter independenceand financial expertise standards for audit committee members and imposesincreased civil and criminal penalties for companies, their chief executiveofficers, chief financial officers and directors for securities law violations.In addition, The NASDAQ National Market, on which our common stock is listed,has also adopted comprehensive rules and regulations relating to corporategovernance. These laws, rules and regulations have increased and willcontinue to increase the scope, complexity and cost of our corporategovernance, reporting and disclosure practices, which could harm our results ofoperations and divert management’s attention from business operations. We alsoexpect these developments to make it more difficult and more expensive for us toobtain director and officer liability insurance in the future, and we may berequired to accept reduced coverage or incur substantially higher costs toobtain coverage.

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

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**If we fail to maintain an effective system of internalcontrols, we may not be able to report our financial results accurately ordetect fraud. As a result, we could be subject to costly litigation, andcurrent and potential shareholders could lose confidence in our financialreporting, which could harm our business and the trading price of our commonstock.**

Effective internalcontrols are necessary for us to provide reliable financial reports and todetect and prevent fraud. We are currently performing the system and processevaluation required to comply with the management certification and auditorattestation requirements of Section 404 of the Sarbanes-Oxley Act.This evaluation may conclude that enhancements, modifications or changes to ourinternal controls are necessary. Completing this evaluation, performing testingand implementing any required remedial changes will require significantexpenditures in the short term and on a regular basis in the future. We cannotbe certain as to the timing of completion of our evaluation, testing andremediation actions or the impact of the same on our operations. We have in thepast discovered, and may in the future discover, areas of our internal controlsthat need improvement. For example, during our 2003 audit, our independentregistered public accountant brought to our attention a need to improve theclosing process used at our Irvine, California location by formally documentingour policy relating to recognition of revenues derived from agency arrangementsas well as reseller arrangements, ensuring proper recognition of broadbandservice installation revenues, training employees performing key finance andaccounting functions and documenting certain judgmental accounting matters.Although these items were subsequently addressed, the auditor initiallyidentified these items, collectively, as a “reportable condition,” which meansthat they were matters that in the auditor’s judgment could adversely affectour ability to record, process, summarize and report financial data consistentwith the assertions of management in the financial statements. During late2004, we determined that the internal documentation of our revenue recognitionpolicy was not consistent with our actual practice, which we believe has beenand is consistent with accounting principles generally accepted in the UnitedStates (“GAAP”). We subsequently revised this documentation to be consistentwith our practice. During our 2004 audit, our independent registered publicaccountant noted deficiencies which they considered to be significant in theaggregate, although they noted no matters involving our internal controlstructure and our operations that they considered to be a material weaknessthat had a material impact on the true and fair view of our consolidatedfinancial statements. Going forward, the completion of our evaluation ofinternal controls, implemention of any changes that are necessary, andmaintenance of an effective system of internal controls will be expensive andrequire considerable management attention. However, if we fail to maintain aneffective system of internal controls or prevent fraud, we could be subject tocostly litigation, we may be unable to comply with Section 404 of Sarbanes-Oxley,we may be delisted from trading, investors could lose confidence in ourreported financial information and our brand and operating results could beharmed, which could have a negative effect on the trading price of our commonstock.

**The current regulatory environment affectingaccounting principles generally accepted in the United States is uncertain andvolatile, and significant changes in current principles could affect ourfinancial statements going forward.**

Recent actions and publiccomments from the Securities and Exchange Commission have focused on theintegrity of financial reporting generally. In addition, the FinancialAccounting Standards Board (“FASB”) and other regulatory accounting agencieshave recently introduced new accounting standards, such as accounting for stockoptions, and continue to develop new proposed standards, some of which wouldrepresent a significant change from current industry practices. While webelieve that our financial statements have been prepared in accordance withaccounting principles generally accepted in the United States, we cannotpredict the impact of the adoption of any such proposals on our financialstatements going forward. For example, we currently are not required to recordstock-based compensation charges if the employee’s stock option exerciseprice equals or exceeds the fair value of our common stock at the date ofgrant. However, several companies have elected to change their accountingpolicies and begun to record 

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the fairvalue of stock options as an expense. In December 2004, the FASB issued arevision of Statement of Financial Accounting Standards (SFAS) No. 123 (“SFAS 123Revised”), *Accounting for Stock-BasedCompensation*, which is effective as of the beginning of the firstinterim or annual reporting period that begins after June 15, 2005. We havenot completed our evaluation of the impact of adoption of SFAS 123 Revisedon our consolidated financial position or results of operations. We expect tocomplete our evaluation during the second quarter of fiscal year 2005.

**Provisions in our charter documents might deter acompany from acquiring us, which could inhibit your ability to receive anacquisition premium for your shares.**

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

·       authorizethe board to issue preferred stock without stockholder approval;

·       prohibitcumulative voting in the election of directors;

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

**ITEM3.**                QUALITATIVEAND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

*Foreign Currency Risk.  *Wehave limited exposure to financial market risks, including changes in foreigncurrency exchange rates and interest rates. Although we have foreign operationsin Europe and Asia, to date, our exposure to foreign currency fluctuations hasnot been significant. We primarily invoice and settle in U.S. dollars amongstour customers and providers. We do not participate in any foreign currencyhedging activities.

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

**ITEM 4.**                CONTROLSAND PROCEDURES

*Evaluation of Disclosure Controlsand Procedures*.   Regulations under the SecuritiesExchange Act of 1934 require public companies to maintain “disclosure controlsand procedures,” which are defined as a company’s controls and other proceduresdesigned 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 

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Chief Executive Officerand our Chief Financial Officer, based on their evaluation of the effectivenessof our disclosure controls and procedures as of the end of the period coveredby this report, concluded that our disclosure controls and procedures wereeffective for this purpose.

*Changes in Internal Controls.  *Duringthe period covered by this report, there were no changes in the Company’sinternal controls over financial reporting that materially affected, or arereasonably likely to materially affect, the Company’s internal controls overfinancial reporting. However, we have in the past and intend in the future tocontinue to refine our internal controls on an ongoing basis.

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

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**PART II.   OTHERINFORMATION**

**ITEM1.**                LEGALPROCEEDINGS

We are subject to various legal proceedings and claimsarising in the ordinary course of business. Our management does not expect thatthe results in any of these legal proceedings will have a material adverseeffect on our financial condition, results of operations, or cash flows.

In July and August 2001, we and certain ofour officers were named as defendants in five purported securities class actionlawsuits filed in the United States District Court, Southern District of NewYork, captioned as In re GRIC Communications, Inc. Initial Public OfferingSecurities Litigation, No. 01 Civ 6771 (SAS), and consolidated withmore than three hundred substantially identical proceedings as In re InitialPublic Offering Securities Litigation, Master File No. 21 MC 92 (SAS). 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 14, 1999 initial public offering (“underwriter defendants”),under Sections 11 and 15 of the Securities Act of 1933, as amended, and under Section 10(b) and20(a) of the Securities Exchange Act of 1934, as amended.

Citing several press articles, the ConsolidatedComplaint alleges that the underwriter defendants used improper methods inallocating shares in initial public offerings, and claims the underwriterdefendants entered into improper commission agreements regarding aftermarkettrading in our common stock purportedly issued pursuant to the registration statementfor the initial public offering. The Consolidated Complaint also alleges marketmanipulation claims against the underwriter defendants based on the activitiesof their respective analysts, who were allegedly compromised by conflicts ofinterest. The plaintiffs in the Consolidated Complaint seek damages as measuredunder Section 11 and Section 10(b) of the Securities Act of1933, pre-judgment and post-judgment interest, and reasonable attorneys’ andexpert witnesses’ 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 anddirectors who had been named as defendants in the In re Initial Public OfferingSecurities Litigation were dismissed without prejudice upon order of thepresiding judge. In February 2003, the presiding judge dismissed the Section 10(b) claimsagainst us and our named officers and directors with prejudice.

From September 2002 through June 2003, weparticipated in settlement negotiations with a committee of issuers’ litigationcounsel, plaintiffs’ executive committee and representatives of variousinsurance companies (the “Insurers”). Our Insurers were actively involved inthe settlement negotiations, and strongly supported a settlement proposalpresented to us for consideration in early 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 thesettlement proposal in July 2003. Although we believe that plaintiffs’claims are without merit, we have decided to accept the settlement proposal(which does not admit wrongdoing) to avoid the cost and distraction ofcontinued litigation. Because the settlement will be funded entirely by ourInsurers, we do not believe that the settlement will have any effect on ourconsolidated financial condition, results or operations or cash flows.

The settlement waspresented to the Court for approval in June 2004. The Court preliminarilyapproved most of the settlement in February 2005, but requested a fewminor modifications be made to its terms. The parties are currently negotiatingthese modifications and intend to present the revised settlement agreement tothe Court shortly. While the Court is expected to finally approve or disapprove

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thesettlement in the coming months, there can be no guarantee that the settlementwill be judicially approved.

**ITEM2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

**ITEM3.**                DEFAULTSUPON SENIOR SECURITIES

Not applicable.

**ITEM4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

**ITEM5.**                OTHERINFORMATION

Not applicable.

**ITEM6.**                EXHIBITS

(a)   Exhibits
| Exhibit    | ** ** | ** **                                                                                                          | ** ** | **Incorporated by Reference** | ** ** | **Filed or Furnished** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------|
| **Number** | ** ** | ** **                                                                                                          | ** ** | **Exhibit Description**  | ** ** | **Form**               | ** ** | **File No.** | ** ** | **Exhibit** | ** ** | **Filing Date** | ** ** | **Herewith** |
| 31.01      |       | Rule 13a-14(a)/15d-14a certification of  Registrant’s Chief Executive Officer, dated March 14, 2005. |       |                          |       |                   |   |   |   |   |   | X |
| 31.02      |       | Rule 13a-14(a)/15d-14a certification of  Registrant’s Chief Financial Officer, dated March 14, 2005. |       |                          |       |                   |   |   |   |   |   | X |
| 32.01*     |       | Section 1350 certification of Registrant’s  Chief Executive Officer, dated March 14, 2005.           |       |                          |       |                   |   |   |   |   |   | X* |
| 32.02*     |       | Section 1350 certification of Registrant’s  Chief Financial Officer, dated March 14, 2005.           |       |                          |       |                   |   |   |   |   |   | X* |
|            |            |                                                                                                                     |            |                               |            |                        |  |  |  |  |  |  |  |  |

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

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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 March 14, 2005.
|            | GoRemote Internet Communications, Inc.                 |
|------------|-------------------------------------------------------------|
| ** ** | /s/ DANIEL  W. FAIRFAX                                      |
|       | Daniel W. Fairfax                                           |
|       | Senior Vice  President and Chief Financial Officer          |
|       | (principal  financial officer and  duly authorized officer) |

 

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