GRIC COMMUNICATIONS INC, 10-Q, 2000-08-11

GRIC COMMUNICATIONS INC
10-Q, 2000-08-11
BUSINESS SERVICES, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

------------------------

FORM 10-Q

(MARK ONE)

<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>

FOR THE TRANSITION PERIOD FROM ______________ TO ______________.

COMMISSION FILE NUMBER: 000-27871

------------------------

GRIC COMMUNICATIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S> <C>
DELAWARE 77-0368092
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
</TABLE>

1421 MCCARTHY BLVD.
MILPITAS, CALIFORNIA 95035
(408) 955-1920
(Address, including Zip Code, of Registrant's Principal Executive Offices and
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 /X/ No / /

The number of shares of the registrant's common stock outstanding as of
July 31, 2000 was 19,500,247 shares.

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<PAGE>
GRIC COMMUNICATIONS, INC.
INDEX

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999..................................... 3

Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999......... 4

Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999....................... 5

Notes to Condensed Consolidated Financial Statements........ 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9

Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 21

PART II. OTHER INFORMATION

Item 1. Legal Proceedings........................................... 22

Item 2. Changes in Securities and Use of Proceeds................... 22

Item 3. Defaults Upon Senior Securities............................. 22

Item 4. Submission of Matters to a Vote of Security Holders......... 22

Item 5. Other Information........................................... 22

Item 6. Exhibits and Reports on Form 8-K............................ 23

SIGNATURE............................................................. 24
</TABLE>

2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

GRIC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
2000 1999(1)
----------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 41,409 $ 64,655
Short-term investments.................................... 19,057 13,030
Accounts receivable, net of allowances of $1,161 and $701
at June 30, 2000 and December 31, 1999, respectively.... 4,113 2,596
Other current assets...................................... 434 401
-------- --------
Total current assets........................................ 65,013 80,682
Property and equipment, net................................. 7,367 4,404
Other assets................................................ 262 291
-------- --------
Total assets............................................ $ 72,642 $ 85,377
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 6,204 $ 5,302
Accrued compensation and benefits......................... 2,392 1,620
Other current liabilities................................. 979 829
Current portion of long-term debt and capital lease
obligations............................................. 655 626
-------- --------
Total current liabilities................................... 10,230 8,377
Long-term debt and capital lease obligations................ 866 1,147
Commitments and contingencies
Stockholders' equity:
Preferred stock, 5,000 shares authorized at June 30, 2000
and December 31, 1999, respectively; no shares issued
and outstanding......................................... -- --
Common stock, $0.001 par value; 50,000 shares authorized;
19,327 and 19,162 shares issued and outstanding at June
30, 2000 and December 31, 1999, respectively............ 19 19
Additional paid-in capital................................ 125,574 125,057
Deferred stock-based compensation......................... (1,266) (1,479)
Accumulated deficit....................................... (62,767) (47,744)
Accumulated other comprehensive loss...................... (14) --
-------- --------
Total stockholders' equity.............................. 61,546 75,853
-------- --------
Total liabilities and stockholders' equity.............. $ 72,642 $ 85,377
======== ========
</TABLE>

------------------------

(1) Amounts as of December 31, 1999 were derived from the audited consolidated
financial statements at that date but do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.

See accompanying notes

3
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GRIC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Settlement............................................ $ 6,774 $ 1,230 $ 11,742 $ 1,966
Software and other.................................... 264 561 498 992
------- ------- -------- -------
Total revenues...................................... 7,038 1,791 12,240 2,958
Costs and expenses:
Cost of settlement revenues........................... 5,862 892 10,473 1,523
Cost of software and other revenues................... 76 50 76 75
Network and operations(1)............................. 1,828 602 3,175 1,163
Research and development(2)........................... 2,800 1,969 5,266 3,427
Sales and marketing(3)................................ 3,198 1,917 6,113 3,562
General and administrative(4)......................... 2,159 942 3,860 1,866
Amortization of stock-based compensation.............. 106 62 213 86
------- ------- -------- -------
Total costs and expenses............................ 16,029 6,434 29,176 11,702
------- ------- -------- -------
Operating loss.......................................... (8,991) (4,643) (16,936) (8,744)
Interest income and other, net.......................... 970 119 2,078 159
Interest expense........................................ (36) (850) (89) (1,241)
------- ------- -------- -------
Loss before income taxes................................ (8,057) (5,374) (14,947) (9,826)
Provision for income taxes.............................. 48 10 76 18
------- ------- -------- -------
Net loss................................................ $(8,105) $(5,384) $(15,023) $(9,844)
======= ======= ======== =======
Basic and diluted net loss per share.................... $ (0.42) $ (2.65) $ (0.78) $ (4.92)
======= ======= ======== =======
Shares used to compute basic and diluted net loss per
share................................................. 19,228 2,033 19,195 2,000
======= ======= ======== =======
</TABLE>

------------------------

(1) Excludes $2 and $1, separately stated in amortization of stock-based
compensation, for the three months ended June 30, 2000 and 1999,
respectively, and excludes $4 and $1, separately stated in amortization of
stock-based compensation, for the six months ended June 30, 2000 and 1999,
respectively.

(2) Excludes $43 and $19, separately stated in amortization of stock-based
compensation, for the three months ended June 30, 2000 and 1999,
respectively, and excludes $86 and $28, separately stated in amortization of
stock-based compensation, for the six months ended June 30, 2000 and 1999,
respectively.

(3) Excludes $17 and $8, separately stated in amortization of stock-based
compensation, for the three months ended June 30, 2000 and 1999,
respectively, and excludes $34 and $11, separately stated in amortization of
stock-based compensation, for the six months ended June 30, 2000 and 1999,
respectively.

(4) Excludes $44 and $34, separately stated in amortization of stock-based
compensation, for the three months ended June 30, 2000 and 1999,
respectively, and excludes $89 and $46, separately stated in amortization of
stock-based compensation, for the six months ended June 30, 2000 and 1999,
respectively.

See accompanying notes

4
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GRIC COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(15,023) $(9,844)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and
equipment............................................. 1,618 720
Amortization of stock-based compensation................ 213 86
Noncash interest expense................................ -- 273
Noncash warrant expenses--preferred stock............... 8 920
Noncash warrant expenses--common stock.................. 69 45
Net changes in assets and liabilities:
Accounts receivable..................................... (1,517) (271)
Inventories............................................. -- 69
Other current assets.................................... (33) (108)
Accounts payable........................................ 902 (85)
Accrued compensation and benefits....................... 772 120
Other current liabilities............................... 150 166
Other assets............................................ (48) --
Other long-term liabilities............................. 61 28
-------- -------
Net cash used in operating activities................. (12,828) (7,881)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale investments:
Purchases............................................... (21,700) --
Sales................................................... 15,659 --
Capital expenditures...................................... (4,581) (722)
-------- -------
Net cash used in investing activities................. (10,622) (722)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt and capital lease obligations............. (313) (1,576)
Proceeds from sales of preferred stock.................... -- 25,174
Proceeds from sales of common stock, net.................. 517 236
-------- -------
Net cash provided by financing activities............. 204 23,834
-------- -------
Net increase (decrease) in cash and cash equivalents........ (23,246) 15,231
Cash and cash equivalents at beginning of quarter........... 64,655 1,362
-------- -------
Cash and cash equivalents at end of quarter................. $ 41,409 $16,593
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid......................................... $ 2 $ 1
Interest paid............................................. $ 80 $ 63
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Conversion of 1998 bridge notes principal and interest
into Series D preferred stock........................... $ -- $ 2,801
Conversion of 1999 bridge notes principal and interest
into Series D preferred stock........................... $ -- $ 175
Purchase of equipment under capital leases................ $ -- $ 108
</TABLE>

See accompanying notes

5
<PAGE>
GRIC COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
representation have been included. The results for the six months ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for future periods. The following information should be read in conjunction with
the consolidated financial statements and notes thereto included in the GRIC
Communications, Inc. (the "Company") Annual Report on Form 10-K for the year
ended December 31, 1999.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NET LOSS PER SHARE

Net loss per common share for each of the three months and six months ended
June 30, 2000 and 1999 was computed by dividing the net loss by the weighted
average shares outstanding during the respective period in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." 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 1.4 million
and 857,000 shares of common stock for the three months ended June 30, 2000 and
1999, respectively, and 1.9 million and 866,000 shares of common stock for the
six months ended June 30, 2000 and 1999, 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.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements, as amended by SAB No. 101A and No. 101B, which provides guidance on
the recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The SEC has recently indicated that it intends to issue
further guidance with respect to adoptions of specific views addressed by SAB
No. 101. Until such time as this additional guidance is issued, the Company is
unable to assess the impact, if any, it may have on its results of operations,
financial position, or cash flows.

In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of Accounting Principles Board ("APB") Opinion
No. 25. This Interpretation clarifies the application of Opinion No. 25 for
certain issues including: (a) the definition of employee for purposes of
applying Opinion

6
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GRIC COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
No. 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. In
general, the Interpretation is effective July 1, 2000. We do not expect the
adoption of Interpretation No. 44 to have a material effect on our results of
operations, financial position, or cash flows.

3. COMPREHENSIVE LOSS

The components of comprehensive loss for the three and six months ended
June 30, 2000 and 1999, respectively, are as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss.............................................. $(8,105) $(5,384) $(15,023) $(9,844)
Other comprehensive gain (loss):
Unrealized gain (loss) on available-for-sale
securities........................................ 4 -- (14) --
------- ------- -------- -------
Comprehensive loss.................................... $(8,101) $(5,384) $(15,037) $(9,844)
======= ======= ======== =======
</TABLE>

The only component of accumulated other comprehensive gain (loss) at
June 30, 2000 was unrealized loss on available-for-sale securities.

4. SEGMENT INFORMATION

The Company operates solely in one segment, providing a global network for
Internet service providers and telecommunications companies.

7
<PAGE>
GRIC COMMUNICATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

4. SEGMENT INFORMATION (CONTINUED)
The following is a summary of revenue and long-lived assets by geographical
area for the periods presented:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue by external customers:
United States........................................ $4,207 $ 513 $ 7,018 $ 736
Southeast Asia....................................... 782 469 1,692 875
Japan................................................ 555 303 1,027 506
Europe............................................... 1,050 125 1,650 280
China................................................ 198 139 391 220
Rest of world........................................ 246 242 462 341
------ ------ ------- ------
$7,038 $1,791 $12,240 $2,958
====== ====== ======= ======
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Long-lived assets:
United States............................................. $7,155 $4,223
Rest of world............................................. 212 181
------ ------
$7,367 $4,404
====== ======
</TABLE>

Revenue by external customer is based on the customer's billing locations.
Long-lived assets are those assets used in each geographic location.

5. COMMITMENTS AND CONTINGENCIES

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 the Company's financial condition, results of operations, or cash
flows.

8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with our condensed
consolidated financial statements and accompanying notes, which appear elsewhere
in this Quarterly Report on Form 10-Q. The following discussion contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and Section 27A of the Securities Act of 1933 that involve
risks and uncertainties. These forward-looking statements include statements
that reflect our plans, estimates and beliefs, based on information available to
us at the time of this report. We assume no obligation to update any such
forward-looking statements. Actual results could differ materially from those
anticipated in the 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 below and elsewhere in this Form 10-Q, particularly in "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.

OVERVIEW

We provide services and software that enable our customers to offer
Internet-based products and services. Our customers include telecommunications
companies, Internet service providers and newly-emerging communication service
providers.

Settlement revenues are generated when we provide settlement services to
customers whose end users initiate Internet communications. For each global
Internet roaming transaction, we use our software to track the usage, collect
the amount that a roamer's "home" service provider owes us, pay the appropriate
amount to the service provider enabling local access, and provide the underlying
usage data to our customer to enable billing of its end user. For each Internet
telephony call, we use our software to track the usage, settle the amounts owed
to GRIC and owed by GRIC as a result of the transaction, and provide the
underlying usage data to our customers to enable billing of their end users.

We have incurred substantial losses since our inception as a result of
expenses associated with building our GRIC Alliance and related network
infrastructure and developing our software products. As of June 30, 2000, we had
an accumulated deficit of approximately $62.8 million. We anticipate that our
operating expenses will increase substantially in the future as we continue to
expand our network and develop our software products. Accordingly, we expect to
incur additional losses for the foreseeable future, and we cannot assure you
that we will achieve or sustain profitability. See "Factors That May Affect
Future Results."

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 early stages of development, particularly
companies--like us--that are in new and rapidly evolving markets. See "Factors
That May Affect Future Results."

RESULTS OF OPERATIONS

QUARTER AND YEAR-TO-DATE ENDED JUNE 30, 2000 COMPARED TO QUARTER AND
YEAR-TO-DATE ENDED JUNE 30, 1999

REVENUES

Total revenues increased 293% to $7.0 million in the three months ended
June 30, 2000 from $1.8 million in the three months ended June 30, 1999. Total
revenues increased 314% to $12.2 million

9
<PAGE>
in the six months ended June 30, 2000 from $3.0 million in the six months ended
June 30, 1999. The primary reason for the growth is increased settlement
revenues.

SETTLEMENT REVENUES. Settlement revenues increased to $6.8 million in the
three months ended June 30, 2000 from $1.2 million in the three months ended
June 30, 1999, representing an increase of 451%. Settlement revenues increased
to $11.7 million in the six months ended June 30, 2000 from $2.0 million in the
six months ended June 30, 1999, representing an increase of 497%. The increases
reflect higher volumes of both Internet telephony and Internet roaming
transactions, including a non-recurring payment of approximately $200,000 from a
single customer. We expect settlement revenues from Internet telephony in the
future to increase at a faster rate than revenues from Internet roaming.

SOFTWARE AND OTHER REVENUES. Software, hardware, and maintenance and
services revenues decreased to $264,000 in the three months ended June 30, 2000
from $561,000 in the three months ended June 30, 1999, representing a decrease
of 53%. Software, hardware, and maintenance and services revenues decreased to
$498,000 in the six months ended June 30, 2000 from $992,000 in the six months
ended June 30, 1999, representing a decrease of 50%. The decreases are primarily
due to lower sales of our prepaid Internet telephony software and discontinued
sales of hardware, partially offset by an increase in revenues of our Internet
roaming software and related maintenance and services.

COSTS AND EXPENSES

COST OF SETTLEMENT REVENUES. Cost of settlement revenues represents the
amounts we pay to access the Internet for Internet roaming services for our
customers, and to terminate Internet telephony services for our customers. Cost
of settlement revenues increased to $5.9 million in the three months ended
June 30, 2000 from $892,000 in the three months ended June 30, 1999,
representing an increase of 557%. Cost of settlement revenues increased to
$10.5 million in the six months ended June 30, 2000 from $1.5 million in the six
months ended June 30, 1999, representing an increase of 588%. The increases were
due to higher sales volumes of our Internet telephony services and the higher
proportion of our total service mix that these services represented.

COST OF SOFTWARE AND OTHER REVENUES. Cost of software, hardware and
maintenance and services revenues represents the cost of Internet telephony
equipment, software and professional services. Cost of software, hardware and
maintenance and services revenues increased to $76,000 in the three months ended
June 30, 2000 from $50,000 in the three months ended June 30, 1999, representing
an increase of 52%. Cost of software, hardware, and maintenance and services
revenues increased slightly to $76,000 in the six months ended June 30, 2000
from $75,000 in the six months ended June 30, 1999, representing an increase of
1%. The increases are primarily due to increased professional services cost
offset by the discontinued sales of hardware.

NETWORK AND OPERATIONS. Network and operations expenses include salaries,
benefits, allocated facility and management information systems costs, costs of
co-location of network equipment and leased telecommunication lines, and
depreciation on network equipment. Network and operations expenses increased to
$1.8 million in the three months ended June 30, 2000 from $602,000 in the three
months ended June 30, 1999, representing an increase of 204%. Network and
operations expenses increased to $3.2 million in the six months ended June 30,
2000 from $1.2 million in the six months ended June 30, 1999, representing an
increase of 173%. The increases were due to higher levels of business activity
and higher costs associated with the expansion of our customer support and
network operation centers to a 24 hours-a-day, seven days-a-week basis. We
expect that network and operations expenses will continue to increase in
absolute dollars as we expand our network infrastructure to meet anticipated
increases in transaction processing volume.

10
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries, benefits and recruiting costs of employees and outside consultants, as
well as quality assurance, allocated facility and depreciation costs. Research
and development expenses increased to $2.8 million in the three months ended
June 30, 2000 from $2.0 million in the three months ended June 30, 1999,
representing an increase of 42%. Research and development expenses increased to
$5.3 million in the six months ended June 30, 2000 from $3.4 million in the six
months ended June 30, 1999, representing an increase of 54%. The increases were
primarily due to the continuing development of our GRIC Convergent Services
Platform software, also known as GRIC CSP. To date, all software development
costs have been expensed in the period incurred. We believe that continued
investment in research and development is critical to achieving our strategic
objectives. We expect the dollar amount of research and development expenses to
increase in the future.

SALES AND MARKETING. Sales and marketing expenses include salaries,
benefits and commissions earned by sales and marketing personnel, allocated
facility, management information systems and depreciation costs, costs for
marketing and promotional programs, and costs associated with our domestic and
international sales offices. Sales and marketing expenses increased to
$3.2 million in the three months ended June 30, 2000 from $1.9 million in the
three months ended June 30, 1999, representing an increase of 67%. Sales and
marketing expenses increased to $6.1 million in the six months ended
June 30, 2000 from $3.6 million in the six months ended June 30, 1999,
representing an increase of 72%. The increases reflect the hiring of additional
personnel to expand our geographic coverage and to support the growth of our
Internet telephony service. We expect the dollar amount of sales and marketing
expenses to increase in the future as we seek to expand our customer base and
increase brand awareness.

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, as well as provisions
for uncollectible receivables. General and administrative expenses increased to
$2.2 million in the three months ended June 30, 2000 from $942,000 in the three
months ended June 30, 1999, representing an increase of 129%. General and
administrative expenses increased to $3.9 million in the six months ended
June 30, 2000 from $1.9 million in the six months ended June 30, 1999,
representing an increase of 107%. The increases reflect the hiring of additional
personnel and consultants to provide the infrastructure to support future
growth, as well as increases in the provision for uncollectible receivables. We
expect that general and administrative expenses will continue to increase in
absolute dollars in the future as a result of the continued expansion of our
administrative staff and the expenses associated with being a public company,
including annual and other public reporting costs, directors' and officers'
liability insurance premiums, investor relations programs and professional
services fees.

AMORTIZATION OF STOCK-BASED COMPENSATION. Some stock options previously
granted through December 14, 1999 are considered compensatory because the
estimated fair value for accounting purposes was greater than the stock option
exercise price as determined by the board of directors on the date of grant. As
a result, we have recorded expenses of $106,000 in the three months ended
June 30, 2000 relating to the amortization of deferred compensation expense and
had an aggregate of $1.3 million of deferred compensation remaining to be
amortized at June 30, 2000. Deferred compensation is amortized on a
straight-line basis over the vesting period of the options. We expect
amortization of approximately $427,000 in each of fiscal 2000, 2001, and 2002,
and $198,000 in fiscal 2003.

INTEREST INCOME AND OTHER, NET

Interest income and other, net, primarily represents interest income on cash
balances. Interest income and other, net, increased to $970,000 in the three
months ended June 30, 2000 from $119,000

11
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in the three months ended June 30, 1999. Interest income and other, net,
increased to $2.1 million in the six months ended June 30, 2000 from $159,000 in
the six months ended June 30, 1999. The increases were due to higher average
cash balances during the quarter resulting from the Company's initial public
offering in December 1999.

INTEREST EXPENSE

Interest expense consists of amortization of the fair value of warrants
issued in connection with our financing activities and interest expense
associated with capital leases and bridge financing. Interest expense decreased
to $36,000 in the three months ended June 30, 2000 from $850,000 in the three
months ended June 30, 1999. Interest expense decreased to $89,000 in the six
months ended June 30, 2000 from $1.2 million in the six months ended June 30,
1999. The decreases are primarily due to the reduction in warrant expenses from
$752,000 to $4,000 for the three months ended June 30, 1999 and 2000,
respectively, and from $918,000 to $8,000 for the six months ended June 30, 1999
and 2000, respectively, as well as the conversion of bridge loans to preferred
stock in the second quarter of 1999.

INCOME TAXES

The provision for income taxes increased to $48,000 in the three months
ended June 30, 2000 from $10,000 in the three months ended June 30, 1999. The
provision for income taxes increased to $76,000 in the six months ended
June 30, 2000 from $18,000 in the six months ended June 30, 1999. The provision
for income taxes consists of foreign taxes.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES. Net cash used in operating activities was
$12.8 million and $7.9 million in the six months ended June 30, 2000 and 1999,
respectively. Net cash used in operating activities in the six months ended
June 30, 2000 and 1999 was primarily a result of net operating losses.

INVESTING ACTIVITIES. Net cash used in investing activities was
$10.6 million and $722,000 in the six months ended June 30, 2000 and 1999,
respectively. Our recent investing activities have consisted primarily of
purchases of short-term investments arising from the funds received from the
Company's initial public offering. Other uses of cash in investing activities
consisted of purchases of computer hardware, relating to the network
infrastructure, and of computer hardware and software, for our increasing
employee base. We expect that capital expenditures will increase due to
continued expansion of our network infrastructure as well as our increasing
employee base.

FINANCING ACTIVITIES. Net cash provided by financing activities was
$204,000 and $23.8 million in the six months ended June 30, 2000 and 1999,
respectively. In the six months ended June 30, 2000, the financing activity
consisted primarily of the exercise of stock options. In the six months ended
June 30, 1999, the financing activity consisted primarily of the issuance of our
Series D financing of $25.2 million net of issuance costs and interest expense.

COMMITMENTS. We lease all of our facilities under operating leases that
expire at various dates through 2003. As of June 30, 2000, we had $2.8 million
in future operating lease commitments and $1.4 million of capital lease
obligations and equipment promissory notes.

SUMMARY OF LIQUIDITY. We believe that the existing cash, cash equivalents
and short-term investments, in addition to funds available under existing credit
facilities, will be sufficient to meet our working capital requirements for at
least the next 12 months. We may require additional funds to support our working
capital requirements or for other purposes and may seek to raise these
additional funds through public or private debt or equity financing or from
other sources. There can be no assurance that additional funding will be
available at all or that if available such financing will be obtainable on terms
favorable to the Company.

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RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the SEC released SAB No. 101, Revenue Recognition in
Financial Statements, as amended by SAB No. 101A and No. 101B, which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. The SEC has recently indicated that it
intends to issue further guidance with respect to adoptions of specific views
addressed by SAB No. 101. Until such time as this additional guidance is issued,
the Company is unable to assess the impact, if any, it may have on its results
of operations, financial position, or cash flows.

In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion
No. 25. This Interpretation clarifies the application of Opinion No. 25 for
certain issues including: (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. In general, the Interpretation is effective July 1, 2000. We do not
expect the adoption of Interpretation No. 44 to have a material effect on our
results of operations, financial position, or cash flows.

FACTORS THAT MAY AFFECT FUTURE RESULTS

In addition to other information in this Quarterly Report on Form 10-Q, the
following factors may affect the Company's future operating results.

OUR OPERATING HISTORY IS MORE LIMITED THAN THAT OF MANY OTHER COMPANIES, SO YOU
MAY FIND IT DIFFICULT TO EVALUATE OUR BUSINESS IN MAKING AN INVESTMENT DECISION.

We have limited experience in developing and providing our products and
services. Since our inception, we have had limited revenues from our current
Internet-based communications software products and services, and have never
generated revenues from licensing our GRIC Convergent Services Platform
software, or GRIC CSP software, as a separately licensed product. Many members
of our senior management team and other employees have worked with us for only a
short period of time. Consequently, we have not demonstrated that our business
can succeed.

WE HAVE NOT BEEN PROFITABLE TO DATE, WE MAY NEVER BE PROFITABLE AND WE
ANTICIPATE CONTINUED LOSSES FOR THE FORESEEABLE FUTURE.

To date, we have not been profitable. We cannot assure you that we will ever
achieve or sustain profitability. We reported operating losses of $22.6 million
for 1999, $17.9 million for 1998 and $3.8 million for 1997. As of June 30, 2000,
our accumulated deficit was $62.8 million. We expect to incur operating losses
for the foreseeable future. In particular, we expect to continue to invest
heavily in 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, we will continue to
sustain losses, and our business and the price of our common stock may be
harmed.

IF WE FAIL TO DEVELOP GRIC CSP SOFTWARE PRODUCTS OR WE OR OTHERS FAIL TO DEVISE
AN APPROPRIATE PRICING MODEL FOR THESE PRODUCTS, WE ARE UNLIKELY TO ACHIEVE OUR
REVENUE GOALS.

Our future growth and profitability, if any, depend to a great extent on our
being able to develop and market future versions of our GRIC CSP software that
can be licensed to current and potential customers as separate products. This is
a complex, long-term development effort in a rapidly changing

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and competitive arena. We may not be able to complete the effort successfully or
in a timely fashion, particularly given our lack of experience in development
projects of this magnitude.

Even if we succeed in developing future versions of our GRIC CSP software,
we do not know whether they will achieve market acceptance at all or, if they
do, that they will support the pricing levels or generate the revenues we
anticipate. We have not yet established pricing for any GRIC CSP software
products or related services. We have limited experience with the
transaction-based revenue models that we hope to use with our GRIC CSP software.
If we fail to establish a pricing model acceptable to our customers, our GRIC
CSP software products will not be commercially successful. Further, we do not
know whether third-party developers of Internet communications applications will
be willing to develop new applications that interface with our GRIC CSP software
platform, or that we will be able to develop any applications of this type
ourselves. If no such applications are developed, our GRIC CSP software will not
achieve market acceptance. These uncertainties make it difficult to make any
judgment about our future business prospects.

OUR SUCCESS DEPENDS ON OUR ABILITY TO MAINTAIN AND INCREASE OUR CUSTOMER BASE.

Our goal of achieving profitability depends on our ability to maintain and
expand our customer base. However, our customers are generally free to use
competing products and services, and the costs of switching are low, so we could
face significant customer losses. Our customers are generally not obligated to
generate minimum revenues, and some generate very little revenue for us. These
factors make it difficult to anticipate what our future revenues from existing
customers will be. In addition, our success depends on our ability to expand our
customer base. If we lose any significant customer or are unable to expand our
customer base and to increase our average revenues per customer, our business
will be harmed.

WE DEPEND ON OUR CUSTOMERS TO MARKET NEW INTERNET-BASED SERVICES TO THEIR END
USERS, SO OUR REVENUES DEPEND ON THE ACTIVITIES OF OTHERS AND THE MARKET
ACCEPTANCE OF THOSE NEW SERVICES.

Our business depends on the efforts and success of our customers in
marketing Internet-based services to their end users. Our ability to promote
those services is limited. Many Internet-based services, such as Internet
telephony, are new and have not achieved widespread acceptance in the
marketplace. As a result, our customers may be reluctant to promote these
services until they gain greater commercial acceptance, which may never occur.
If our customers fail to market Internet-based services effectively, for any
reason, our revenues would be reduced.

WE FACE SIGNIFICANT COMPETITION IN THE MARKETS IN WHICH WE OPERATE, INCLUDING
COMPETITION FROM LARGE TELEPHONE COMPANIES, WHICH COULD MAKE IT MORE DIFFICULT
FOR US TO SUCCEED.

There are low barriers to entry by new or existing businesses seeking to
offer services on the Internet. As a result, our business environment is
intensely competitive, highly fragmented and rapidly changing. Competition can
come from many sources and may be focused on different parts of our business.
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 Alliance. Our competitor, Transnexus, offers a software-based clearinghouse
solution that, like our Convergent Services Platform, operates in multiple
hardware and software environments. Providers of Internet telephony services,
such as iBasis and ITXC, compete with our Internet telephony offerings.
Potential competitors to future stand-alone products based on GRIC CSP software
may include independent software vendors and vendors of operations support
system software, such as Cap Gemini Ernst & Young, EDS and Lucent Technologies.
Large telephone companies such as AT&T and MCI Worldcom have the ability and
resources to compete in any or all of our markets or future markets if they
choose to do so.

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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. In that event, our products and services may not achieve the market
acceptance necessary for us to achieve success.

IF WE ARE UNABLE TO MANAGE RAPID GROWTH, THE GRIC ALLIANCE AND OUR PRODUCT
DEVELOPMENT EFFORTS EFFECTIVELY, OUR BUSINESS AND THE PRICE OF OUR STOCK WILL BE
HARMED.

In recent periods, rapid growth of the GRIC Alliance and acceleration of our
product development efforts have strained our network operations, product
development and other managerial, operating and financial resources. We expect
these strains to continue if we continue our growth, and our financial
performance and our ability to compete effectively will depend, in part, on our
ability to manage any future growth effectively. To that end, we must:

- manage our research and development efforts;

- expand the capacity, scalability and performance of our network and
software infrastructure;

- develop our administrative, accounting and management information systems
and controls;

- improve coordination among our engineering, accounting, finance, marketing
and operations personnel; and

- hire and train additional qualified personnel.

We may not be able to accomplish these tasks, which would harm our business
and the price of our stock.

INTERNET TELEPHONY HAS NOT ACHIEVED, AND MAY NEVER ACHIEVE, WIDESPREAD MARKET
ACCEPTANCE.

Using Internet telephony for voice traffic may never achieve widespread
acceptance. The Internet telephony market is relatively new; less than 4% of all
voice calls worldwide are currently transmitted over Internet-based networks. We
expect both telecommunications companies and telephone users to resist changing
to Internet-based telephony unless it offers clear benefits. Historically, the
sound quality of Internet telephone calls has been poor. Due to capacity
constraints on the Internet over which Internet telephone calls travel, callers
sometimes experience transmission delays or transmission errors. If Internet
telephone calls do not achieve commercial acceptance at all or as soon as
anticipated, our efforts to increase our Internet telephone call business, which
is key to our business strategy, could suffer.

THE SUCCESS OF OUR INTERNET TELEPHONY BUSINESS DEPENDS ON RELATIONSHIPS WITH
THIRD PARTIES, WHICH MAY BE DIFFICULT TO ESTABLISH AND MAINTAIN.

The development of our Internet telephony business will depend on our
ability to establish and maintain strategic relationships with technology
leaders. For example, we must maintain compatibility of our products with the
Internet telephony equipment of Lucent Technologies and Cisco Systems since they
are currently the most significant manufacturers of Internet telephony
equipment. We must also remain compliant with industry standards set by third
parties. Further, to increase traffic for our Internet telephony service, we
must continue to make arrangements with third parties to originate and terminate
customer calls and to expand our network. If we fail to develop and maintain
relationships of this sort, we will be unable to increase our Internet telephony
business, which is key to our business strategy.

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WE EXPECT THE PRICING ADVANTAGE OF INTERNET TELEPHONY TO DECLINE, WHICH WOULD
HAMPER OUR EFFORTS TO EXPAND THIS KEY COMPONENT OF OUR BUSINESS.

Today, Internet telephony generally enjoys a price advantage over
traditional international long distance rates. We expect this price differential
to decline, and it may decline more rapidly than we expect. If prices of
traditional international long distance calls decline to a point where Internet
telephony no longer offers a price advantage, Internet telephony will lose an
important competitive advantage and the prospects for this key component of our
business will decline.

OUR INTERNET TELEPHONY REVENUE IS CONCENTRATED IN ONLY A SMALL NUMBER OF
CUSTOMERS, THE LOSS OF ANY ONE OF WHICH COULD HARM OUR REVENUES AND
PROFITABILITY.

Only a small number of customers originate or terminate Internet telephone
calls using our Internet telephony services. The loss of any of these customers
could have a material adverse effect on our Internet telephony business because
it would be difficult to replace that business. Future growth depends in large
part on our ability to establish relationships with new customers wishing to
originate or terminate Internet telephone calls and to expand the volume of
Internet telephone calls originated and terminated by our existing customers.

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 in large part 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 when they use Internet-based communications services. To achieve these
objectives, we depend on the quality, performance and scalability of our
products and services, the responsiveness of our technical support and the
capacity, reliability and security of our network operations. We also depend on
third parties over which we have no control. For example, our ability to serve
approximately 60 countries is based solely on our network access agreement with
one service provider and on that service provider's ability to provide reliable
Internet access points in those countries. 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.

AS A CLEARINGHOUSE, WE HAVE GREATER COLLECTION RISKS THAN MOST COMPANIES.

Difficulties in collecting accounts receivable will harm our financial
results, and this collection risk is inherently greater for us as a
clearinghouse service provider because we are obligated to pay amounts owed to
each customer whether or not we have collected all the amounts due to us from
other customers. In addition, if end users or unauthorized third parties engage
in unauthorized or otherwise fraudulent roaming or telephony activity, we may
face difficulty collecting the resulting accounts receivable. If we are not able
to manage this problem, our financial results will suffer.

IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS AND SERVICES, WE WILL BE
LESS LIKELY TO ATTRACT OR RETAIN CUSTOMERS.

We expect the market for Internet communications products and services to
continue to change rapidly. To succeed, we will be required to adapt to those
changes by improving and enhancing our existing products and services, and
developing and introducing new products and services. We have not demonstrated
that we can consistently develop and market product enhancements and new
products or

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services on a timely or on a cost-effective basis. On several occasions, we have
altered the course of our product development efforts or discontinued products
after their introduction, which has resulted in delays and increased research
and development expenses. If we fail to produce technologically competitive
products and services in a cost-effective manner and on a timely basis, our
business will be harmed.

OUR OPERATING RESULTS FLUCTUATE AND ARE DIFFICULT TO PREDICT, SO WE MAY FAIL TO
SATISFY THE EXPECTATIONS OF INVESTORS OR MARKET ANALYSTS AND OUR STOCK PRICE MAY
DECLINE.

Our quarterly operating results have fluctuated in the past, and we expect
them to continue to fluctuate in the future. Factors that cause these
fluctuations, many of which are beyond our control, include:

- the volume of transaction-based revenues;

- management of growth;

- the rate at which customers use our services;

- our dependence on the timely and successful launch of future products,
including future versions of our stand-alone GRIC CSP software products;

- the mix of services used by our customers' end users;

- economic conditions specific to the Internet, as well as general economic
and market conditions;

- our ability to avoid problems in managing the GRIC Alliance network;

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- intense competition;

- our ability to collect accounts receivable; and

- the domestic and international regulatory environment.

Business models relying on the Internet to provide Internet-based
communications services are still evolving. As a result, we believe that
period-to-period comparisons of our historical operating results are not
meaningful. Additionally, if our operating results in one or more quarters do
not meet or exceed securities analysts' or market expectations, the price of our
common stock is likely to decline.

OUR LONG SALES CYCLE MAKES IT PARTICULARLY DIFFICULT FOR US TO FORECAST
REVENUES, REQUIRES US TO INCUR HIGH COSTS OF SALES, AND AGGRAVATES FLUCTUATIONS
IN QUARTERLY FINANCIAL RESULTS.

Our business is characterized by a long sales cycle between the time a
potential customer is contacted and a new customer relationship is established,
and between the time the new customer is won and when we begin to realize
significant transaction-based revenues. In part this is because the markets for
Internet-based communications services are new and demand is uncertain. This
makes it difficult for us to predict future revenues. In addition, we incur
substantial sales costs before we win a customer or recognize any related
revenues, which increases the volatility of our results because we may have high
costs without associated offsetting revenues.

BECAUSE MUCH OF OUR BUSINESS IS CONDUCTED INTERNATIONALLY, WE ENCOUNTER SPECIAL
PAYMENT AND REGULATORY DIFFICULTIES, WHICH MAY REDUCE OUR PROFITABILITY AND HARM
THE PRICE OF OUR COMMON STOCK.

Because the generation of our revenues is based upon the conduct of business
in multiple countries, we are subject to special risks. Those risks include:

- longer payment cycles for foreign customers, including delays due to
currency controls and fluctuations;

- negative impacts of changes in foreign currency exchange rates;

- potentially high taxes in foreign countries;

- difficulties complying with a variety of foreign laws, trade standards and
tariffs and of overcoming trade barriers; and

- difficulties complying with telecommunications and other Internet-related
regulations in many foreign jurisdictions.

We are also exposed to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships. Any of
these factors may reduce our profitability and harm the price of our common
stock.

WE NEED TO HIRE AND RETAIN QUALIFIED PERSONNEL TO SUSTAIN THE GROWTH OF OUR
BUSINESS, WHICH IS PARTICULARLY DIFFICULT FOR US BECAUSE WE COMPETE WITH OTHER
INTERNET-RELATED COMPANIES IN THE SAN FRANCISCO BAY AREA WHERE WE ARE BASED.

Our future success depends, in part, on the continued service of our key
executive, management and technical personnel, many of whom we hired only
recently, and our ability to attract new skilled employees. From time to time we
have experienced difficulty in hiring and retaining highly skilled employees and
executives, and we expect to continue to experience this sort of difficulty.
Competition for employees and executives in our industry is intense,
particularly in the San Francisco Bay area where we are located, and we have
experienced significant attrition. Declines in the market price of our common
stock could also hurt employee morale and retention. If we are not able to
retain our key

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employees or to attract, assimilate or retain other highly qualified employees
in the future, our business could be harmed because our growth might be slowed
or executive leadership might be disrupted.

LITIGATION ARISING OUT OF INTELLECTUAL PROPERTY INFRINGEMENT OR OTHER COMMERCIAL
DISPUTES COULD BE EXPENSIVE AND DISRUPT OUR BUSINESS.

We cannot be certain that our products do not, or will not, infringe upon
patents, trademarks, copyrights or other intellectual property rights held by
third parties. In addition, since we rely on third parties to help us develop,
market and support our product and service offerings, we cannot assure you that
litigation will not arise from disputes involving those third parties. From time
to time we have been, and we expect to continue to be, parties to disputes with
these third parties. We may incur substantial expenses in defending against
these claims, regardless of their merit. Successful claims against us may result
in substantial monetary liability, significantly impact our results of
operations in one or more quarters or materially disrupt the conduct of our
business.

WE ANTICIPATE THE NEED FOR ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND GROWTH;
IF FINANCING IS NOT AVAILABLE ON ACCEPTABLE TERMS, OUR ABILITY TO SUCCEED WILL
BE HAMPERED.

We expect to be required to raise additional capital to fund our operations,
to finance investments in the equipment and corporate infrastructure needed for
the expansion of our network, to enhance and expand the range of products and
services we offer and to respond to competitive pressures and perceived
opportunities. To date, our cash flow from operations has not been sufficient to
cover our expenses and capital needs, and we cannot assure you that it will be
sufficient in the future. We also cannot assure you that any financing will be
available on terms favorable to us or at all. If adequate funds are not
available on acceptable terms or at all, we may be forced to curtail or cease
our operations.

OUR EXECUTIVE OFFICERS AND DIRECTORS HOLD A SIGNIFICANT PERCENTAGE OF OUR STOCK
AND WILL BE ABLE TO CONTROL MATTERS REQUIRING STOCKHOLDER APPROVAL.

As of June 30, 2000, our executive officers and directors and their
affiliated entities owned approximately 30% of our outstanding common stock.
Accordingly, these stockholders, acting together, will have a substantial
influence on all matters requiring approval by our stockholders, including the
election of directors and the approval of significant corporate transactions.
This concentration could also have the effect of delaying or preventing a change
in control of our company.

OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE A TAKEOVER AND DEPRESS OUR STOCK PRICE.

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 may adopt a shareholder rights plan, or "poison pill," and
we have elected to remain subject to the anti-takeover provisions of the
Delaware General Corporation Law. These factors may discourage takeover
attempts.

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OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD LEAD TO LOSSES BY INVESTORS WHICH
COULD LEAD TO SHAREHOLDER LAWSUITS.

The stock market frequently experiences extreme price and volume
fluctuations. In particular, the market prices of the securities of
Internet-related companies have been especially volatile recently, and often
these fluctuations have been unrelated or disproportionate to operating
performance. This increases the risk that if you wish to sell our stock the
market price may be lower than the price at which you may have purchased our
stock. If the market value of our stock experiences adverse fluctuations and we
become involved in class actions lawsuits by security holders, we could incur
substantial legal costs and management's attention could be diverted, to the
detriment of our operations and results.

We expect the market price for our common stock to continue to be subject to
wide fluctuations as a result of factors including:

- quarterly variations in our operating results;

- announcements of technological innovations by us or our competitors;

- announcements of new products or services by us or our competitors;

- investor perception of us, the market for Internet-based communications
services or the Internet in general;

- changes in financial estimates by securities analysts; and

- general economic and market conditions.

In addition, the market price of our common stock could decrease as a result
of sales of substantial amounts of common stock in the public market or the
perception that substantial sales could occur.

FUTURE DEVELOPMENTS IN INTERNET-BASED COMMUNICATIONS SERVICES, WHICH ARE
CRITICAL TO OUR SUCCESS, ARE UNCERTAIN.

For us to increase our revenues, the Internet must be validated as an
effective medium for the delivery of Internet roaming, Internet telephony and
other Internet-based communications services. The infrastructure of the public
Internet may not be able to support increased demands placed on it, and the
performance of the Internet may be adversely affected. Our business will be
harmed if the Internet does not continue to grow as a telecommunications medium,
and that growth may be inhibited by factors such as:

- unreliability of the Internet infrastructure;

- inability of vendors to develop Internet networking equipment that offers
telecommunications-grade communications services over the Internet;

- security concerns;

- new regulatory requirements;

- inconsistent quality of service; and

- lack of availability of cost-effective service.

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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 cryptography or other developments could result in
compromised security on our network or the networks of others. If any
well-publicized compromises of confidential information were to occur, it could
reduce demand for Internet-based communications and our products and services.

U.S. OR FOREIGN GOVERNMENTAL REGULATIONS REGARDING INTERNET TELEPHONY OR THE
INTERNET GENERALLY MAY BE ENACTED, WHICH COULD IMPEDE OUR BUSINESS.

To date, governmental laws and regulations applicable to access to or
commerce on the Internet or use of the Internet to provide telephone service
have not materially restricted use of the Internet in our markets. However, the
legal and regulatory environment that pertains to the Internet is uncertain and
may change. For example, the Federal Communications Commission has at times
considered proposals to impose surcharges or other common carrier regulations
upon direct providers of Internet telephony to end users located within the U.S.
It is also possible that the FCC may adopt a regulatory framework, other than
traditional common carrier regulation, that would apply to Internet telephony
providers. In addition, Congress and other federal entities have adopted or are
considering other legislative and regulatory proposals that would further
regulate the Internet. Further, a number of foreign countries prohibit Internet
telephony or permit but regulate Internet telephony. Other foreign countries
have considered or are considering whether to regulate Internet telephony. The
European Union has also enacted several directives relating to the Internet,
including one which affects U.S. companies that collect or transmit information
over the Internet from individuals in European Union member states. New domestic
or foreign taxes could also be adopted that would apply to the delivery or use
of communications services over the Internet. Uncertainty about and adoption of
new regulations could increase our costs of doing business, or prevent us from
delivering our products and services over the Internet or significantly slow the
growth of the Internet. This could delay growth in demand for our products and
services and harm our business.

ITEM 3. QUANTITATIVE AND QUALITATIVE 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.

INTEREST RATE RISK. The Company's exposure to interest rate risk relates
primarily to its investment portfolio and debt obligations. Interest rate risk
occurs when the Company cannot hold a purchased investment to its maturity. The
Company limits the weighted-average maturity of its investment portfolio to
90 days. The Company has the intent to hold its securities until maturity and,
therefore, does not expect to recognize an adverse impact on income or cash
flows, although there can be no assurance of this. The Company has established
policies and business practices regarding its investment portfolio to preserve
principal while obtaining reasonable rates of return without significantly
increasing risk. The Company places investments with high credit quality issuers
according to the Company's investment policy. We do not use derivative financial
instruments in our investment portfolio. All investments are carried at fair
market value. 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 rate fluctuation. Therefore, no accompanying table has been provided.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On December 14, 1999, a registration statement on Form S-1 (No. 333-87497)
was declared effective by the Securities and Exchange Commission, pursuant to
which 5,290,000 shares of our common stock were offered and sold for our account
at a price of $14.00 per share, generating gross proceeds of approximately
$74 million. Each outstanding share of preferred stock was automatically
converted into one share of common stock upon the closing of the initial public
offering. The managing underwriters were CIBC World Markets, U.S. Bancorp Piper
Jaffray and Prudential Volpe Technology.

In connection with the offering, we incurred $5.2 million in underwriting
discounts and commissions, and $2.0 million in other related expenses. The net
proceeds from the offering, after deducting the foregoing expenses, were
$66.8 million. From the effective date of the registration statement through
June 30, 2000, the Company applied $19.0 million of the proceeds towards short
term investments, $4.6 million of the proceeds towards capital expenditures and
the balance of the proceeds to working capital.

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 16, 2000.
Following are descriptions of the matters voted on and the results of such
meeting:

<TABLE>
<CAPTION>
VOTES VOTES VOTES VOTES BROKER
FOR AGAINST ABSTAINED WITHHELD NON-VOTES
---------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
1. Election of Directors

Roger L. Peirce................................ 12,305,939 -- -- 10,890 --

Dr. Hong Chen.................................. 12,305,639 -- -- 11,190 --

Thomas Denys................................... 12,305,639 -- -- 11,190 --

Dr. Yen-Son (Paul) Huang....................... 12,305,939 -- -- 10,890 --

Kheng Nam Lee.................................. 11,711,339 -- -- 605,490 --

Lynn Y. Liu.................................... 12,305,039 -- -- 11,790 --

Stanley J. Meresman............................ 12,303,189 -- -- 13,640 --

2. Proposal to ratify the appointment of Ernst &
Young LLP as independent auditors of the
Company for the fiscal year ending December 31,
2000........................................... 12,311,157 2,142 3,530 -- --
</TABLE>

ITEM 5. OTHER INFORMATION

Not applicable.

22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

The following exhibits are filed herewith or incorporated by reference
herein:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
27.1 Financial Data Schedule (EDGAR only).
</TABLE>

(B) REPORTS ON FORM 8-K

No reports on Form 8-K were filed for the three months ended June 30, 2000.

23
<PAGE>
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 11, 2000.

<TABLE>
<S> <C>
GRIC COMMUNICATIONS, INC.

/S/ JOSEPH M. ZAELIT
------------------------------------------------
Joseph M. Zaelit
SENIOR VICE PRESIDENT, FINANCE AND
ADMINISTRATION AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)

/s/ KIM S. SILVERMAN
------------------------------------------------
Kim S. Silverman
CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>

24
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
27.1 Financial Data Schedule (EDGAR only).
</TABLE>