GRIC COMMUNICATIONS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2003

or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number: 000-27871

GRIC COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware		77-0368092
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1421 McCarthy Blvd., Milpitas, California		95035
(Address of Principal Executive Offices)		(Zip Code)

408-955-1920
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

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

GRIC COMMUNICATIONS, INC.

INDEX

PART I
FINANCIAL INFORMATION

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

PART II
OTHER INFORMATION

Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURE

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GRIC COMMUNICATIONS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

	Jun 30, 2003			Dec 31, 2002
	(unaudited)
ASSETS
*Current assets:*
Cash and cash equivalents	$	3,426		$	7,314
Short-term investments	19,259			15,765
Accounts receivable, net of allowances of $282 and $249 at June 30, 2003 and December 31, 2002, respectively	4,708			3,978
Prepaid expenses and other current assets	1,468			1,108
Total current assets	28,861			28,165
Property and equipment, net	1,600			1,778
Other assets	506			667
Total assets	$	30,967		$	30,610

LIABILITIES AND STOCKHOLDERS’ EQUITY
*Current liabilities:*
Accounts payable	$	4,533		$	4,331
Accrued compensation and benefits	964			596
Deferred revenue	448			276
Other current liabilities	335			343
Total current liabilities	6,280			5,546
Long-term liabilities	—			88
Commitments and contingencies
Stockholders’ equity:
Series A redeemable convertible preferred stock, $0.001 par value: 12,801 shares authorized, 8,434 and 9,036 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively	10,968			11,752
Preferred stock, 5,000 shares authorized at June 30, 2003 and December 31, 2002: no shares issued and outstanding	—			—
Common stock, $0.001 par value; 50,000 shares authorized at June 30, 2003 and December 31, 2002: 21,485 and 20,337 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively	21			20
Additional paid-in capital	143,259			141,829
Deferred stock-based compensation	(4		)	(65		)
Accumulated deficit	(129,557		)	(128,560		)
Total stockholders’ equity	24,687			24,976
Total liabilities and stockholders’ equity	$	30,967		$	30,610

See accompanying notes

GRIC COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations

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

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

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

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

See accompanying notes

GRIC COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

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

*Supplemental disclosures of cash flow information:*
Income taxes paid	$	20		$	—
Interest paid	$	—		$	14

See accompanying notes

GRIC COMMUNICATIONS, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Basis of Presentation

The financial information at June 30, 2003 and for the three and six months ended June 30, 2003 and 2002 is unaudited, but includes all adjustments (consisting of normal recurring adjustments and restructuring adjustments) that GRIC Communications, Inc. (the “Company”) considers necessary for a fair presentation of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements. The results for the three and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for future periods.

The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The following information should be read in conjunction with consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

2. Summary of Significant Accounting Policies

Revenue Recognition and Related Allowances. The Company derives revenues primarily from remote Internet access services to customers through its virtual network. These services are generally billed on a per-minute basis for usage or at a flat rate per month per user based on negotiated rates. The Company has some customers with minimum commitment arrangements. To a lesser extent, the Company derives revenues from licenses of its authentication software, related maintenance and support services, which are recognized ratably over the contractual services period or term of services, and other optional services related to its GRIC MobileOffice offering, which are recognized at the time of delivery.

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

The Company records estimated allowances against revenues in the same period the revenues are recorded. These estimates are based upon historical analysis of our credit memo data and other known factors for pricing and transaction volume disputes that arise in the normal course of business. To date, allowances pertaining to the Company’s current business have not been significant.

From time to time, the Company’s customers, including significant customers, may seek protection under bankruptcy laws. When this occurs, the Company determines its ongoing exposure to risk that a pre-filing account receivable will prove to be uncollectable, and establishes appropriate allowances for that contingency as necessary. In addition, for each continuing customer in bankruptcy the Company evaluates the creditworthiness of the customer and determines whether revenue should be recognized on an accrual basis or as cash payments are received. When revenue is recorded on an accrual basis, the Company bases its judgment on the creditworthiness of the debtor-in-possession, their payment experience, collectability of receivables is reasonably assured, all in addition to other revenue recognition criteria having been met.

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

Long-Lived Assets. As part of the Company’s review of its property and equipment during the three months ended June 30, 2003, certain matters were identified related to prior financial reporting periods that required the recording of a net reduction in operating expenses. The Company quantified the amounts associated with certain property and equipment for which excess depreciation charges had been recorded against certain property and equipment in prior periods. The Company also identified certain leasehold improvements that were abandoned in previous periods but remained on its financial statements. Accordingly, for the three months ended June 30, 2003, the Company recorded a net reduction to operating expenses of $217,000 resulting from reduced

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

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

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

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

Reclassifications. Amounts for revenues and cost of revenues in the previous quarter have been reclassified to conform to the current presentation.

Recent Accounting Pronouncements. In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The principle difference between SFAS 146 and EITF 94-3 relates to its requirement for recognition of a liability for a cost associated with an exit or disposal activity. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. This statement also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. There was no impact on the Company’s consolidated financial position or results of operations from the adoption of SFAS 146 as the Company did not have any new exit or disposal activities during the six months ended June 30, 2003.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a roll forward of the entity’s product warranty liabilities. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted the disclosure provisions and accounting requirements of FIN 45. The adoption of the disclosure provisions and accounting requirements of FIN 45 did not have a material impact on its consolidated financial position or results of operations.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123.” SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transition and annual disclosure requirements of SFAS 148 are effective for fiscal years ending after December 15, 2002. The interim financial statement disclosure requirements of SFAS 148 are effective for interim periods beginning after December 15, 2002. The transition provisions do not currently have an impact on the Company’s consolidated financial position and results of operations as the Company has not elected to adopt the fair value method of accounting for stock-based compensation as per SFAS 123. The Company has adopted the annual and interim disclosure requirements of SFAS 148.

the voting equity investors do not have a controlling interest, or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from other parties. For arrangements entered into with VIEs created prior to January 31, 2003, the provisions of FIN 46 are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The provisions of FIN 46 were effective immediately for all arrangements entered into with new VIEs created after January 31, 2003. Based on the Company’s initial review, there were no entities identified that would require consolidation. The Company expects to complete the review in the third quarter of 2003.

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

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The provisions of SFAS 150 must be applied immediately to instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. Based on the Company's initial review, it does not appear that the adoption of the provisions of SFAS 150 will have a material impact on its consolidated financial position or results of operations. The Company expects to complete the review in the third quarter of 2003.

3. Stock-Based Compensation

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

Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS No. 148 and SFAS No. 123 and has been determined as if the Company had accounted for awards to employees under the fair value method of SFAS No. 123. The fair value of stock options under the Company’s 1999 Equity Incentive Plan and stock purchase rights under the Company’s 1999 Employee Stock Purchase Plan was estimated as of the grant date using the Black-Scholes option pricing model.

The fair value of stock options granted during the three months ended June 30, 2003 and 2002 were estimated at the date of grant assuming no expected dividends and the following weighted average assumptions.

Stock Options

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002

Expected life (years)	2.09		1.31		2.04		2.40
Expected stock price volatility	2.50		0.84		1.94		0.99
Risk-free interest rate	2.62	%	4.51	%	2.76	%	4.31	%

Stock Purchase

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002

Expected life (years)	0.49		0.49		0.50		0.50
Expected stock price volatility	0.77		0.97		0.77		0.97
Risk-free interest rate	2.46	%	4.09	%	2.46	%	4.09	%

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

The Company’s pro forma information is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(in thousands, except per share amounts)
Net loss as reported	$	(376	)	$	(14,800	)	$	(977	)	$	(16,815	)
Stock-based compensation expense	(1,219		)	(870		)	(1,953		)	(2,099		)
Amortization of stock compensation	20			42			61			86
Pro forma net loss	$	(1,575	)	$	(15,628	)	$	(2,869	)	$	(18,828	)

Basic and fully diluted net loss per share
As reported	$	(0.02	)	$	(0.74	)	$	(0.05	)	$	(0.84	)
Pro forma	$	(0.07	)	$	(0.78	)	$	(0.14	)	$	(0.94	)

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

4. Intangible Assets

The Company entered into an agreement with a wireless service provider during 2001 for the exchange of services, which resulted in a prepayment for future wireless services and the obligation by the Company to provide future Internet roaming services. The assessed value of these wireless services is included in prepaid expenses and other current assets and in other assets in the amounts of $200,000 and $400,000, respectively. As of June 30, 2003, these assets had not been utilized. The underlying agreement is due to expire on September 30, 2003. The Company is currently in discussions with the provider to modify the scope of the business relationship in order to enable the Company to realize the amount previously prepaid. In assessing the recoverability, the Company must make certain assumptions regarding a number of factors, including its ability to modify the scope of the business relationship to determine the fair value of the prepaid amount. If the Company is unable to modify the scope of the business relationship or if these assumptions change during the term of the underlying agreement with the service provider, the Company will be required to record an impairment charge related to these assets in the quarter ended September 30, 2003.

5. Commitments and Contingencies

Lease commitments. The Company leases all of its facilities under operating leases that expire at various dates through 2008. As of June 30, 2003, the Company had $2.5 million in future operating lease commitments.

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

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

In July and August 2001, the Company and certain of its officers were named as defendants in five purported securities class action lawsuits filed in the United States District Court, Southern District of New York, captioned as In re GRIC Communications, Inc. Initial Public Offering Securities Litigation, No. 01 Civ 6771 (SAS), and consolidated with more than three hundred substantially identical proceedings as In re Initial Public Offering Securities Litigation, Master File No. 21 MC 92 (SAS). The Consolidated Amended Class Action Complaint for Violation of the Federal Securities Laws (“Consolidated Complaint”) was filed on or about April 19, 2002, and alleges claims against certain of the Company’s officers and against CIBC 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 (“underwriter defendants”), under Sections 11 and 15 of the Securities Act of 1933, as amended, and under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended.

activities of their respective analysts, who were allegedly compromised by conflicts of interest. The plaintiffs in the Consolidated Complaint seek damages as measured under Section 11 and Section 10(b) of the Securities Act of 1933, pre-judgment and post-judgment interest, and reasonable attorneys’ and expert witnesses’ fees and other costs; no specific amount is claimed in the plaintiffs’ prayer in the Consolidated Complaint. By Order of the Court, no responsive pleading is yet due, although motions to dismiss on global issues affecting all of the issuers have been filed.

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

For several months, the Company has participated in settlement negotiations with a committee of Issuers’ litigation counsel, plaintiffs’ executive committee and representatives of various insurance companies (the “Insurers”). The Company’s Insurers were actively involved in the settlement negotiations, and strongly supported a settlement proposal presented to the Company for consideration in early June 2003. The settlement proposed by the plaintiffs would be paid for by the Insurers and would dispose of all remaining claims against the Company.

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

The settlement will be presented to the Court for approval in the coming months. There can be no guarantee that the settlement will be judicially approved.

Indemnifications. The Company from time to time enters into types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (ii) agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.

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

6. Restructuring Events

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

	Employee Severance Costs			Termination of Lease and Other Obligations			Loss on Disposition and Retirement of Fixed Assets			Total
	(in thousands)

Provision recorded in the quarter ended June 30, 2002	$	964		$	169		$	43		$	1,176
Non-cash charges	—			—			(43		)	(43		)
Cash payments	(444		)	(101		)	—			(545		)
Accrual reversals	(191		)	(68		)	—			(259		)
Accruals at December 31, 2002	329			—			—			329
Cash payments	(44		)	—			—			(44		)
Accruals at March 31, 2003	285			—			—			285
Cash payments	(121		)	—			—			(121		)
Accrual reversals	(164		)	—			—			(164		)
Accruals at June 30, 2003	$	—		$	—		$	—		$	—

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

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

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

The termination of lease and other obligations resulted in a charge of $169,000. During the year ended December 31, 2002, the Company recorded noncash-restructuring benefits from lease and other obligations of $68,000, as a result of final settlements that were less than the amount of previously recorded obligations. As of June 30, 2003, the Company had no further lease and other obligations pertaining to the June restructuring.

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

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

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

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

7. Segment Information

The Company operates solely in one segment, providing a global network for corporate enterprises with mobile and remote workforces and for the Company’s service provider resellers and value-added resellers.

The following is a summary of revenue and long-lived assets by geographical area for the periods presented:

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

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

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

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

8. Stock Repurchase Program

In September 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 open market transactions. The Company purchased 110,000 shares for approximately $99,000 during 2001. The Company repurchased no additional shares during 2002 or during the three and six months ended June 30, 2003. The Company’s management currently does not have plans to repurchase any shares in the near future.

9. Subsequent Event

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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the selected consolidated financial information and the consolidated financial statements and notes appearing elsewhere in this Form 10-Q. The following discussion contains forward-looking statements, such as statements of expected revenues and expenses, that involve risks and uncertainties. We assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those detailed from time to time in our filings with the Securities and Exchange Commission and those discussed in this Form 10-Q, particularly in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and under “Factors That May Affect Future Results.”

Unless expressly stated or the content otherwise requires, the terms “we”, “our”, “us”, “the Company” and “GRIC” refer to GRIC Communications, Inc. and its subsidiaries as a whole.

Overview

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

We provide services over a heterogeneous virtual network known as the GRIC TierOne Network. As of June 30, 2003, the GRIC TierOne Network included more than 25,000 Internet access-dialing locations, 2,000 public wireless fidelity — or WiFi — hotspots and over 400 public broadband access points in approximately 150 countries. We created this network by forming contractual relationships with over 300 Internet service providers and telecommunication companies. These providers, to whom we refer as the GRIC TierOne Network members, are able to share their communications networks. Our customers benefit from the resulting network delivering a secure mobile Internet access solution cost-effectively. Our member providers benefit from the GRIC TierOne Network because we manage this shared network and provide settlement services as a clearinghouse. As a clearinghouse, we have established common technical, service and payment standards to settle charges that our customers incur when their end users access the network facilities of GRIC TierOne Network members in order to initiate Internet-based communications, such as Internet roaming. We intend to continue evolving our service offering to introduce new Internet-based mobile office communications services that may be adopted, deployed and managed on a global scale across the GRIC TierOne Network.

We have incurred substantial losses since our inception as a result of expenses associated with building the GRIC TierOne Network and related network infrastructure and with developing our software products. Although we were cash flow positive for our combined activities during the three months ended June 30, 2003, we had an accumulated deficit of approximately $129.6 million as of June 30, 2003 and incurred a loss for the three-month period ending June 30, 2003. See “Factors That May Affect Future Results—We have a history of net losses and may incur future losses.”

Our business model has evolved in the course of our development and we believe that period-to-period comparisons of our operating results should not be relied upon as indicative of future performance. Our future prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of development, particularly companies in new and rapidly evolving markets. See “Factors That 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 you to evaluate us.”

Critical Accounting Policies and Estimates

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances when made. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities and reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may vary from what we anticipate, and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, because they are important to the portrayal of our financial statements and they require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements.

Revenue Recognition and Related Allowances. We derive revenues primarily from remote Internet access services we provide to customers through our virtual network. These services are generally billed on a per-minute basis for usage or at a flat rate per month per user based on negotiated rates. We have some customers with minimum commitment arrangements. To a lesser extent, we also derive a portion of our revenues from licenses of our authentication software, related maintenance and support services, which are recognized ratably over the contractual services period or term of service, and other optional services related to our GRIC MobileOffice offering, which are recognized at the time of delivery. These other revenues amounted to five percent or less of total revenues over the last three years. Revenues are recognized when a binding agreement or purchase order from the customer has been received, the services have been delivered, the fee or price was fixed or determinable, the collection of the receivable was reasonably assured, and no significant post-delivery obligations remained.

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

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

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses from our customers’ inability to make payments they owe us. In order to estimate the appropriate level of this allowance, we analyze historical bad debts, customer concentrations, current customer credit-worthiness, current economic trends and changes in our customer payment patterns. If the financial condition of our customers were to deteriorate and to impair their ability to make payments to us, additional allowances might be required in future periods and consequently may result in deferring revenue going forward.

Long-Lived Assets. As part of our review of our property and equipment during the three months ended June 30, 2003, certain matters were identified related to prior financial reporting periods that required the recording of a net reduction in operating expenses. We quantified the amounts associated with certain property and equipment for which excess depreciation charges had been recorded against certain property and equipment in prior periods. We also identified certain leasehold improvements that were abandoned in previous periods but remained on our financial statements. Accordingly, for the three months ended June 30, 2003, we recorded a net reduction to operating expenses of $217,000 resulting from reduced accumulated depreciation and depreciation expense of approximately $302,000, partially offset by an impairment charge to property and equipment of approximately $85,000 that was applied against the restructuring benefit. We do not believe these amounts are material to the periods in which they should have been recorded, nor do we expect that the adjustment will be material to our consolidated operating results for the year ending December 31, 2003. However, if these adjustments are ultimately deemed to be material to the consolidated operating results for the year ending December 31, 2003, we will need to restate prior financial reporting periods including the three months ended June 30, 2003. The impact would increase the net loss for the three months ended June 30, 2003 by $217,000 ($0.01 per share) and decrease net loss for the year ended December 31, 2002 by $217,000 ($0.01 per share), as well as decrease accumulated deficit and increase net property and equipment by $217,000.

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

Results of Operations

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

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

Cost of Revenues. Cost of revenues consists of amounts we pay to access the Internet in order to provide remote Internet access services to our customers and amounts we pay to third parties to offer other mobile broadband services. Cost of revenues increased to $4.4 million in the three months ended June 30, 2003 from $3.7 million in the three months ended June 30, 2002, which represented an increase of 20%. Cost of revenues increased to $8.8 million in the six months ended June 30, 2003 from $7.0 million in the six months ended June 30, 2002, which represented an increase of 25%. The increase of approximately $753,000 and $1.8 million during the three and six month periods ended June 30, 2003, respectively, reflects corresponding increases in the volume of remote Internet access and the expansion of our customer base as well as the cost of adding additional products to our Mobile Office solution offering. As remote Internet access revenues increase we expect that the cost of revenues in 2003 will increase in absolute dollars when compared to 2002, but decline as a percentage of total revenues.

Network and Operations. Network and operations expenses include salaries and benefits, allocated facility and management information systems expenses, depreciation on network equipment, administrative expenses, costs of co-location of network equipment and leased telecommunication lines and other related costs. Network and operations expenses decreased to $824,000 in the three months ended June 30, 2003 from $1.1 million in the three months ending June 30, 2002, representing a decrease of 27%. The decrease of approximately $298,000 reflects reductions of approximately $142,000 in depreciation expense primarily associated with older assets that are still in use, but have reached the end of their estimated lives for accounting purposes, an additional reduction of depreciation expense of approximately $74,000 due to property and equipment adjustments that related to prior periods and reductions of approximately $55,000 in compensation-related expenses that were primarily due to lower staffing levels and the elimination of compensation programs. Network and operations expenses decreased to $1.8 million in the six months ended June 30, 2003 from $2.2 million in the six months ending June 30, 2002, representing a decrease of 20%. The decrease of approximately $448,000 reflects reductions of approximately $277,000 in depreciation expense primarily associated with older assets that are still in use, but have reached the end of their estimated lives for accounting purposes and reductions of approximately $125,000 in compensation-related expenses that were primarily due to lower staffing levels and the elimination of compensation programs. We expect the amount of network and operations expenses in 2003 to be less than total expenses in 2002 as we maintain current staffing levels and utilize the existing network infrastructure.

Research and Development. Research and development expenses consist of quality assurance, salaries and benefits, allocated facility and management information systems, depreciation costs, facilities costs, outside consultants, administration and other related costs. Research and development expenses decreased to $554,000 in the three months ended June 30, 2003 from $781,000 in the three months ended June 30, 2002, representing a decrease of 29%. The decrease of approximately $227,000 reflects a reduction of depreciation expense of approximately $87,000 due to property and equipment adjustments that related to prior periods and reductions of approximately $73,000 in compensation-related expenses, primarily due to shifting staff from our U.S. headquarters to our development center in India where engineering talent is available at more favorable rates and approximately $44,000 in depreciation expense primarily associated with older assets that are still in use, but have reached the end of their estimated lives for accounting purposes. Research and development expenses decreased to $1.2 million in the six months ended June 30, 2003 from $1.6 million in the six months ended June 30, 2002, representing a decrease of 24%. The decrease of approximately $369,000 reflects reductions of approximately $129,000 in compensation-related expenses primarily due to shifting staff from our U.S. headquarters to our development center in India, lower professional fees of approximately $100,000 due to the decreased use of outside services and approximately $87,000 due to the property and equipment adjustment previously discussed. We expect research and development expenses to be lower in 2003 as compared to 2002 due to our utilization of existing assets and resources in our development center in India.

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

costs due to continuing efforts to reduce operating costs and a reduction of depreciation expense of approximately $79,000 due to property and equipment adjustments that related to prior periods partially offset by an increase in compensation expense of approximately $264,000 primarily due to higher compensation-related expenses pertaining to our increased sales force. Sales and marketing expenses decreased to $6.0 million in the six months ended June 30, 2003 from $6.5 million in the six months ended June 30, 2002, representing a decrease of 7%. The decrease of approximately $447,000 principally reflects reductions of approximately $216,000 in advertising and promotion expenses and $133,000 in compensation-related expenses due to continued efforts to streamline our operations in 2003 and approximately $87,000 in depreciation expense primarily associated with older assets that are still in use, but have reached the end of their estimated lives for accounting purposes. We expect the overall amount of sales and marketing expenses to significantly increase during the remainder of 2003 and to be greater than total expense in 2002 as we evolve our business strategy to employ not only an indirect sales channel, but also a direct sales channel and to increase our marketing presence by investing in marketing programs.

General and Administrative. General and administrative expenses consist of general corporate and facility costs as well as salary, benefits and related costs for executive, finance, legal, administrative, human resources, investor relations and management information systems functions and provisions for uncollectible receivables. General and administrative expenses remained consistent at $1.2 million in the three months ended June 30, 2003 compared to the three months ended June 30, 2002. Although the total expense remained constant, there was a reduction of approximately $198,000 in depreciation expense primarily associated with older assets that are still in use, but have reached the end of their estimated lives for accounting purposes and approximately $108,000 in lower facility costs due to continued efforts to streamline our operations in 2003 mostly offset by increased professional services fees of approximately $147,000 due to the increased use of outside services and increased compensation-related expenses of approximately $145,000 due to a one-time bonus accrual reversal in the second quarter of 2002. General and administrative expenses remained consistent at $2.6 million in the six months ended June 30, 2003 compared to the six months ended June 30, 2002. Although the total expense remained constant, there was a decrease of approximately $347,000 in depreciation expense primarily associated with older assets that are still in use, but have reached the end of their estimated lives for accounting purposes and approximately $194,000 in lower facility costs due to continued efforts to streamline our operations in 2003, offset by an increase of approximately $408,000 for one-time costs related to payments made in connection with the resignation of our former CEO during the first quarter of 2003, the reversal of bad debt reserves of approximately $75,000 during the six months ended June 30, 2002. We expect the amount of general and administrative expenses to remain consistent for the remainder of 2003 and to be only slightly higher than total expenses in 2002.

Amortization of Stock-Based Compensation. Some stock options granted through December 14, 1999 were considered compensatory because the deemed fair value for accounting purposes was higher than the stock option exercise price as determined by the board of directors on the date of grant. As a result, we recorded amortization of deferred compensation expense of $20,000 and $42,000 in the three months ended June 30, 2003 and 2002, respectively, and we recorded amortization of deferred compensation expense of $61,000 and $86,000 in the six months ended June 30, 2003 and 2002, respectively. As of June 30, 2003, we had an aggregate of $4,000 of deferred compensation remaining to be amortized. Deferred compensation is amortized on a straight-line basis over the vesting period of the options. We expect amortization to end in 2003.

Restructuring Charge. In each of June 2002 and January 2001, we undertook plans to restructure operations in order to reduce operating expenses.

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

In our January 2001 strategic restructuring, we decided to cease providing Internet telephony settlement services, based on an analysis of the operating expenses required to support these services and the low gross margins associated with them, and on our expectation that continued Internet telephony operations would require additional cash infusions to the business. During the six months ended June 30, 2002, we recorded a restructuring benefit of $494,000 due to a gain of approximately $335,000 on Internet telephony assets that were previously written-off during the restructuring in January 2001 and the elimination of the remaining restructuring accruals in the amount of $159,000. The accrual was reversed as a result of final settlements that were less than the amount of previously reserved obligations. As of June 30, 2003, there were no remaining accruals from our January 2001 strategic restructuring.

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

Financing activities. Net cash provided by financing activities was $647,000 in the six months ended June 30, 2003 and $14.2 million in the six months ended June 30, 2002. The net cash provided by financing activities in the six months ended June 30, 2003 was principally due to proceeds received from the sale of common stock through our incentive stock option and employee stock purchase plans. The net cash provided by financing activities in the six months ended June 30, 2002 was primarily the result of proceeds from the issuance of our Series A Preferred Stock.

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

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

We believe that our available cash, cash equivalents and short-term investments of $22.7 million at June 30, 2003, and cash expected to be generated by operations during the next twelve months, will fund planned operations for at least the next twelve months. Our current business model does not require a substantial investment in capital equipment. Although a large portion of our

property and equipment have reached the end of their useful lives for accounting purposes, we expect spending levels for capital assets in the near-term to remain consistent with levels in recent quarters.

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

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

If we are unable to attain our revenue and margin goals, significant reductions in spending and the delay or cancellation of planned activities or more substantial restructuring may be necessary to enable us to meet our cash requirements through at least the next 12 months. These actions could have a material adverse effect on our business, results of operations and prospects. Furthermore, we may need to raise additional funds in future periods through public or private financing, or other arrangements, to fund operations and potential acquisitions, if any. Although we achieved cash flow positive results for our combined activities during this quarter, we may not remain cash flow positive. If additional financing is needed, it might not be available on reasonable terms or at all. Failure to raise capital when needed could seriously harm our business and results of operations. If additional funds were raised through the issuance of equity securities, the percentage of ownership of our stockholders would be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to our common stock.

Recent Accounting Pronouncements

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

In November 2002, the FASB issued FASB Interpretation No. 45 (‘‘FIN 45’’), ‘‘Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.’’ FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a roll forward of the entity’s product warranty liabilities. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We have adopted the disclosure provisions of FIN 45. We do not expect that the adoption of the accounting requirements of FIN 45 will have a material impact on our consolidated financial position or results of operations.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (‘‘SFAS 148’’), ‘‘Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123.’’ SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transition and annual disclosure requirements of SFAS 148 are effective for fiscal years ending after December 15, 2002. The interim financial statement disclosure requirements of SFAS 148 are effective for interim periods beginning after December 15, 2002. The transition provisions do not currently have an impact on our consolidated financial position and results of operations, as we have not elected to adopt the fair value based method of accounting for stock-based compensation as per SFAS 123. We have adopted the annual and interim disclosure requirements of SFAS 148.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires an investor with a majority of the variable interests (primary beneficiary) in a variable interest entity (VIE) to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the voting equity investors do not have a controlling interest, or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from other parties. For arrangements entered into with VIEs created prior to January 31, 2003, the provisions of FIN 46 are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The provisions of FIN 46 were effective immediately for all arrangements entered into with new VIEs created after January 31, 2003. Based on our initial review, there were no entities identified that would require consolidation.

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

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

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The provisions of SFAS 150 must be applied immediately to instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. Based on our initial review, it does not appear that the adoption of the provisions of SFAS 150 will have a material impact on our consolidated financial position or results of operations. We expect to complete our review in the third quarter of 2003.

Factors That May Affect Future Results

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

We face many risks in connection with our proposed merger with Axcelerant. Some of those risks apply whether or not the merger is completed.

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

•		The price of our common stock may decline to the extent that it reflects a market assumption that the merger will be completed.

•		Customers may delay or defer purchasing our products because of uncertainty about the future direction of the company's product offerings.

•		Any delay in the completion of the merger could diminish the anticipated benefits of the merger or result in additional transaction costs, loss of revenue or other effects associated with uncertainty about the transaction, including a decline in the price of our common stock.

•		We will be required to pay significant costs incurred in connection with the merger, including legal, accounting and financial advisory fees and certain filing fees, whether or not the merger is completed.

Even if the proposed merger is completed, the combined company may not realize expected benefits because of integration and other challenges. These risks include the following:

•		The failure of the combined company to meet the complex challenges involved in integrating the products, services, technology, personnel and other operations of GRIC and Axcelerant successfully, or to realize anticipated cost savings, could seriously harm the results of operations of the combined company.

•		Managing the implementation of the integration plan will divert management attention from ongoing business concerns, which could harm our future operating results.

•		Employees may be uncertain about their future roles with the combined company until integration plans are finalized, which could adversely affect their productivity and our ability to attract or retain key employees.

•		The completion of the merger depends on regulatory approval that, even if granted, may result in unfavorable restrictions or conditions.

•		The combined company must retain and motivate key employees, which will be particularly difficult due to the potential distractions of the merger, until our strategies with regard to the integration of Axcelerant are executed.

Merger-related earnings charges may adversely affect the market value of our common stock following the merger. We will allocate the total estimated purchase price among Axcelerant's various tangible and intangible assets, and record the excess of the purchase price over those fair values as goodwill. Some allocated portions of the purchase price may be expensed in the quarter in which the merger is completed; that amount has not yet been determined, but may be material. We will incur additional amortization expense over the useful lives of various acquired assets. In addition, to the extent the value of goodwill or intangible assets that result from our proposed merger becomes impaired, we may be required to record material charges relating to the impairment of those assets. We may also incur liabilities and restructuring charges associated with integration planning, including costs associated with employee severance, which are currently unknown but may be material.

We have a history of net losses and may incur future losses.

We have incurred net losses every year since our inception. We reported net losses of approximately $376,000 and $997,000 for the three and six months ended June 30, 2003, respectively, $5.0 million for 2002, $31.6 million for 2001, and $32.4 million for 2000. Although we experienced positive cash flow for our combined activities in the fourth quarter of 2002 and in the second quarter of 2003, we experienced negative cash flow in the first quarter of 2003 and have experienced negative cash flows in each year since our inception in 1994. As of June 30, 2003 we had an accumulated deficit of $129.6 million. We cannot assure you that we will become profitable or remain cash flow positive. Moreover, we might not be able to increase our operating profitability on a quarterly or annual basis. To increase profits, we will need to generate additional revenue growth from our existing customers and to obtain new customers, while continuing to control our expenses. We expect to continue to invest in network and operations, research and development and sales and marketing, and we expect to face pressure to adopt new pricing arrangements, including volume discounts, that may lower our gross margins. If revenues do not meet levels we anticipate, or if our costs and expenses exceed our expectations, our quarterly losses would continue, and the price of our common stock is likely to decline as a result.

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

We have limited experience providing clearinghouse services—having done so since only 1997—and it is only since January 2001 that our efforts have been focused primarily on providing services that enable our customers to provide Internet roaming services to their end-users. We have only offered our GRIC MobileOffice solution since mid-2002. Many members of our senior management team and other employees have worked with us for only a short period of time. As a result of our limited operating history, we have little meaningful historical financial data upon which to plan operating expenses or forecast our revenues accurately. This combination of factors makes it difficult for us to plan and to implement plans, and it makes it difficult for you to evaluate your investment in GRIC.

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

If our cash proves to be insufficient to fund our operations, we may need to raise additional funds at some point in the future. If we raise additional funds by selling equity or convertible debt securities, our stockholders may experience additional dilution and these new securities may have powers, preferences and rights that are senior to those of the rights of our common stock. For example, as a result of the April 2002 sale of our Series A Preferred Stock, the investors in our Series A Preferred Stock control a significant portion of our outstanding capital stock, and the owners of the Series A Preferred Stock have rights that are senior to those of holders of the common stock in the event of a bankruptcy or liquidation, and the issuance of the Series A Preferred Stock has substantially diluted the ownership interest of the common stockholders. We cannot predict whether additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to fund our business operations, promote our brand identity, take advantage of acquisition opportunities, 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.

We restructured our business in 2001 to focus on our Internet roaming service, which makes us more dependent on the success of this service.

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

We face significant competition, including competition from larger companies, which could make it more difficult for us to succeed.

Our business environment is intensely competitive, highly fragmented and rapidly changing. Competition can come from many sources. For example, we compete directly with iPass in the market for Internet roaming and related settlement services, and iPass has a network that competes with the GRIC TierOne Network. Large communications service providers such as AT&T, Equant and WorldCom/UUNET also have the ability and resources to compete with us in the Internet-based mobile office communications services market. We could also face competition from emerging, wireless based network service providers targeting the traveling business communities. Many of our competitors have substantially greater resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we have. Any of these competitors may combine or form strategic partnerships, gaining competitive advantages as a result. Our competitors may be able to develop and market products and services that are superior to our own in terms of features, quality, pricing or other factors. This competition may result in reduced prices and longer sales cycles for our products. If any of our larger competitors were to commit greater technical, sales, marketing and other resources to our markets, it would be more difficult for us to compete.

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

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

If we fail in our strategy of focusing our sales efforts on larger companies, our revenue and profitability goals will likely not be achieved.

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

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

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

We depend on our reseller customers to market Internet-based communications services to their end users, so if our reseller customers fail to market their services effectively, our revenues may be reduced.

Our business depends in part on the efforts and success of our Internet service provider and telecommunications service customers in marketing Internet-based communications services to their end users. We have little ability to promote our services, or to promote demand for our reseller customers’ services generally. The use of the Internet as a medium for communications services remains unproven. If our reseller customers fail to market their Internet-based communications services effectively, our revenues will be reduced. Similarly, if the market for Internet-based communications services fails to grow, or expands more slowly than anticipated, our revenues will be lower than expected. The Internet-based services we provide are relatively new and have not achieved widespread market acceptance. Network service providers and communication solutions providers may be reluctant to promote or rely upon our services until they gain greater commercial acceptance, which may never occur.

The unpredictability of our quarterly results may cause the trading price of our common stock to decline.

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

• the volume of transaction-based revenues;

• the timing of deployment of services by our customers;

• competitive pricing pressure;

• changes in global travel patterns due to past and potential future terrorist activities in the U.S. and the military responses to them in the Middle East, Southern Asia and elsewhere;

• the mix of services used by our customers’ end users;

• difficulty collecting accounts receivable, particularly from customers based outside the U.S.; and

• regulation, domestically and internationally.

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

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

Our success depends on our ability to assure generally error-free clearinghouse services, uninterrupted operation of our network and software infrastructure, and a satisfactory experience for our customers’ end users. In the past, we have experienced problems due to our inability to detect system malfunctions and due to errors in collecting or processing account usage and settlement data. Due to the high level of performance required for critical communications traffic, any failure to deliver a satisfactory experience to end users, whether or not caused by our own failures, and any failure to provide accurate settlement data in connection with acting as a clearinghouse, could reduce demand for our products and services.

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

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

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

We generate most of our revenues from business conducted internationally, so we are subject to special risks. It is costly to maintain international facilities and operations, promote our brand internationally and develop localized systems and support centers. In some regions revenues may not offset the expense of maintaining operations there. Some of the risks that we face as a result of our international operations include:

• foreign customers often take longer to pay for services;

• business activity is often slow in some region or another, negatively impacting overall results;

• foreign currency exchange rates fluctuate and can impact our results;

• recruitment and retention of experienced senior management and staff for our international operations is costly;

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

• compliance with telecommunications and other Internet-related regulations in foreign jurisdictions is expensive and difficult; and

• general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, can have a significant impact on our business.

Terrorist acts and acts of war may seriously harm our business and revenue, costs and expenses and financial condition.

Terrorist acts or acts of war, including military actions in Iraq and other parts of the Middle East, may cause damage or disruption to us, our employees, facilities, partners, suppliers, resellers or customers, which could significantly impact our revenue, costs and expenses and financial condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially harm our business and results of operations. The long-term effects on our business of the September 11, 2001 attacks and the current state of warfare in the Middle East are unknown. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot presently be predicted. In addition, as a multi-national company with headquarters and significant operations located in the United States, we may be impacted by actions against the United States. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.

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

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

The economic downturn could adversely affect our revenue, gross margins and expenses.

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

It is difficult to hire and retain qualified sales personnel.

Highly trained sales personnel are key to our performance. Competition for these individuals is often intense, and we may not be able to hire the type and number of sales personnel we need. Moreover, even after we hire salespersons, they require extensive training in our products and services. This training typically covers six to eight weeks of formal in-class and on-the-job instruction. If we are unable to continue to retain our current employees and train new sales personnel as rapidly as necessary, we may not be able to increase market awareness and sales of our services, which may prevent us from generating revenue and achieving sustained profitability.

We could become subject to litigation regarding intellectual property rights that could be costly and result in the loss of significant rights.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We may become a party to a litigation in the future to protect our intellectual property or as a result of an alleged infringement of another party’s intellectual property. Claims for alleged infringement and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation could also force us to do one or more of the following:

• stop or delay selling, incorporating or using products that use the challenged intellectual property;

• obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license might not be available on reasonable terms or at all; and

• redesign the products that use that technology.

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

The concentration of our capital stock ownership with insiders will likely limit the ability of other stockholders to influence corporate matters.

As of July 31, 2003, our executive officers and directors, and their related entities, owned a majority of our outstanding common stock and common stock equivalents, including the effect of a voting agreement that covers elections of directors, to which some of our stockholders are parties. As a result, these stockholders will be able to exercise control over all matters requiring approval of our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership might also have the effect of delaying or preventing a change in control of the Company that might be viewed as beneficial by other stockholders.

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

As the holders of our Series A Preferred Stock reduce their ownership interest through resales pursuant to our prospectus dated September 19, 2002, or otherwise, their interest in contributing to our success may decline and the price of our common stock may be harmed.

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

Provisions in our charter documents might deter a company from acquiring us, which could inhibit your ability to receive an acquisition premium for your shares.

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

• authorize the board to issue preferred stock without stockholder approval;

• prohibit cumulative voting in the election of directors;

• limit the persons who may call special meetings of stockholders; and

• establish advance notice requirements for nominations for the election of the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

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

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

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

Government regulations and legal uncertainties regarding the Internet could harm our business.

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

United States. We believe that, under United States law, the Internet-related services that we provide constitute information services or other non-telecommunications services, and do not constitute regulated telecommunications services. Therefore our services are not currently subject to regulation by the Federal Communications Commission, and, by operation of federal preemption law, are also exempt from regulation by state agencies charged with regulating telecommunications carriers. We do not know the extent to which our Internet-related services may be subject to regulation by the Federal Communications Commission or state telecommunications authorities in the future.

The Federal Communications Commission has initiated several proceedings that may change the regulatory and legal framework for the provision of broadband and Internet services. Recently, the Federal Communications Commission determined that cable modem services constitute unregulated information services. This decision is currently under appeal in the Court of Appeals for the Ninth Circuit. In addition, the industry and policy makers continue to debate the obligation of cable operators to provide ISPs non-discriminatory access to cable broadband platforms. The Federal Communications Commission also has recently issued new rules in its Triennial Review proceeding relieving incumbent local exchange carriers of certain regulatory obligations in the provision of broadband services, including requirements that they provide certain types of network access services on an unbundled and discounted basis to competitors. The Federal Communications Commission is also considering whether incumbent local exchange carriers should be treated as non-dominant in the provision of broadband services as well as whether facilities-based broadband Internet access providers should be required to contribute to the universal service fund, which is used to subsidize the universal availability of telecommunications services. If adopted, these regulatory measures may lessen some of the regulatory burdens on existing providers of broadband services, particularly incumbent local exchange carriers, but may increase barriers to entry for new providers and may result in increased costs to customers of such services. We cannot be certain of the impact that any of these measures would have on our business.

The regulatory status and treatment of various configurations of voice over Internet protocol (“VoIP”) service is also under consideration by the Federal Communications Commission as well as certain state regulatory commissions. We cannot determine the impact that any changes in the regulatory treatment of VoIP may have on our business.

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

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

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

In particular, the European Union has enacted several directives concerning the Internet and Internet-related activities. The European Union has, for example, adopted a directive that requires Member States to impose restrictions on the collection and processing of personal data and to prevent transmission outside of Europe of personal data, which can include customer and billing information as well as human resource data, except to countries that provide adequate protection of such data. In response to the European Union directive, the U.S. negotiated with the European Union the establishment of certain “Safe Harbor” principles, effective as of November 2000, which provide U.S. companies choosing to adhere to them a presumption of adequate protection of privacy. Companies complying with the Safe Harbor principles must provide notice to users of personal data collection, provide choices to users regarding certain uses, including the transfer of information to third parties, guarantee the security and integrity of personal data collected, provide users with the ability to access, correct and delete personal information that is being stored, and provide for user enforcement and redress in the event of violation of the principles. These principles are more restrictive than other applicable U.S. laws and may impose additional cost on companies that decide to comply. Currently, the Safe Harbor principles are voluntary and are intended to be implemented through self-regulation and industry self-certification. In the future, however, the requirements embodied in the principles may become mandatory. To date, we have not certified that we will operate under the Safe Harbor principles.

Although we do not engage in the collection of data for purposes other than routing our services and billing for our services, the directive is broad and the European Union privacy standards are stringent. Accordingly, the potential effect on us is uncertain. In conducting our business internationally, we must comply with privacy laws directly applicable to our activities in Europe and similar privacy and data protection rules in other countries in which we do business. Any such requirements may adversely affect our ability to collect demographic and personal information from users, which could have an adverse effect on our ability to provide targeted advertisements. Although we will endeavor to meet the requirements of the European Union directive and any U.S. regulations, we cannot guarantee that adequacy of our compliance will not be subject to challenge.

As our services are made available in foreign countries, and as we facilitate sales by our customers and affiliates to end users located in foreign countries, these countries may claim that we or our customers are required to qualify to do business in the particular foreign country, that we are otherwise subject to regulation, including requirements to obtain authorization, or that we or our customers are prohibited in all cases from conducting business as currently conducted in that foreign country. Our failure to qualify as a foreign corporation in a jurisdiction in which we are required to do so or to comply with foreign laws and regulations could subject us to taxes and penalties or preclude us from, or limit our ability in, enforcing contracts in these jurisdictions, which could materially adversely affect our business, prospects, operating results and financial condition.

Our customers and affiliates may also currently be, or in the future may become, subject to requirements to qualify to do business in a particular foreign country, to comply with regulations, including requirements to obtain authorization, or to cease from conducting their business as conducted in that foreign country. We cannot be certain that our customers and affiliates are currently in compliance with any of these requirements, will be able to comply with any of these requirements, or will continue in compliance with any of these requirements. The failure of our customers and affiliates to comply with these requirements could materially adversely affect our business, prospects, operating results and financial condition.

Compliance with new rules and regulations concerning corporate governance may be costly and could harm our business.

The Sarbanes-Oxley Act, which was signed into law in July 2002, mandates, among other things, that companies adopt new corporate governance measures and imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit committee members and imposes increased civil and criminal penalties for companies, their chief executive officers and chief financial officers and directors for securities law violations. In addition, The Nasdaq National Stock Market, on which our common stock is listed, is also considering the adoption of additional comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations will increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management’s attention from business operations. We also expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage.

Further, our board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficultly attracting and retaining qualified board members and executive officers, which would adversely affect our business.

The current regulatory environment affecting accounting principles generally accepted in the United States of America is uncertain and volatile, and significant changes in current principles could affect our financial statements going forward.

Recent actions and public comments from the Securities and Exchange Commission have focused on the integrity of financial reporting generally. In addition, the FASB and other regulatory accounting agencies have recently introduced several new or proposed accounting standards, or are developing new proposed standards, such as accounting for guarantees, restructuring charges and stock options, some of which would represent a significant change from current industry practices. While we believe that our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, we cannot predict the impact of the adoption of any such proposals on our financial statements going forward.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk. We have limited exposure to financial market risks, including changes in foreign currency exchange rates and interest rates. Although we have foreign operations in Europe and Asia, to date our exposure to foreign currency fluctuations has not been significant. Therefore, no accompanying table has been provided.

Interest Rate Risk. Our exposure to interest rate risk relates primarily to our investment portfolio and debt obligations. Interest rate risk occurs when we cannot hold a purchased investment to its maturity. The weighted-average maturity of our investment portfolio, when taking into account the reset feature of floating rate municipal bonds, is limited to 90 days. We intend to hold our securities until maturity and, therefore, do not expect to recognize an adverse impact on income or cash flows, although there can be no assurance of this. We have established policies and business practices regarding our investment portfolio to preserve principal while obtaining reasonable rates of return without significantly increasing risk. We place investments with high credit quality issuers according to our investment policy. We do not use derivative financial instruments in our investment portfolio. All investments are carried at fair market value at June 30, 2003. Due to the short-term nature of our investments and the immaterial amount of our debt obligation, we believe that there is no material exposure to interest fluctuation. Therefore, no accompanying table has been provided.

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

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) and 20(a) of the Securities Exchange Act of 1934, as amended.

Citing several press articles, the Consolidated Complaint alleges that the underwriter defendants used improper methods in allocating shares in initial public offerings, and claim the underwriter defendants entered into improper commission agreements regarding aftermarket trading in our common stock purportedly issued pursuant to the registration statement for the initial public offering. The Consolidated Complaint also alleges market manipulation claims against the underwriter defendants based on the activities of their respective analysts, who were allegedly compromised by conflicts of interest. The plaintiffs in the Consolidated Complaint seek damages as measured under Section 11 and Section 10(b) of the Securities Act of 1933, pre-judgment and post-judgment interest, and reasonable attorneys’ and expert witnesses’ fees and other costs; no specific amount is claimed in the plaintiffs’ prayer in the Consolidated Complaint. By Order of the Court, no responsive pleading is yet due, although motions to dismiss on global issues affecting all of the issuers have been filed.

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

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

After careful consideration, we decided to approve the settlement proposal during 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 of continued litigation. Because the settlement will be funded entirely by our Insurers, we do not believe that the settlement will have any effect on our financial condition, results or operations or cash flows.

The settlement will be presented to the Court for approval in the coming months. There can be no guarantee that the settlement will be judicially approved.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

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

	Votes For	Votes Against	Votes Abstained	Votes Withheld	Broker Non-Votes
1. Election of Directors

Series A Directors
Mark Hsu	16,839,550			176,714
Kheng Nam Lee	16,839,448			176,816
Robert Shen	16,840,050			176,214

Additional Directors
Dr. Hong Chen	16,721,702			294,562
Bharat Davé	16,994,536			21,728
Roderick C. McGeary	16,989,861			26,303
Hock Chuan Tam	16,915,200			101,064
Gerald Wright	16,655,011			361,253
Joseph M. Zaelit	16,648,842			367,422

2. Proposal to ratify the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending December 31, 2003	16,928,285	74,469	13,510		0

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit
Number

Incorporated by Reference

Filed or Furnished

Herewith

Exhibit Description

Form

File No.

Exhibit

Filing Date

10.37

Offer letter dated August 7, 2003 to Rob Fuggetta.

31.01

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Registrant’s Chief Executive Officer, dated August 14, 2003.

31.02

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Registrant’s Chief Financial Officer, dated August 14, 2003.

32.01*

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Registrant’s Chief Executive Officer, dated August 14, 2003.

32.02*

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Registrant’s Chief Financial Officer, dated August 14, 2003.

* These certifications accompany GRIC’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003. These certifications are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference in any filing of GRIC under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

(b) Reports on Form 8-K

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

SIGNATURE

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

	GRIC COMMUNICATIONS, INC.


	/s/ KIM S. SILVERMAN
	Kim S. Silverman
	Vice President and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

For the quarterly period ended June 30, 2003

For the transition period from to

Lease commitments. The Company leases all of its facilities under operating leases that expire at various dates through 2008. As of June 30, 2003, the Company had $2.5 million in future operating lease commitments.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURE